MANCHANDA, J. -
(1.)THIS is case stated under section 66(1) of the Income-tax Act of 1922 (hereinafter referred to as the Act) by the Income-tax Appellate Tribunal (hereinafter referred to as the Tribunal). The question referred for the opinion of this court is :
Whether the assessment made on the assessee-firm for the assessment year 1953-54 in respect of the pre-dissolution profits after its dissolutions valid in law ?
(2.)THE material facts lending up to this reference are thes : THE relevant assessment years is 1953-54, the previous year being the year 1st October, 1951, to 30th September, 1952. THE assessee is a registered partnership firm consisting of four partners, Roshan Lal, Ram Swarup, Jugal Kishore and Purshottam Das, each having a four annas share. THE assessee was manufacturing sugar in its factory at Barabanki. For the relevant year of assessment the firm submitted on the 30th December, 1953, a return of Rs. 2,176 as its income from business. In response to a notice under section 23(3) and 22(4), one L. D. Seth the authorised representative of the partners along with the two employees of the firm (two were subsequently employed as secretary and accountant of Messrs. Ram Chandra and Sons Sugar Mills Ltd., the successors to the business of the assessee, hereinafter referred to as the company) produced the assessees accounts and furnished the informations required by the Income-tax Officer.
From the books of the account and the information furnished, the Income-tax Officer found that the aforesaid private limited company was incorporated on the 2nd of August 1951 (in the prior assessment year 1952-53), with the object of purchasing and acquiring the business of the assessee together with all its land, buildings, railway siding, plant, machinery and its liability with the Punjab National Bank of Rs. 2,47,281. A sale deed was executed on the 15th January, 1952, which fell within the relevant previous year. THE consideration was Rs. 41,69,681, and each of the abovesaid four partners was allotted 100 hares of Rs. 1,000 each in the said company and was credited with Rs. 8,80,600 in the books of the company.
During the relevant assessment proceedings its was claimed by the firm that it was dissolved on the 17th of January, 1952, and it had ceased to do business thereafter and, therefore, no assessment could be made upon it. THE Income-tax Officer, in the absence of a deed of dissolution, and inasmuch as the books of accounts were kept open till the 30th September, 1952, held that the firm was not dissolved till that date, and further that even if the firm had been dissolved on the 30th September, 1952, or earlier, the income of the partners could be computed in the hands of the firm as they are jointly and severally responsible for tax and other liabilities of the firm under section 44 of the Income-tax Act. THE assessment was completed and the operative portion of the assessment order dated February 27, 1958, reads :
Subject to the above remarks assessment of the firm is completed under section 23(3), 23(5)(a). Registration of the firm is renewed under my separate order under section 26(A). Partners to pay taxes direct on their shares of profits as allocated as per my order of date under section 23(5).
In computing the total income of the assessee-firm of Rs. 17,78,586, the profit, under section 10(2)(vii), was also included in the sum of Rs. 13,00,000. The depreciation on the assets up to the date of the transfer to the company, i.e. the 15th of January, 1952, was also proportionately allowed in computing the total income.
Against the assessment order the assessee appealed to the Appellate Assistant Commissioner (hereinafter referred to as the Appellate Assistant Commissioner). The two grounds taken wer : (1) as to the validity of the assessment, the assessment having been made on a dissolved firm, and (2) the quantum of assessment. In view of the fact that the Income-tax Officer had admitted that dissolution of the firm had taken place on the 15th January, 1952, a finding was recorded by the Appellate Assistant Commissioner that the assessee-firm stood dissolved as on the 15th of January, 1952. Further, agreeing with the contention of the assessee, it was held that the business of the firm had obviously not been discontinued, and, therefore, section 44 will not apply to this case. A reference was also made by the Appellate Assistant Commissioner to his appellate order for the immediately preceding assessment year 1952-53, where he had held that section 44 did not apply and, therefore it was not necessary for the Income-tax Officer to issue a notice to each of the individual partners of the dissolved firm. The Tribunal had also held that section 44 did not apply and the case was governed by the provisions of section 26(2) of the Act. Though the Appellate Assistant Commissioner was of opinion that the ground taken was a technical one, he annulled the assessment but defined to modify the assessment of the partners who, according to him, were, obviously chargeable on their share of income under section 3 of the Income-tax Act in their own assessment..... The assessment of the partners had, therefore, become final and conclusive.
On further appeal to the Tribunal by the assessee as well as the Income-tax Officer, the Tribunal reiterated the view that it had taken in the appeal by the assessee against its assessment for the earlier assessment year 1952-53, and quoted froms its earlier order in extenso. Whatever, mistake the Income-tax Officer or the Appellate Assistant Commissioner may have made in making the assessment, the Tribunal set that right. The finding of fact which is inferable from the order of the Tribunal and which finding is binding on this court is :
There is no doubt that, in the present case, there was a succession and not a discontinuance of the business.
The legal conclusion drawn from the aforesaid finding based on the decision given by it for the assessment year 1952-53 was :
In such a case section 44 has no application. In the case of firm, under section 26(2), the successor and the succeeded shall each be assessed in respect of his actual share. The assessment on each must be separate and distinct.
After having reiterated its earlier view that the case was governed by section 26(2) and not by section 44, it went on to hold that, even if there was dissolution simpliciter of the firm, the Supreme Court had now laid down in C. A. Abraham v. Income-tax Officer, Kottayam, that an assessment can also be made, as such, on a firm after its dissolution, and, therefore, on this ground also the assessment cannot be said to be illegal or invalid. It further went on to hold that section 44, after its amendment by the Finance Act of 1950 had removed the anomaly which hitherto existed in section 44 of between assessment of an association of persons and a firm and though the amendment came into effect from 1st April, 1952, yet as the section was only a machinery section, it would have retrospective effect and would be applicable to the relevant year of assessment, as that assessment was still subject to appeal before them and had not become final. Accordingly, the assessees appeal was dismissed and the Income-tax Officers appeal was allowed.
As a reference has been made both in the orders of the Appellate Assistant Commissioner and the order of the Tribunal to the orders passed in appeal for the earlier assessment year 1952-53 and in order to complete the narration of facts, it becomes necessary to advert briefly thereto. In that order, repelling the contention of the assessee, it was held that section 44 had no application to a case where a business had not been discontinued but had been succeeded to and that the assessment made under section 26(2) of the Act was valid and even, assuming that section 44 applied, there was nothing improper or irregular in the assessment made by the Income-tax Officer. The assessee had appealed to the Tribunal contending that the Appellate Assistant Commissioner had erred in holding that the provisions of section 44 did not apply to this case and that on the dissolution of the firm the Income-tax Officer ought to have adopted the procedure laid down under section 44 and made an assessment against all the partners of the dissolved firm. The Tribunal, as already observed, repelled this contention and held that there was a succession and therefore there was a transfer of the ownership of the business of the partners of the firm to the limited company and that in such a case section 44 had no application; that the case fell within the ambit of section 26(2) of the Act and, therefore, the successor and the succeeded were each to be assessed in respect of their actual share and the assessment on each of them must be separate and distinct. In this view of the matter, the order of the Appellate Assistant Commissioner was set aside and the case was remanded to the Income-tax Officer to make a fresh assessment in accordance with the law, i.e., under section 26(2) of the Act. Against that order for the assessment year 1952-53, a reference was filed in this court and a Division Bench of the court, of which I was a member, by its order dated the 31st October, 1962, answered both the questions referred in the affirmative. The two questions that were referred were :
(1) Whether, in view of the facts and circumstances of the case, assessment can be made on the firm admittedly dissolved ?
(2) Whether the provisions of section 26(2) of the Income-tax Act governs the present case ?
The view, therefore, taken was that an assessment can be made on a firm which is admittedly dissolved, and (2) that the provisions of section 26(2) of the Income-tax Act were also applicable. In other words, the view taken was that the assessment of firm which was dissolved and had been succeeded to could be made not only under section 26(2) of the Act but also under section 44 of the Act.
(3.)IN the present reference only one question, as reproduced hereinabove, instead of two as in the earlier assessment year, has been referred. The question, however, is very widely worded and would embrace both the questions which were referred in respect of the earlier assessment year. The question as referred was one which was agreed to by the assessee and it is, therefore, not possible to restrict the scope of that question, as is now attempted to be done by Mr. Brijlal Gupta, the learned counsel for the assessee before us. According to him the question should be narrowed down and considered only from the point of view whether the assessment is valid under the provisions of section 44 of the Act. IN other words, this court should not consider whether the assessment of pre-dissolution profits could be held to be valid under the provisions of section 26(2) of the Act. There can be no warrant for restricting the scope of the question by inserting section 44 into it, which is not there, and thus ruling out of the consideration the applicability of section 26(2) of the Act. To do so would be to alter the whole nature of the question, and that would require ignoring the reiteration by the Tribunal of the view taken by it in the earlier year that the provisions of section 26(2) were also applicable to the facts of the case, as there was succession and not a discontinuance of the business. Use of the word also in the order of the Tribunal indicates that the validity of the assessment was being upheld on the alternate ground that it could also have been made under section 44, in view of the Supreme Court decision in Abrahams case. The alternative view taken by the Tribunal may be wrong but that would not justify ignoring the view taken by it that the assessment in a case, such as the present, fell also within the ambit of section 26(2) of the Act. It is, therefore, not possible, nor is it right, to accede to the submission of the learned counsel that the question posed should be restricted to a consideration of the applicability of section 44 of the Act.
There cannot, now, be any doubt after the decision of the Supreme Court in Shivram Poddar v. INcome-tax Officer, Central Circle II, Calcutta, explaining the decision in C. A. Abrahams case that a firm which has been succeeded to (sic) and the business has not been discontinued, the provisions of section 44 have not application and it is obligatory to make the assessment on such a firm under section 26(2) of the Act. It was pointed out :
Section 44 operates in two classes of case : where there is discontinuance of business, profession or vocation carried on by a firm or association, and where there is dissolution of an association. It follows that mere dissolution of a firm without discontinuance of the business will not attract the application of section 44 of the Act......
Discontinuance of business has the same connotation in section 44 as it has in section 25 of the Act; it does not cover mere charge in ownership or in the constitution of the unit of assessment. Section 44 is, therefore, attracted only when the business of a firm is discontinued, i.e., when there is complete cessation of the business and not when there is a change in the ownership of the firm, or in its constitution, because by reconstitution of the firm, no change is brought in the personality of the firm, and succession, to the business and not discontinuance of the business results.... Where the firm is dissolved, but the business is not discontinued, there being change in the constitution of the firm, assessment has to be made under section 26(1), and if there be succession to the business, assessment has to be made under section 26(2). The provisions relating to assessment on reconstituted or newly constituted firms, and on succession to the business are obligatory. Therefore, even when there is change in the ownership of the business carried on by a firm on reconstitution or because of new constitution, assessment must still be made upon the firm. When there is succession the successor and the person succeeded have to be assessed each in respect of his actual share. This scheme of assessment furnishes the reason for omitting reference to dissolution of a firm from section 44 when such dissolution is not accompanied by discontinuance of the business....
Absence of reference to dissolution of a firm (not resulting in discontinuance) in section 44 was therefore a logical sequel to the provisions relating to assessment of firm, contained in Chapter IV, especially sections 23(5), 25(1), 26(1) and (2).
The view taken by a Bench in the said Income-tax Reference No. 224 of 1960, decided on the 31st October, 1962, of which I was a member, that a firm which has been succeeded to could also be assessed under section 44 of the Act can no longer be held to be good law. Its decision, however, that the assessment was valid under section 26(2) would undoubtedly be correct. Similarly, the view taken by the Tribunal in the order under reference that section 44 in the alternative would also validate the assessment for the relevant year, therefore, is now clearly erroneous. It is also unnecessary to decide in these proceedings whether section 44, as amended by the Finance Act of 1958, has retrospective effect or not, as the question can be answered without doing so.
In this view of the matter, the only point that has to be considered is whether, on the facts of the case, the assessment made in respect of predissolution profits is valid in la ? The Income-tax Officer in the operative portion of the order had applied only the provisions of section 23(3) and section 23(5)(a) of the Act but in the title mentioned section 44 also and further held that dissolution had not taken place, but, as already observed, the finding that dissolution had not taken place was put right by the Appellate Assistant Commissioner and the correct section under which assessment should have been made was held to be section 26(2) of the Act. That was also the view which was taken by the Tribunal in the earlier year and upheld upon reference by this court. This view has now been affirmed by the Supreme Court in Shivram Poddars case. That the mistaken mention of a particular section or the label or nomenclature used is not determinative of the validity of the assessment is clear from a decision of the Judicial Committee given in Commissioner of Income-tax v. Khemchand Ramdas, where it was laid down that the mere fact that an order purports to have been made under a particular section does not shut out an appeal if the facts go to show that the correct section which the order ought to have been made was another one, against which an appeal would lie. If the facts go to show that the correct section under which the order ought to have been made was an appealable one an appeal would lie. It is the substance and not the form which matters. In the present case, merely because section 44 was mentioned along with section 23(3) in the title of the assessment order will not per se render the assessment invalid if it is otherwise valid under section 23(3) read with section 26(2) or any other section of the Act.