V.K.SINGHAL, J - (1.) THE Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, has referred the following question of law arising out of its order dated January 28, 1986, in respect of the assessment year 1982-83 under section 256(1) of the Income-tax Act, 1961 : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the firm stood dissolved and further in holding that capital gains arising on the sale of property is not chargeable in the hands of the firm
(2.) THE brief facts of the case are that the assessee-firm constituted with four partners out of whom two retired in the year 1959. During the period relevant to the assessment year 1982-83, certain properties were attached and sold by the Income-tax Department in public auction for recovery of outstanding tax arrears. THE factory building and its officer were disposed of for a sum of Rs. 5,72,000 on March 5, 1982. THE last assessment was completed in respect of the assessment year 1957-58 and thereafter no assessment was made as the business was discontinued. THE Income-tax Officer applied the provisions of section 189 and taxes the capital gains in the hands of the firm while the claim of the assessee was that the firm has been dissolved long time back and capital gains cannot be levied on the firm. Against the order passed by the Income-tax Officer, an appeal was preferred to the Commissioner of Income-tax (Appeals) was concluded that the provisions of section 189 were not applicable since no partner existed on the date of auction, as they expired much before the assessment of the firm, and the said assessment was held invalid. The èCommissioner of Income-tax (Appeals) came to the conclusion that there is no material or evidence in the possession of the Department which could indicate that any business was carried on after 1957-58. He also found that the Income-tax Officer has considered the status of the assessee as a firm in the assessment order without mentioning as to whether it was a registered firm or an unregistered firm. But since no allocation was made of shares of the partners in the assessment order, it was taken to be an unregistered firm. He came to the conclusion that the provisions of section 189 of the Act would be available for assessing the income of a firm for pre-dissolution and not for assessment of a dissolved firm for its post-dissolution income. The properties of the firm after the dissolution of the firm were held by the partners in the capacity of co-owners. The effect of death of two partners out of four before February 11, 1953, was undisputed and the remaining two partners also died about 5-10 years earlier to the date of auction. No assessment could have been made of such a dissolved firm which has no existence at all at the time for which the assessment is to be made and, therefore, the order passed by the Income-tax Officer was cancelled. As appeal was preferred by the Revenue before the Income-tax Tribunal which also came to the conclusion that the two partners expired prior to 1953 and the remaining two partners expired about 5-10 years thereafter and the partnership being at will, on account of death of all the partners, the firm stands dissolved in terms of section 42(c) of the Partnership Act. At the time of recovery, the property of the firm was sold, but there was no firm in existence. It was also observed that the provisions of section 189 confers jurisdiction for making an assessment up to the date of dissolution of the firm and the firm is deemed to be in existence. The liability of the partners with regard to the recovery of tax is joint and several and the amount could be covered from the properties of the firm. The order passed by the Income-tax Officer would have been valid if the properties had been sold during the lifetime of the partners and the recoveries are effected therefrom. The order of the Commissioner of Income-tax (Appeals) was upheld. We have considered the matter. A deeming fiction is created by section 189 in respect of a business or profession carried on by the firm which is discontinued or the firm is dissolved as if there is no such discontinuance or dissolution. The provisions contemplate that assessment could be made and all the provisions of the Act shall apply to such an assessment. This section refers to the business or profession carried on by a firm which has been discontinued or where the firm is dissolved. The power to make an assessment in such a case is in respect of that period for which the business or profession was carried on by the firm. Section 42 of the Partnership Act contemplates the contingency of dissolution of the firm and under section 42(c), the firm stands dissolved by death of a partner. The provision of èsection 189 has been made for the limited purpose that any firm which is dissolved may not escape the liability to tax after its dissolution. It is not the power of recovery of tax which is to be examined, but as to whether there could have been any assessment of tax by invoking the provisions of section 189 when the firm had not carried on any business and was not in existence (because it was dissolved). Section 2(31) of the Act defines person and a firm has been included in the definition of person. It has not been brought on record as to who are the persons on behalf of the deceased partners who have inherited the property of such deceased partners. If the firm is not in existence then assessment could be made of the persons who are the legal heirs. The fact that the firm was not in existence during the assessment year 1982-83 has not been stressed and the finding which has been recorded by the Tribunal is that the undisputed fact in the instant case is that the remaining two partners who comprised the firm from 1953 also died about 5-10 years back. Section 189, therefore, cannot be invoked in such a situation where the firm was not in existence and had not carried on any business. The finding which has been recorded by the Income-tax Appellate Tribunal that no business was carried on by the firm in the assessment year 1982-83 and the provisions of section 189 cannot be invoked is unassailable. For the purpose of capital gains also, the same position of law is applicable. The assessment in respect of capital gains could not have been made on the firm which has not carried on any business during the year 182-83 when the sale of the property was effected. In view of the above, we are of the view that the Income-tax Appellate Tribunal was right in holding that the firm stood dissolved and further in holding that the capital gains arising from the sale of property is not chargeable in the hands of the firm. ;