# Anr., 41 I.T.R. 425 and Comml1Sloner of lnco-.t=, Madr01 A Anr v. S. V. Angidl Chtttlar, 44. I.T.R. 739, applied

- **Citation:** [1969] 3 S.C.R. 983
- **Court:** Supreme Court of India
- **Decided:** 1969-03-12
- **Case number:** Civil Appeal No. 2456 of 1966
- **Bench:** J. C. Shah A~D A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/anr-41-i-t-r-425-and-comml1sloner-of-lnco-t-madr01-a-anr-v-s-v-angidl-chtttlar-4711
- **Pages:** 6

## Headnote

Indian Jnrome-tax Act, 1922, ss. 26, 28, 44 and 66-Pena/ty leviah/e
on firn: for assess1nent year 194849-Firin reconstituted in later years
but business not discontinued-Penalt,v in respect of
1948-49 whether
/eviable on reconstituted firm-Sect.ion 44 not apjJlicable to such CllllsApplicahility of ss. 26 and 28-Question not rc.·ised before Tribunal cannot he raised in reference under s. 66.
The respondent was a firm on which penalty under s. 28(1)(c) ot
the Indian Income-tax Act, 1922 was imposed by the Income-tax Officer
in respect of the assessment year 1948-49. At the time when the penalty
was imposed the cpnstitution of the firm had changed though the same
business was continued by the reconstituted firm.
The appeals filed by
the respondent before the Appellate Assistant Commissioner and the Tribunal were rejected. In reference the High Court held that penalty could
be legally imposed upon the original firm constituted in the account year
relevant to the assessment year 194849 and not upon the new firm constituted in 1952.
In coming to their conclusions the Tribunal as well a!
the. High Court proceeded on the assumption that the source and power
of the Income-tax Officer to impose a penalty was in s. 44 of the Indian
Income-tax Act, 1922.
In appeal by the Revenue to this Court,
HELD : (i) Section 44 only applies to those <ases in which· there has·
been discontinuance of the business and not to cases in which the business continues after the reconstitution of the firm, or there is succession
to the business. Cases of reconstitution df the firm or succeso;ion to the
business are covered by ss. 26(1) and (2~. The Tribun•l and the High
Court were therefore in ctr.or
in relying on s. 44 of the Act. [988 A;
985 D-E]
(ii) Assessment in Ch. IV of the Income-tax Act 1922 includes
a
proceeding for imposition of penalty and the expression 'per~on' includes
for the purpose of s. 28 a firm registered or unregistered. If there is recbn·stitution of the firm by virtue of s. 26, the Income-tax Officer will in
imposing the penalty proceed against the firm. lf there is discontinuance
of the business penalty will be imposed against the partners of the firm.
[988 B-0]
In the present case, however, this Court could not go into the question
\vhether penalty on the respondent firm was leviahle under the terms of
ss. 26 and 28 even though the question raised by the Tribunal was irt terms
sufficiently comprehensive
to
embrace
the enquiry.
In a
refetence
under s. 66 of the Indian Income-tax Act. 1922, only the question which
was either raised or argued before the Tribunal may be answered, even if
the language of the question framed by the Tribunal may apparently include an enquiry into other matters which could have been but were not.
raised or argued. [988 D-Fl
Shivr.m Poddar v. lncom•-tax Officer, Central Circle ll, Calcutta ~
Anr., 51 I.T.R. 823, C. A. Abraham v, Jncom•-tax Officer, Kottav•m qnd
98.&
Sl!PUM• OOUllT llPOlln
[1909] 3 S.C.L
Anr., 41 I.T.R. 425 and Comml1Sloner of lnco-.t=, Madr01 A Anr. v.
S. V. Angidl Chtttlar, 44. I.T.R. 739, applied,
S. M. S. Karuppl•h Pillai Y. Comml'11oner qf lncom<·t= Madr01, 9
I.T.R. 1, approved.

## Text

98~
A
COMMISSIONER OF INCOME-TAX, BIHAR & ORISSA,
PATNA
B
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F
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v.
MIS. KIRKEND COAJ, COMPANY
March 12, 1969
[J. C. SHAH A~D A. N. GROVER, JJ.)
Indian Jnrome-tax Act, 1922, ss. 26, 28, 44 and 66-Pena/ty leviah/e
on firn: for assess1nent year 194849-Firin reconstituted in later years
but business not discontinued-Penalt,v in respect of
1948-49 whether
/eviable on reconstituted firm-Sect.ion 44 not apjJlicable to such CllllsApplicahility of ss. 26 and 28-Question not rc.·ised before Tribunal cannot he raised in reference under s. 66.
The respondent was a firm on which penalty under s. 28(1)(c) ot
the Indian Income-tax Act, 1922 was imposed by the Income-tax Officer
in respect of the assessment year 1948-49. At the time when the penalty
was imposed the cpnstitution of the firm had changed though the same
business was continued by the reconstituted firm.
The appeals filed by
the respondent before the Appellate Assistant Commissioner and the Tribunal were rejected. In reference the High Court held that penalty could
be legally imposed upon the original firm constituted in the account year
relevant to the assessment year 194849 and not upon the new firm constituted in 1952.
In coming to their conclusions the Tribunal as well a!
the. High Court proceeded on the assumption that the source and power
of the Income-tax Officer to impose a penalty was in s. 44 of the Indian
Income-tax Act, 1922.
In appeal by the Revenue to this Court,
HELD : (i) Section 44 only applies to those <ases in which· there has·
been discontinuance of the business and not to cases in which the business continues after the reconstitution of the firm, or there is succession
to the business. Cases of reconstitution df the firm or succeso;ion to the
business are covered by ss. 26(1) and (2~. The Tribun•l and the High
Court were therefore in ctr.or
in relying on s. 44 of the Act. [988 A;
985 D-E]
(ii) Assessment in Ch. IV of the Income-tax Act 1922 includes
a
proceeding for imposition of penalty and the expression 'per~on' includes
for the purpose of s. 28 a firm registered or unregistered. If there is recbn·stitution of the firm by virtue of s. 26, the Income-tax Officer will in
imposing the penalty proceed against the firm. lf there is discontinuance
of the business penalty will be imposed against the partners of the firm.
[988 B-0]
In the present case, however, this Court could not go into the question
\vhether penalty on the respondent firm was leviahle under the terms of
ss. 26 and 28 even though the question raised by the Tribunal was irt terms
sufficiently comprehensive
to
embrace
the enquiry.
In a
refetence
under s. 66 of the Indian Income-tax Act. 1922, only the question which
was either raised or argued before the Tribunal may be answered, even if
the language of the question framed by the Tribunal may apparently include an enquiry into other matters which could have been but were not.
raised or argued. [988 D-Fl
Shivr.m Poddar v. lncom•-tax Officer, Central Circle ll, Calcutta ~
Anr., 51 I.T.R. 823, C. A. Abraham v, Jncom•-tax Officer, Kottav•m qnd
98.&
Sl!PUM• OOUllT llPOlln
[1909] 3 S.C.L
Anr., 41 I.T.R. 425 and Comml1Sloner of lnco-.t=, Madr01 A Anr. v.
S. V. Angidl Chtttlar, 44. I.T.R. 739, applied,
S. M. S. Karuppl•h Pillai Y. Comml'11oner qf lncom<·t= Madr01, 9
I.T.R. 1, approved.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2456 of
1966.
Appeal from the judgment and order dated January 27, 1964
of the Patna High Court in Misc. Judicial Case No. 299 of 1958.
D. Narsaraju, S. K. A.iyar, R. N. Sachthey .and B. D. Sharma,
· for the appellant.
C. K. Daphtary, Narain Rao, V. D. Narayan and D. Goburdhun, for the respondent.
The Judgment of the Court was delivered by
A
B
c
Shah, J. In determining the taxable income of the respon·
dent firm for the assessment year ~948-49 the Income-tax Officer
added to the income returned a sum of Rs. 1,60,000 as 'undis·
closed rcc.~ipts'. The order was confirmed in appeal by the
D
Appellate Assistant Commissioner, and by the Tribunal. The
Income-tax Officer had in the meantime commenced a proceeding
for the levy of penalty and in exercise of the power under s. 28
( 1 )( c) of the Indian Income-tax Act, 1922 he directed the res·
pendent firm to pay Rs. 60,000 as penalty. The Appellate Assistant Commissioner in appeal confirmed the order. The Income- z
tax AJ)pellate Tribunal rejected the contention of the respondent
that the order imposing penalty upon the firm after the original
firm was dissolved was without jurisdiction. '
The Tribunal referred at the instance of the respondent firm
the following question to the High Court of Patna for opinion;
"Whether on the facts and in the circumstances of
F
the case the imposition of penalty under s. 28 ( 1 )( c)
of the Indian Income-tax Act, upon the petitioner firm
(respondent) as constituted at the time of levy of
penalty was legal and, valid?"
The High Court called for a supplementary statement of the
case and pursuant thereto the Tribunal submitted a statement on
G
the specified points raised by the order of the High Court that :
( 1) The firm which carried on the business during
the calendar year 1947 was dissolved on July 7, 1951
when Butta Kristo Roy, one of the partners, died.
(2) During the previous year 1947 there was no
ff
instrument of partnership in existence, but the terms
of the oral partnership were the same as set out in the.
partnership deed dated October 17, 1949.
........... A
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C,I.T. V. KIRKEND COAL CO. (Shah, J.)
( 3) The business of the firm was continued with
effect from July 8, 1951 by the new firm as successor
to the business of the old firm.
l:he terms of the partnership were the same as set out in the deed dated
October .17, 1949 and the partners and their shares
were also the same except that Baidyanath Roy took
the place of Butto Kristo Roy.
(4) With effect from April 28, 1952, the business
was carried on by a partnership constituted by Baidyanath Roy and Bijali Kanti Roy under an instrument
dated August 27, 1952. There was no dissolution of
the firm, which was carrying on the business; there
was only a change in the constitution of the old firm
from April 28, 1952.
The High Court held that penalty could be legally levied only
upon the original firm constituted in the account year relevant
to the assessment year 1948-49 and not upon the new firm constituted under the deed dated April 27, 1952.
The Tribunal and the High Court approached the problem
before th.em on the assumption that the source of the power .of
the Income-tax Officer to impose a penalty was in section 44 of
the Indian Income-tax Act, 1922. In so assuming, in our judgment, they were in error. Section 44 of the Indian Income-tax
Act, 1922, as it stood at the relevant date, in so far as it is material provided :
"Where any business, profession or vocation carried
on by a firm . . . . has been discontinued . . .
every person who was at th.e time of such discontinuance . . . . . a partner of such firm . . . . .
shall, in respect of the income, profits and gains of the
·firm . . . . . be jointly and severally liable to
assessment under Chapter IV and for ihe amount of tax
payable and ·all the provisions of Chapter IV shall, so
far as may be, apply to any such assessment".
The section is fairly plain : it applies to cases of discontinuance
of the business of a firm and not wh.ere there is dissolution of the
firm but not discontinuance of.its business.
In S. M. S. Karuppiah Pillai v. Commissioner of Income-tax,
Madras( 1 ), in dealing with the effect of s.
44 ol' the Indian
Income-tax Act, 1922, before if was amended by Act 7 of 1939,
a Full Bench of the Madras High Court observed :
·
·
"This section (s.44) only applies when there has
been discontinuance of the business, ... , The section
(I) 9,~.T.R, 1.
986
SUPREME COU..T RllPOJ.TS
(1969] 3 S.C.R.
mys that if a business is discontinued the partners shall
nevertheless be jointly and severally liable for the proli cs which had been earned".
A
In Shivram Poddar v. Income-tax Officer, Central Circle II,
Calcuca oni Anr. (1)
this Court examined the scheme of
s. 44 (bfore it was amended by the Finance Act of 1958) and
B
its inter-relation with the provisions of ss. 25 (I), (2), 26( 1),
(2) anJ 28(l)(c) in some detail.
The Court observed :
"Section 44 operates in two classes of cases; where
there is discontinuance of business, profession or voca.
ticin carried on by a firm or association, and where
there is dissolution of an association. It follows that
mere dissolution of a finn without discontinuance of
the business will not attract the application of s.44 of
the Act .
The reason for this distinction appears from
the
scheme of the Income-tax Act in its relation to assessment of the income of a finn.
A finn whether registered or unregistered is recognised under the Act as
a m.it of assessment (sections 3 and 2(2) ), and its
income is computed under clauses (3) and
(4) of
section 23 as the income of any other unit. Section
25 ( 1) relates to assessment in cases of a discontinued
business-whether the business is carried on by a firm
or by any other person. . . . . . Then there is the
special provision relating to
assessment when at the
time of making an assessment it is found that a change
has occurred in the constitution of a firm, or a firm
has been newly constituted : section 26 ( 1). The date
on which the change has occurred is immaterial; it may
be in the year of account, in the year of assessment or
even after the close of the year of assessment. The Income-far.: Officer has under section 26(1) to assess the
!inn as constituted at the time of making the assessment, but the income. profits and gains of the previous
year have. for the purpose of inclusion in the total inCOIT'.e of the partners, to be apportioned between the
nartners who were entitled to receive the same.
Subsection (2) of section 26 relates to assessment in the
case of succession to a person (which expression includes a fi•m) carrying on a business by another person in such capacity. . . . . . · Discontinuance of
business
has
the
same
connotation
in
section 44 as it has in section 2 5 of the Act; it does not
11) ~11.T.R. 823.
c
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C.l.T. v. K!J.DND C.OA.L eo. (Shah, J.)
cover mere change 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. . . . .
But the
Income-tax Act recognises a firm for purposes of assessment as a unit independent of the partners constituting
it; it invests the firm with a personality which survives
reconstitution.
A firm discontinuing its business may
be assessed in the manner provided by section 25 ( 1)
in the year of account in which it discontinues its business; it may also be assessed in the year of assessment.
In either case it is the assessment of the income of the
firm. 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
(I ) , and if there be succession to the business assessment has to be made under section 26(2). The provisions rehting to assessment on reconstituted or newly
c0wtituted firms. and on succession to the business are
obligatorv.
Therefore, even when there is change in
the ownershio of the business carried on by a firm on
reconstitution or because of a new constitution, assessment mmt still be made upon the firm.
When there
is succession, the successor and the oerson 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".
987
Two other cases decided by this Court mav be briefly noticed.
In C. A. Abrah'1m "·Income-tax Officer, Kotrayam and Another(') there was discontinuance of the business of the firm
consequent upon dis<olution of the firm. s. 44 was held applicable, and it wns Jield that imnosition or penaltv beimt a nrc>cess
of assessment the Tncnme-tax Officer was not incnmnetent to levv
penaltv after discontinuance of the business.
In Commis•ioner
of Tnrnm~-tn~. M11dra• an-I Anmher v. S. V. AnviJ; Ch•t•iar(')
this Court held th~t the Income-tax Officer coulcl exercise under
s. 44 read with s. 28 power to impose penalty uoon the firm which
discontinued its business on dissolution caused by the death of
one of the partners.
Ill 41 T.T.lt 42~.
:l) .. J.T.R. 739.
988
SUPREME COURT REPORTS
[!969] 3 S.C.R·
Section 44 therefore only applied to
those cases in which
there had been discontinuance of the business and not to cases
in which the business continued after reconstitution of the firm,
or there was succession to the business.
Cases of reconstitution
of the firm or succession to the business of the firm are covered
by ss. 26(1) and (2).
"Assessment'' in Chapter IV of the Income-ta-,: Act,
1922,
includes a proceeding for imposition of penalty.
Section 28 of
the Act authorises the Income-tax Officer, if satisfied,
in the
course of any proceeding under the Act that any · person has,
inter a/ia, concealed the particulars of his income or deliberately
furnished inaccurate particulars of such income, to direct that
such person shall p~y by way of penalty,
a sum of money not
exceeding the amount specified therein in addition to the income·
tax and super-tax payable by such person. The expression
"person" includes for the purpose of s. 28, a firm registered or
unregistered. If there is reconstitution of the firm, ·by virtue of
s. 26, the Income-tax Officer will in imposing the penalty proceed
against the firm.
Tf there is discontinuance of the business penalty
will be imposed against the partners of the firm.
Before the Tribunal and the Higi\ Court the case was argued on
the footing that s. 44 alone was applicable. Whether under the
terms of s. 26 read with s. 28, penalty may be imposed upon the
new partners for the failure of the partners of the firm constituted
in the year of account relating to the assessment 1948-49 was
never investigated.
The question raised by the Tribunal is in
terms sufficiently comprehensive to embrace an enquiry whether
partners of the firm in existence on July 30, 1954, were liable to
be assessed to penalty as successors in interest of the partners of
the original firm in existence in the year of account relating to
the assessment year 1948-49. But in a reference under s. 66 of
the Indian Income-tax Act, 1922, only the question which was
either raised or argued before the Tribunal may be answered,
even if the language of the question framed by the Tribunal may
apparently include an enquiry into other matters which could
have been, but were not, raised or argued.
The aopeal fails and is dismissed.
In the circumstances of
the case there will he no order as to costs in this Court.
CT.C.
Appeal di.nnissetl,
A
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