1960 PLP 1333 (PTD)

The facts in this case are shortly as follows : In the year 1947, the partnership firm of Balmukund Radheshyam came into existence. The petitioner, Shivram Poddar, was a partner of the said firm. It appears from the returns filed by the firm for the years 1949‑50 and 1950-51, that the principal place of business of the firm was at No. 138, Cross Street, Calcutta, with branches at Ratlam, Indore and 357 Kalbadevi Road, Bombay. The firm carried on business as commission agent to cotton, sale and pur chase of cotton and cotton piece goods, and speculation in cotton and silver. It is said that the firm was dissolved in February 1950, and that the notice of dissolution of the firm was duly given to the Income‑tax Officer, Special Survey Circle III, Calcutta, by March 1953. This, however, is denied by the respondents. On August 20, 1952, a return was filed in respect of the income of the firm before the Income‑tax Officer, Special Survey Circle III, Calcutta, in respect of the assessment year 1949‑

50. An order of assessment was made on October 28, 1952. It is said that the income‑tax assessed was duly paid. This firm had an income‑tax file in the office of the income‑tax Officer, Special Survey Circle III, Calcutta, and another file in the office of the Second Income‑tax Officer, Bombay, in which, however, no return was filed and no assessment was made. By an order dated August 3, 1955, the Central Board of Revenue, in exercise of powers under subsection (7A) of section 5 of the Indian Income‑tax Act, 1922 (hereinafter referred to as the "Act") transferred the pending income tax case in respect of the Bombay and Calcutta files to the file of the Income‑tax Officer (Central) Circle II, Calcutta. By a letter dated October 13, 1953, the income‑tax Officer (Central) Circle II, Calcutta, called upon the ex‑partners of the said firm to produce books of the firm for the year 2004‑05, and particularly all the documents relating to the speculation in cotton and silver. On October 22, 1955, the said Income‑tax Officer issued a notice under section 34 of the said Act on the petitioner. A copy of the said notice is annexed herewith and marked with the letter "E". It was addressed to "Shri Shivram Poddar (Partner), for and on behalf of Messrs Balmukund Radheshyam, 138, Cross Street, Calcutta". In that notice it was stated that the said Income‑tax Officer had reason to believe that his income assessable to income‑tax for the year ending March 31, 1950, had been under assessed and that he proposed to re‑assess the income. The petitioner was called upon to file his return. Thereafter, there was correspondence between the petitioner and/or his authorised representative and the Income tax Officer, and several notices were issued. It is unnecessary to go into details. On December 14, 1955, the petitioner made an application to this Court under Article 226 of the Constitution, and a rule was issued on December 16, 1955, calling upon the res pondents in that application to show cause why appropriate writs should not be issued commanding the said respondents to forbear to give effect to the said notices and for other orders. A copy of this rule is annexed to the petition and marked with the letter "O". By an order made by me dated January 23, 1957, this rule was made absolute and the respondents in the said application were prohibited and restrained from taking any further steps upon tie said notice with liberty, however, to proceed against the partners of the said dissolved firm and/or their legal representatives or in any manner in accordance with law. A copy of the rule absolute is annexed to the petition and marked with the letter "P". The respondents thereupon preferred an appeal, which appeal was dismissed with costs on May 26, 1950. In deciding the said application, followed my own decision in Manindra Lal Goswami v. Income‑tax Officer ((1956) 30 I T R 550), wherein had held that under the circumstances prevailing in the case, there could not be any assess ment or re‑assessment of a dissolved firm as such. This decision of nine has been upheld by the appeal Court in R. N. Bose v. Manindra Lal Goswami ((1958) 33 I T R 435). I shall refer to this decision in greater detail presently. On March 28, 1958, the said Income‑tax Officer who is the respondent No. 1 in this case issued another notice under section 34 read with section 22 (2) of the said Act. A copy of this notice is annexed to the petition and marked with the letter "Q". 'This notice is addressed to "Shri Shivram Poddar, partner of the firm of Messrs Balmukund Radheshyam at the time of its dissolution C/o Messrs Anandram Gajadhar, 33 Netaji Subhas Road, Calcutta." The relevant part of this notice runs as follows: "Whereas I have reason to believe that Messrs Balmukund Radheshyam (name of the firm) was dissolved on or about February 24, 1950 : And whereas the income of the said firm assessable to income‑tax for the assessment year 1949‑50 has been under assessed : And whereas I propose to re‑assess the said income : And whereas under section 44 of the Indian Income‑tax Act, 1922, you, the said Shivram Poddar and Ramnaraiti Ojha (deceased) 33, Netaji Subhas Road, Calcutta, who were partners of the said firm of Messrs Balmukund Radheshyam at the time of its dissolution, are jointly and severally liable to assessment in respect of the income, profits and gains of the said firm before its dissolution and for the amount of tax payable thereon ; Now therefore under section 34 read with section 22 (2) of the said Act, I require you, the said Shivram Poddar to deliver to me within 35 days of the receipt of this notice a return in the attached form of the total income and the total world income of the said firm assessable for the year ending 31st March 1950 . . . . " I have set out the notice in some detail, because the petitioner in this application challenges this notice. In August 1958, the petitioner protested against the validity of the notice and pro ceedings and thereafter made .an application to this Court and this rule was issued on September 18, 1958, calling upon the respondent No. 1 to show cause why he should not be directed to forbear from giving effect to the said notice and why the said notice and the proceedings should not be quashed by appropriate writs. Before I proceed to deal with the point that has been raised in this application, I might state here that the whole case depends on the interpretation of section 44 of the said Act. This section has now been amended. For the sake of convenience I set out the original section and the amendment Original section "

44. Where any business, profession or vocation carried on by a firm or association of persons has been discontinued, or where an association of persons is dissolved, every person who was at the time of such discontinuance or dissolution a partner of such firm or a member of such association shall, in respect of the income, profits and gains or the firm or association, he jointly and severally liable to assessment under Chapter IV and for the amount of tax payable and all the provisions of Chapter IV shall so far as may be apply to any such assessment." This section was amended by the Finance Act of 1958 (II of 1958). The new section 44 runs as follows: "

44. Liability in case of a firm or association discontinued of dissolved.‑(1) Where any business; profession or vocation carried on by a firm or other association of persons has been discontinued or where a firm or other association of persons is dissolved, the Income‑tax Officer shall make an assessment of the total income of the firm or other association of persons as such as if no such discontinuance or dissolution had taken place. (2) Every person who was at the time of such discontinuance or dissolution a partner of the firm or a member of the associ ation, as the case may be, shall be jointly and severally liable for the amount of tax or penalty payable, and all the provisions of Chapter IV, so far as may be, shall apply to any such assess ment or imposition of penalty." The Finance Act of 1958 received the assent of the President on April 28, 1958. The argument of the learned standing counsel appearing on behalf of the petitioner in this case is shortly as follows. He argues that under section 44 of the Act before the amendment it was not possible to assess a firm which had been dissolved under any circumstances, and that this has been upheld by Chakravartti, C. J., in the decision mentioned above. He says that in the case of the dissolution of a firm, not only was it impossible to assess the firm as such, but also the partners of the firm which had been dissolved could not be assessed. In other words, under section 44 as it stood before the amendment, once a firm had been dissolved neither the firm nor its partners could be assessed. Strange as this proposition may seem, the learned standing council argues that such was the law before the 1958 amendment, and if there was any lacuna in the law, his client is entitled to take advantage of it. Section 44 as it stood before the amendment speaks about two categories, namely, a "firm" and an "association of persons". A "firm" means, of course, a partnership firm. What is a partnership firm has been defined in section 4 of the Indian Partnership Act, 1932. It is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who entered into partnership with one another are called individually" partners" and collectively "a firm". The dissolution of a firm has been dealt with in Chapter VI of the Indian Partnership Act. Accord ing to section 39, the dissolution of partnership between all the partners of a firm is called the "dissolution of the firm". The word "discontinuance" of a firm is not mentioned in the Indian Partnership Act. The word "discontinuance" has however been used in the body of the Indian Income‑tax Act, in other places as well. For example, it has been used in section 25 (3). It has been held by the Judicial Committee in Commissioner of Income‑tax v. P. E. Polson ((1945) 13 I T R 484), that the word "discontinuance" to section 25 (3) of Act means complete cessation of business and not discontinuance by transfer or assignment. However, coming back to section 44, we find that in the first part it talks about a "firm" as well as an "association of persons" and speaks about their discontinuance. In the second part, mention is only made of an "association of persons" and it speaks about its "dissolution". From this the learned standing counsel argues that in the case of a firm, the section, as it stood prior to the amendment, did not contemplate the case of a dissolution, He says that advisedly the Legislature has used two different sets of expressions in the two different cases and it is not possible to say that no distinction was intended to be laid down. The learned standing counsel referred to the appeal Court judgment which I have mentioned above, R. N. Bose v. Manindra Lal Goswami ((1958) 33 I T R 435). The facts of that case were as follows: A, B and C were the partners of an unregistered firm, Dyes and Chemical Agency, which did business from April 1, 1940, up to March 31, 1944, when it was dissolved. The Income‑tax Officer being of the opinion that the firm's income for the assessment year 1943‑44 had escaped assessment, issued a notice to A under section 34 of the Indian Income‑tax Act, 1922 on November 25, 1944. He was described as "A, partner of Dyes and Chemical Agency". The income which had been discovered to have escaped assessment was described as "your income" and he was required to submit a return of "your total income and the total world income" assessable for the year ending March 31, 1944. When the matter came up before me in the original Court, I held that the notice was bad because a firm which has been dissolved cannot be assessed as such. I also held that the proper way to proceed was to assess the partners. This was upheld by the Court of appeal in the decision mentioned above. The learned Chief Justice, however, made a statement which has been strongly relied upon by the learned standing counsel and which runs as follows (1): "The question, as presented to us, turns on the true con struction of section 44 of the Indian Income‑tax Act. That section speaks of a case where any business, profession or vocation carried on by a firm or association of persons has been discontinued and a case where an association of persons is dissolved. It does not speak of a case, at least expressly, where a firm has been dissolved. It will be noticed that when speaking of the discontinuance of a business, profession or vocation, the section speaks of both a firm and an association of persons, but when speaking of dissolution, it drops the `firm'. It is, therefore, arguable that the dissolution of a firm is not within the con templation of section 44 at all and, therefore, the Department cannot invoke its aid for the purpose of assessing the income of a dissolved firm. Mr. Meyer agreed that if the Department could not rely on section 44, there was no other section in the Act which would authorise it to assess the income of a dissolved firm, but he contended that discontinuance included dissolution. I am unable to accept that contention, because although the dissolution of a firm must involve discontinuance of its business, the converse need not necessarily be true and a firm may con ceivably continue to exist after deciding to discontinue its business as firms very often do for various purposes, such as collecting their debts. Why the section should have dropped the firm when speaking of dissolution it is difficult to understand, but I need not pause to 'speculate about the reasons. The parties have throughout proceeded on the footing that section 44 applied to the case of a dissolved firm and, for the purpose of this case, I shall proceed on the assumption that section 44 applies." In this paragraph the learned Chief Justice has mentioned that it was "arguable" that a dissolution of a firm was not within the contemplation of section 44 of the Act. But he has not decided this question finally for the simple reason that parties before him admitted that section 44 of the Act applied; although it was a case of dissolution, and proceeded upon that footing and it was not necessary to decide the point. In fact, the learned Chief Justice says so in the paragraph set out above. It is true that the learned Chief Justice also says that he was unable to accept the contention that discontinuance included dissolution, but he was obviously thinking about temporary discontinuance, because he accepts the proposition that the dissolution of a firm must involve the dis continuance of business, but the reverse was not true. The reverse would not be true in the case of temporary discontinuance. But where a partnership business has been permanently discontinued it must `be taken to have been dissolved, because it can no longer continue in the eye of law. There cannot be a partnership which permanently; carries, on no business. Under section 2 (6B) of the Indian Income‑tax Act, "firm", "partner" and "partnership" have the same meanings as in the Indian Partnership Act, 1932. The word " partnership" has been defined in section 4 of that Act as follows: "4. `Partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually `partners' and collectively `a firm', and the name under which their business is carried on is called a `firm'." Therefore, the essential feature of a partnership firm is that it must carry on a business. It may be, as the learned Chief Justice points out, that a firm temporarily discontinues its business. That involves no consequences. But where the business has been permanently discontinued as is the case here, the firm must be taken to have been dissolved and discontinued. That it has beep dissolved is also the petitioner's own case. I therefore do not understand how a firm which has been dissolved, and has ceased to exist, can be said to have been not discontinued. Discon tinuance must relate either to the relationship of the partners or the business and in the case of dissolution, both are in fact discontinued. The dissolution of a firm is dealt with in section 39 of the Indian Partnership Act and means the dissolution of partnership between all the partners of a firm. In this particular case it is admitted that it was dissolved. It followed therefore that the business was discontinued. It is nobody's case that it did not. I therefore do not see why the matter is not covered by section 44 of the Act. It seems to be highly improbable that section 44 intended to make the partners of a firm liable when there was a 'temporary discontinuance of business and while the firm still remained in existence and could be made liable, and yet wholly absolve them from all liability when the firm was dissolved, that is to say permanently discontinued and could no longer be made liable as such. Of course, if the appeal Court decision is taken to have held that section 44 did not contemplate the case of the dissolution of a firm at all, then I am bound by it, but I do not think that it is the correct interpretation of it, and, as such, the matter is still open for me .to express my own opinion. The learned standing counsel then tried to argue that even after dissolution, a firm need not necessarily be said to have dis continued its business, because it still carries on business for the purpose of winding up. In my opinion, this is not a point of substance. The position in the case of winding up of a firm has been explained in Lindley on Partnership, 11th edition, page 722, at

723. It has been pointed out that the purposes of winding up, a partnership is "deemed" to continue, meaning thereby that this is merely a legal fiction and that in fact it does not do so. This is also made clear in sections 46 and 47 of the Indian Partnership Act. After dissolution, unfinished transactions must be finished, the debts of the firm paid and the surplus distributed amongst the partners. These provisions are based on section 39 of the English Act and the position in English Law has been stated above. For only these limited purposes, the business is "deemed" to continue, but in, fact the partnership comes to an end upon dissolution. In this case, however this is merely an academic argument because the firm has long ago been dissolved and it is nobody's case that it is being continued even partially for the purposes of winding up. Indeed, as Mr. Meyer pointed out, the respondents would gladly accept the position that the firm had not yet been dissolved and that it has not discontinued business, because then they can proceed against the firm. This is a position however which the petitioner does not accept with any degree of enthusiasm. Mr. Meyer has taken several minor points which I may briefly refer to, although in view of my decision upon the main issue it is un necessary to do so. He has stated that in the pleadings there has been an attempt by the petitioner to mislead the Court. The facts stated in the pleadings, particularly with reference to the previous application, might have been more precisely and accurately stated, but I do not think that it can be said that there has been any actual attempt to mislead the Court. Mr. Meyer next takes a point of res judicata. He says that in the previous application the same point arose and the party proceeded on the footing that section 44 applied and it is now not open to the petitioner to take up the position that under section 44 he should not be made liable. There can be no doubt that the petitioner is taking two inconsistent positions in the two applications. However, the notices in the two cases are not the same, and if there was a real lacuna in the law then I do not think that the application could have been thrown out on the ground of res judicata or principles analogous thereto or on the ground of estoppel. The result is that I must hold that even before the amendment of section 44 of the Act, it was possible to proceed against the partners of a firm which had been dissolved and had completely stopped doing business. Accordingly, the notice under section 34 upon the petitioner was quite legal and no grounds have been shown for my interference. The application is dismissed. The rule is discharged, interim orders vacated. There will be no order for costs. The operation of this order is stayed for a month to enable the petitioner to prefer an appeal. Petition dismissed.