B.V. Venkataramaiah, Accountant Member - (1.) THESE appeals are by the assessees.
(2.) IT Appeal No.230 (Bang.) of 1985 : The firm Swamy & Pathy is being assessed as a registered firm. Its previous year ended on 31st October. Thus, it was assessed for the assessment year 1980-81, with the previous year ending on 31-10-1979. For the assessment year 1981-82, its previous year should normally have been the year ending on 31-10-198O. However, the constitution of the firm underwent a change. According to the assessee the firm was dissolved on 15-4-1980 and a new firm cams into existence thereafter (as understood by the assessee). The new firm, however, chose to close its accounts on 31-3-1981. The assessment year for the new firm was the same, viz., 1981-82 as for the old firm. The firm, accordingly, filed two returns : (i) The ITO, however, held that there was no dissolution on 15-4-1980 of the old firm in terms of Section 187(2) of the Income-tax Act, 1961 ('the Act'). Therefore, an assessment had to be made on the same old firm subject, however, to the allocation of profits between the partners in the proportion they were entitled to in the different parts of the previous year. There is no quarrel between the assessee and the revenue insofar as the application of Section 187(2) is concerned, as it is supported by the decision of the Karnataka High Court in the case of Sangam Silks v. CIT [1980] 122 ITR 479. But the decision of the ITO was that income had to be assessed in one single year on the profits earned by the firm in a period of 17 months starting from 1-11-1979 and ending on 31-3-1981. It is to this proposition that the assessee objects. (ii) According to the assessee, while there is no bar to making an assessment on the firm as if no new taxable entity has come into existence, there was no authority for taxing the income of the firm for a period exceeding 12 months. This was borne out by Section 3 of the Act. It is not to be presumed that the assessee changed the previous year from October ending to March ending with the consent of the ITO. There was no such request on the part of the assessee. The assessee changed the previous year to 31st March as, in its opinion, a new firm came into existence on 16-4-1980 and the new firm could choose its own previous year not exceeding 12 months. In sum, the stand is that, while Section 187(2) enables the ITO to make an assessment of the firm ignoring the claim of the assessee that there was a dissolution of the firm on 15-4-1980 in view of the specific provisions of Section 187(2), there is nothing in the Act to suggest that the previous year of the firm should be extended to a period beyond 12 months. These arguments were rejected by the Commissioner (Appeals) who purportedly relied on the decision of the Punjab and Haryana High Court in the case of Kamal Kaithal Co-operative Transport Society Ltd. v. CIT [1972] 84 ITR 46. The assessee-is in appeal. The learned counsel for the assessee reiterated before us the stand taken by him before the authorities below. He drew our attention to the observations of the High Court in Sangam Silks' case (supra) at p.485, viz, Section 187 contemplates of only one assessment for the entire concerned previous year on the reconstituted firm. It was submitted that this meant that the previous year of the firm cannot be extended beyond 12 months. The previous year remained the same as before, viz., 31st October in this case. He submitted that the order of the Commissioner (Appeals) should be reversed. The learned departmental representative, on the other hand, submitted that the legal fiction enacted under Section 187(2) has to be carried to its logical conclusion. The previous year of the firm having ended on 31-3-1981 the profit of the entire period of 17 months has to be assessed in a single year.
(3.) WE have heard the rival submissions. In Kamal Kaithal Co-operative Transport Society Ltd.'s case (supra) the facts were: up to the assessment year 1955-56, the assessee filed its returns showing the year ending on 31st March of each year as the previous year. For the assessment years 1956-57 to 1959-60, the assessee filed returns showing the year ending 30th September of each year as the previous year. For 1960-61 the assessee filed a return showing the year ending 31st March as the previous year. The ITO required the assessee to file its return for the previous year ending on 30-9-1959. It was held that the ITO was right as the assessee had not applied under Section 2(11) of the Act, for change of previous year. Though previously the assessee had not made any application for changing the previous year from the year ending on 31st March to the year ending on 30th September, the voluntary submission by the assessee of returns for the previous year ending on 30th September amounted to application for change of the previous year and the acceptance of those returns by the officer amounted to his consent for the change and the earlier practice could not be deemed to be continuing : (i) WE notice that the situation here is quite different. The assessee in Karnal Kaithal Co-operative Transport Society Ltd.'s case (supra) was the same. The previous year had changed. Voluntary submission of returns by the same assessee was considered as an application for change of the previous year. In the present case, technically speaking the two firms, viz., the one which existed up to 15-4-80 and the other which came into existence after that date, were different. At any rate that is so in accordance with the Indian Partnership Act, 1932. However, by operation of the legal fiction in Section 187(2) it was considered by the Courts that there was no change in the constitution on 15-4-80. The income-tax law being a special law took precedence over the general law. It is to be noticed that the assessees had not accepted this interpretation until the Court intervened and gave its own interpretation. Therefore, it is by legal fiction, we have to hold that the old firm continued to exist even after its reconstitution after 15-4-1980. (ii) It is well settled that a legal fiction cannot be extended beyond the purpose for which it is intended, as they are created for a limited purpose-CIT v. Amarchand N. Shroff [1963] 48 ITR 59 (SC). Therefore, we cannot say that the legal fiction also enabled the ITO to elongate the previous year from 12 months to 17 months. The submission of the second return disclosing the income from 16-4-1980 to 31-3-1981 cannot be construed as a voluntary act on the part of the assessee changing the previous year from 31st October to 31st March, for, all along the stand of the assessee had been that there were two separate firms. Therefore, the dictum laid down in Karnal Kaithal Co-operative Transport Society Ltd.'s case (supra) cannot be extended to this case. It is necessary, therefore, to provide an opportunity to the assessee to have a say in the matter of chosing the previous year. It is now for the assessee to exercise an option to change its previous year from October ending to March ending. If the legal position regarding the application of Section 187(2) had been known to the assessee, it might not have changed the previous year at all. Therefore, we are of the opinion that the previous year continues to be the same, viz., year ending 31st October. The ITO is, therefore, directed to assess the income of the firm for the period 1-11-1979 to 31-10-1980 for the assessment year 1981-82. If, however, the assessee now makes a request to the ITO that it would like to change its previous year to 31st March the ITO is welcome to assess the income for the period of 17 months. With the above finding, we set aside the orders of the authorities below and restore the assessment to the ITO for the purpose of taxing the income in accordance with the choice of the previous year the assessee would like to make now, keeping in view the provisions of Section 3 of the Act.;