COMMISSIONER OF INCOME TAX Vs. ASSOCIATED COMMERCIAL CORPORATION

JUDGEMENT

(1.) In this reference under section 66(1) of the Indian Income -tax Act, the following three questions are referred to this court by the Income -tax Appellate Tribunal :

(2.) OF these three questions, questions Nos. 1 and 3 have been raised at the instance of the department and question No. 2 at the instance of the assessee. The assessee is an unregistered firm. It was constituted under an oral agreement partnership sometime in March, 1946, between three persons, namely, Amin Valia and Kharas. The business of the firm was to deal in lacquer and oil paints and it was agreed between the three partners constituting the firm that, in the profits of the business, Amin was to get eight annas share and Valia and Kharas, for annas share each. The firm made a purchase of a consignment of paints for a sum of Rs. 1,79,000, and that was the only business purchase made by the firm. Sometime in September, 1946, Amin, who was to manage the business of the firm, represented to Kharas that the paints which they had purchased would not be profitable sold since the prices were falling down. He was, however, willing to purchase the goods from the firm at the cost price in order to save Kharas and Valia from incurring any further losses. He also suggested that the firm may be dissolved after the goods had been purchased by him from the firm. These representations of Amin to Kharas were believed in by the latter and, as a consequence, he agreed to the proposals made by Amin. On the 18th September, 1946, Amin recorded the terms of the agreement arrived at by him with Kharas on a stamp paper of Rs. 50. In this agreement, it was stated that it was agreed between Amin and Kharas that the firm should be dissolved as from that date and that he should purchase from the firm for the price of Rs. 1,79,000 the goods already delivered to the firm by the Western Textile Corporation, together with all rights of the firm against the Corporation under the contract for purchase. Valia denied having received a copy of this agreement. Subsequently, in October, 1946, Kharas to know that Amin had secured the agreement by fraudulent misrepresentation and that Amin had actually sold the goods at Rs. 3,41,649, thus making a considerable profit in the transaction. This led to the instruction of criminal proceedings by Kharas against Amin for cheating and also to a suit by Valia in the High Court of Bombay praying for rendition of accounts and dissolution of the firm. This suit, which was numbered as Suit No. 2120 of 1946, was filed on or about 12th November, 1946. The criminal proceedings which Kharas had instituted came to be dropped and a consent order was taken from the court in the suit filed by Valia on the 22nd March, 1951. The minutes of this consent order as well as the award, which was made by the commissioner appointed under this order, are on the record of the present case, though they have not been annexed to the statement of the drawn up by the Tribunal and made a part of it. We have allowed these two documents to go on the record of this reference and to be treated as a part of the statement on the case. The consent order states the terms on which the parties had agreed that accounts should be taken for the purposes of the suit. Under these terms, so far as they are material, the parties agreed that the partnership should be deemed to have be deemed to have been dissolved from the 12th November, 1946, and that the commissioner should ascertain the amount realized by the sale made Amin to Andrew Gruenberg as if it was a sale by the partnership and credit this amount in the partnership account. It was further provided that, for the purpose of taking accounts, the commissioner should ignore the agreement of dissolution dated the 18th September, 1946. The commissioner appointed under the consent order made his award on the 24th April, 1951. According to the operative part of the award, Valia was declared entitled to a sum of Rs. 25,092 from the partnership, Amin to a sum of Rs. 32,237 and Kharas to a sum of Rs. 27,040, subject to the payment of costs of the suit, etc., including the costs of the arbitration. In pursuance of the award, payments were received by the parties during the accounting year 1952 -53. The amounts which were alleged to have been received by the respective partners as stated in the statement furnished to the income -tax authorities were at variance with the amounts awarded under the award, but the Tribunal has found it necessary to have the figures reconciled as it was not necessary to do so in view of the decision arrived at by it on the points involved in the case. In the return which Valia made for the assessment year 1953 -54 on 4th November, 1953, he did not include his share of the profits from the partnership of Associated Commercial Corporation which he had received under the award in the accounting year 1952 -53; but, in the return filed by M/s. Anantrai Jadhavji and Co. in which Valia was a partner, a sum of Rs. 13,202 was mentioned as the share of the profit of that firm in the firm of M/s. Associated Commercial Corporation. Neither Valia nor the firm of M/s. Anantrai Jadhavji and Co. had declared in the relevant Part III of the return that Valia was a partner in the firm of Associated Commercial Corporation. What was described in the return by M/s. Anantrai Jadhavji and Co. was merely the fact that Valia had a share of profit in a joint business described in the statement of accounts furnished with the return by M/s. Anantrai Jadhavji and Co. as 'share of profit in the joint business of Associated Commercial Corporation.'

(3.) IN the appeal before the Income -tax Appellate Tribunal, several contentions were raised on behalf of the assessee. It was contended that the partnership firm had been dissolved by the order passed by the High Court on the 12th November, 1946, which was long before the notice under section 34, which was issued to the firm on the 27th September, 1955, and served on Amin on the 20th October, 1955, and, consequently, the notices under section 34 as well the subsequent notices under sections 22(4) and 23(2) were all issued to the firm and the assessment was also made of the firm after it had been dissolved and had discontinued business. It was contended that, since the notice had been issued to the firm, after it had been dissolved and after it had discontinued its business, and the assessment too had been made on the dissolved firm in the name of the firm, the entire assessment proceedings as well as the order of assessment passed were basis in law. This contention was accepted by the Tribunal, relying on the case in R. N. Bose v. Manindra Lal Goswam.