Holding

Section 44 (pre‑amendment) applies to a dissolved firm where the dissolution results in discontinuance of business, allowing the Income‑Tax Officer to assess the firm as if it had not been dissolved.

Summary

M/s. Nagarmal Baijnath, a partnership firm, was dissolved on 2 December 1946 and its business was discontinued. Income‑tax and excess‑profits‑tax assessments for the years 1946‑47 and 1947‑48 were nonetheless made in the name of the firm after its dissolution. The assessee initially raised no objection, but later sought to set aside the assessments on the ground that a dissolved firm could not be assessed under the pre‑1958 Section 44 of the Income‑Tax Act, 1922. The Tribunal allowed the new ground, the High Court upheld the Revenue, and the Supreme Court was asked to decide whether Section 44 permitted assessment of a firm whose dissolution resulted in discontinuance of business. The Court held that Section 44 covered both discontinuance and dissolution, and when dissolution leads to discontinuance the officer may assess the firm as if it continued, making the assessments valid. Consequently, the appeal was dismissed.

Issues considered

Whether Section 44 of the Income‑Tax Act, 1922 (as originally enacted) authorises the assessment of a partnership firm that has been dissolved and whose business has been discontinued at the time of assessment.
Whether assessments made on such a dissolved firm are void for lack of statutory authority.

Legislation cited

Subjects

Income TaxSection 44Dissolved partnershipBusiness discontinuanceJoint and several liabilityTax assessmentStatutory interpretation

Judgment

r'

___,.,._,
NAGARMAL BAUNATH A
v.
COMMISSIONER OF INCOME TAX

MARCH 26, 1993
-,.. (B.P. JEEVAN REDDY AND N. VENKATACHALA, JJ.)
B
""'
Income tax Ac4 1922: Section 44 (prior to amendment by Finance Act,
1958)-Scope of-Dissolution of jinn and discontinuance of business-As-
sessment on dissolved firm-Correctness of c
The appellant-assessee, a Rrm which did business during the ac-
--"ff-- - counting years relevant to assessment years 1946-47 and 1947-48, was
dissolved by a deed or dissolution dated December 2, 11146, and Its business
discontinued. Notices were Issued In the name or the partnership firm and
assessments were completed under the Income-tax Act 1922 and Excess D
Profits Tax Act, 1948. Indeed, the returns were filed in the name or the
firm.

During the course or the assessment proceedings under both the
- )< enactments viz. Income-tax and Excess Profit Tax Act, no objection was E
'1. taken as to the validity or the proceedings. Against the orders or assess-
ment, appeals were preferred to the ApP!'llate Assistant Commissioner.
In these appeals also the validity or the assessment order was not chal-
lenged. Even In the further appeals before the Tribunal, no oljjectlon was
taken to the validity or the assessments. Subsequently, however, pennis-
sion was sought for raising additional grounds questioning the validity or
F
, the assessment proceedings. Though, Revenue opposed the same, the
'_..
Tribunal permitted the said new ground to be raised on the ground that
the Income-tax Offieer was aware that the business of the Rrm was dosed.
Ultimately, the Tribunal dismissed the appeals. ·Thereupon the assessee
obtained the reference and since It could not succeed even before the High G
Court, the assessee filed the present appeals.
/If.~
• It was contended on behalf or the appellant-assessee that under the
nnamended Section 44, no assessment could have been made upon a firm
which was dissolved by the time the assessment was made. H
645
646 SUPREME CbURT REPORTS (1993] 2 S.C.R.

A Dismissing the appeals, this Court,

HELD: 1.1. Section 44 of the Income-tax Act, 1922 (before its Amend·
ment by Finance Act, 1958) covered two situations: (1) where any business,
profession or vocation carried on by a firm or association of persons was
discontinued and (2) where an association of persons was dissolved•. In
B either of these situations, every person who at the time of such discon·
tinuance or dissolution was a partner of such firm or member of such
a'ssociation was made jointly and severally liable to assessment under
Chapter IV in respect of the income, profits and gains of the firm or
association as the case may be. The joint and several liability extended to
·C the payment of the tax. [650 C·D]

1.2. The instant case is one where the dissolution of the firm resulted
in discontinuance of its business. This Court is not concerned with the
situation where the firm was dissolved but its business was not discon·
tinned, a distinction which has to be borne in mind. In the case of '
D dissolution resulting in discontinuance of business S.44 of the Income-tax
Act, 1922 enabled the Income-tax Officer to make an assessment on the
dissolved firm. Indeed this aspect is no longer res integra in view of the
settled law. [650 E-H]

E CA. Abraham v. Income Tax Officer, Kottayam & Anr., 41 I.T.R. 425
and Shivram Poddar v. Income Tax Officer, Central Circle II, Calcutta & Anr.,
51 I.T.R. 823, relied on.

C.I.T., Bombay v. Devidayal, 68 I.T.R. 425, Laxmidas v. C.I.T.
Bomaby, 12 I.T.R. 88 and Nagarmal Baijnath v. C.I. T., 114 I.T.R. 133,
F referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 156·
5711979.

From the Judgment and Order dated 5.11.1977 of the Bombay High
G Court in Incoine Tax Reference No. 44 of 1968.

U. Rajagopi~ and Ashok Mathur for the Appellant.

A Raghubir and Ms. A Subhasbini for the Respondent

H The Judgment of the Court was delivered by
NAGARMALBAIJNAIB v. C.l.T. (JEEVANREDDY,J.] 647
~
~.
B.P. JEEVAN REDDY, J. These appeals are preferred against the A
~-
judgment of the Bombay High Court in Income Tax Reference No.44/68.
The question referred under Section 66(1) of the Indian Income Tax Act,
1922 and Section 21 of the Excess Profits Tax Act, 1948 for the opinion of
the High Court reads thus:
.__,._
-· "Whether, on the facts and in the circumstances of the
case, the Income-Tax assessments for the years 1946-47
and 1947-48 and excess profits tax assessments for the
B

chargeable accounting period ending 4.11.1945 and
31.3.1946 made on M/s. Nagarmal Baijnath, a firm which
was dissolved and whose business was discontinued at the c
time of the assessments, were validly made?"
~~
The appellant-assessee, M/s. Nagarmal Baijnath was a firm which did
business during the accounting years relevant to assessment years 1946-47
and 1947-48, the previous years being the years ending November 4, 1945
and March 31, 1946 respectively. By a deed of dissolution dated December D
2, 1946, the firm was dissolved and its business discontinued.

Notice under Section 22(2) of the Act relating to the assessment
years 1946-47 was issued in the name of the partnership firm and served
on one Satyanarayan who accepted it on behalf of the firm, on August 19,
-¥.
, E
..,,_ 1946. Subsequent notices under Sections 22(4) and 23(2) were also issued
in the name of the firm and assessment completed on March 23, 1951 on
.the firm. The same procedure was adopted with respect to the assessment
year 1947-48 and assessment completed on the firm on March 10, 1952. So
far as the assessments under the Excess ·Profits Tax Act are concerned,
'notices were issued again in the name of the firm and assessments com- F
pleted in the name of the firm. Indeed, the returns were filed in the name
of the firm signed by Baijnath Gajanand for and on behalf of the firm.

1 ./
During the course of the assessment proceedings under both the
enactments, no objection was taken by anyone on .behalf of the assessee to
the validity of the proceedings. Against the orders of assessment, appeals
were preferred to the Appellate Assistant Commissioner. Even in these
appeals the validity of the assessment orders was not challenged. On the
G

appeals being dismissed, further appeals were filed before the Income Tax
Appellate Tribunal. In the grounds of appeal before the Tribunal too, no
objection was taken to the validity of the assessments. Subsequently, how- H
648 SUPREME COURT REPORTS [1993) 2 S.C.R.

A ever, permission was sought for raising additional grounds in appeal ques-
tioning the validity of the assessment proceedings. Though, the Revenue
opposed the same; the Tribunal permitted the said new ground to be
raised, observing that even from the assessment order relating to the
assessment year 1946-47, it appears that 'the Income-Taic Officer was
aware that tht business of the firm was closed.' Ultimately,-however, th~
B Tribunal dismissed the appeals. It is there_l!P()n that the appellant obtained
the reference under Section 66(1).

The only question urged by the appellant before the High Court was:
inasmuch as the firm. stood dissolved prior to the date the orders of
C assessment relating to the said two assessment years were made, the orders
of assessment are void. It was urged that Section 44 of the Act did not
authorise the Revenue to make an assessment on the firift after it was
dissolved. The High Court first noticed the factual finding recorded by the
Tribunal viz., when the assessments were made on the firm, the firm was
D not in existence, having been dissolved prior to that date and its business
discontinued. The High Court also noticed the contention of the assessee
that inasmuch as "prior to the dates of the respective assessments, the firm
had been dissolved. and its business discontinued" the assessments made
were contrary to law, in support of which contention the appellant-assessee
relied upon a judgment of the Gujarat High Court in Special Civil Applica-
E tion No.429/60, disposed of on November 12, 1985. The High Court refused
to follow the said judgment . in view of the consistent view taken by the
Bombay High Court that even under the unamended Section 44, it was
permissible for the Revenue to make an assessment upon a dissolved firm
after its dissolution and discontinuation of business. Accordingly, it
answered the question referred to it in the affirmative i.e., against the
F
assessee and in favour of the Revenue.

In this appeal, it is contended by Sri V. Rajagopal, learned counsel
for the appellant that under the unamended Section 44, no assessment
could have been made upon a firm which was dissolved by the date of the
G assessment. Learned counsel laid emphasis on the language of the Section.
He pointed nut that so far as the discontinuance is concerned, it referred
both to association of persons as well as the firms, but when it referred to ':.-
_dissolution, it only referred to association of persons but not to the firm.
This was a clear pointer, says the counsel, to the fact that the section did
H not apply to dissolution of a firm though it may have applied to its
NAGARMALBAIJNATII v. C.l.T. [JEEVAN REDDY,J.] 649

discontinuation .. He further submitted that the mere application of the A
provisions of Chapter IV for the purpose of assessment did. not mean that
an assessment could be made upon a non-existent entity. He contrasted the
language of unamended Section 44 with the language employed in
amended Section 44 and submitted that the very defect pointed out by him
in the unamended provision was rectified by the amendment, and the
omission supplied. He emphasised the proposition that an assessment
B
cannot be made upon a non-existent entity and that such an assessment is
void in law - unless, of course, the law provides for such a course in express
terms. No such provision was there in Section 44 before it was amended
in 1958, says the counsel.

On the other hand, it is contended by Sri A. Raghuvir, learned
c
counsel for the Revenue that' the contention· urged by the appellant is
concluded against him by the decisions of this Court and that it is too late
in the day to re-agitate the said question.

Section 44 of the Indian Income Tax Act, 1922 prior to.its amend- D
ment by the Finance Act, 1958, read as follows:

"Liability in case of discontinued finn or association:

Where any business, profession or vocation carried on by
.· -;.x a firm or association or persons has been discontinued or E
where an association of persons is dissolved, every person
who. was at the time of such dis-continuance or dissolution

- a partner of such firm or a member of such association
shall, in respect of the income, profits and gains of the
firm or association, jointly and severally liable to assess-
F
ment 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.'

After it was amended, the Section read thus:
G
"44. Liability in case of fimt discontinued or dissolved:

(1) Where any business profession or vocation carried on
by a firm on other association or persons has been dis-
continued, or ~ere a firm of other association of persons
is dissolved, the Income Tax Officer shall make an assess- H
650 SUPREME COURT REPORTS [1993) 2 S.C.R.

A ment of the total income of the firm or other association
of persons as such as if no such discontinuance or dissolu-
tion had taken place.

(2) Every person who was at the time of such discon-
tinuance or dissolution a partner of the firm or a member
B of the association, 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 assessment or imposition or penalty."

C Unamended Section 44, it is evident, covered two situations: (1)
where any business, profession or vocation carried on by a firm or associa-
tion of persons was discontinued and (2) wh~n as association of persons -~
'
was dissolved. In either of these situations, every person who at the time
of such discontinuance or dissolution was a partner of such firm or member
D of such association was made jointly and severally liable to assessment
under Chapter IV in respect of the income, profits and gains of the firm
or association, as the case may be. The joint and several liability extended
to the payment of the tax held payable. All the_ provisions of Chapter IV,
so far as the case may be, were made applicable for such assessment.

E In this case,. we are dealing withe the situation where the dissolution
of the firm resulted in discontinuation of its business. We are not con-
cerned herein with the situation where the firm was dissolved but its
business was not discontinued. It is necessary to bear this factual premise
in mind. Indeed, on a pointed query from us, the counsel for the appellant
F stated that this was a case where the dissolution resulted in discontinuance
of business. The question is whether in such a case, does not Section 44
enable the Income Tax Offietr to make an. assessment on the dissolved
firm? We are of the opinion that it does. Indeed this aspect is no longer
res integra in view of the decisions of this Court in CA. Abraham v. Income
Tax Officer, Kottayam & Anr., 41 l.T.R. 425 and Shivram Poddar v. Income
G Tax Officer, Cemral Circle II, Calcutta & Anr., 51 I.T.R. 823. In Abraham,
the firm stood dissolved on the death of a partner and the penalty under
Section 28 of the Act was imposed after its dissolution. It was contended
by the assessee that such imposition was illegal, which contention was
~ =
negatived with reference to unamended Section 44. That was also a case
H where the business of the firm was discontinued because of the dissolution.
r
NAGARMAL BAIJNATH v. C.l.T. [JEEVAN REDDY, J.) 651

The purport of Section 44 was stated by Shah, J ., speaking for the Beocli, A
in the following wor<ls:

"Section 44 sets up machinery for assessing the tax liability
of firms which had discontinued their business and
provides for three consequences,
B
(l} that on the discontinuance of the business of a firm,
every person who was at the time of its discontinuance a
partner is liable in respect of income, profits and gains of
the firm to be assessed jointly and severally (2) each
partner is liable to pay the amount of tax payable. by the
firm, and (3) that the provision of Chapter IV, so far as
c
may be, apply to such assessment... ...

In effect, the Legislature had enacted by Section 44 that
the assessment proceedings may be commenced and con-
tinued against a firm of which business is discontinued as D
if discontinuance has not taken place. It is enacted
manifestly with a view to ensure continuity in the applica-
tion of the machinery provided for assessment and imposi-
tion of tax liability notwithstanding discontinuance of the
business of firms. By a fiction, firm is deemed to continue
E
.:. after discontinuance for the purpose of assessment under
Chapter IV.'

- In our opinion, the above observations squarely apply to the present
case which is also a case where the dissolution of the partnership firm led
to discontinuance of its business. F
To the same effect is the decision in Shivram Poddar. The firm
consisted of four partners including Shivram Poddar. It was dissolved in
February, 1950 and thereupon its business was discontinued. For the
assessment year, 1949-50, one of the partners of the firm submitted a return
of its income and the assessment was made on October 28, 1952 in the G
status of an un-registered firm. Subsequently, in March, 1955 notice was
issued under Section 44 of the Act proposing to re-open. the assessment
for the said assessment year whereupon Shivram Poddar approached the
Calcutta High Court for issuance of a writ of mandamus commending the
Income Tax Officer to forbear from giving effect to the said .notice. _The H
'( . f
•
'
652 SUPREME COURT REPORTS [1993) 2S.C.R.

A High Court dismissed the Writ Petition, whereupon the matter was brought
~·'· l
to this Court. The question arising for consideration was stated by Shah,
' J., speaking for the Bench in the following words:

'The question which falls to be determined in this appeal
is whether the income earned by the firm in the year
B ending March, 1950 could be assessed to tax under Section
44 of the Indian Income-Tax Act, 1922, after the firm was
dissolved.

The learned Judge set out the unamended Section 44 and its object
as adumberated in Abraham and observed thus:
c
'Section 44 operates in two classes of cases: where there
is discontinuance of business, profession or vocation car-
ried on by a firm or association, and where there is
dissolution ofan association. It follows that mere dissolu-
D tion of a firm without discontinuance of the business will
not attract the application of section 44 of the Act. It is
.
'
only where there is discontinuance of business, whether
as a result of dissolution or other cause, that the liability
io assessment in respect of the income of the firm under \
Section 44 arises. In the case of an association, discon-
E
tinuance of business for whatever cause, and dissolution
with or without discontinuance of business, will both at-
tract section 44. The reason for this distinction appears
from the scheme of the Income-Tax Act in its relation of
assessment of the income of a firm.'
-
F
After explaining the scheme ofthe 1922 Act and after referring to
the relevant provisions in that behalf, the learned Judge proceeded to state:
(
'Section 44, is therefore, attracted only when the business
of a firm is discontinued, i.e., when there is complete
G cessation of the business and not when there is a change
in the ownership of the firm, or ~n its re-constitution,
because by re-constitution of the firm, no change is
brought in the personality of the firm and succession to
the business and not discontinuance of the business
H results ........ "
NAGARMAL BAUNATII v. C.l.T. (JEEVAN REDDY,J.] 653

The learned Judge concluded, on a examination of the scheme of the A
Act, that:

'absence of reference to dissolution of firm (not resulting
in dis-continuance in Section 44) in section 44 was there-
+ fore a logical sequel to the provisions relating to assess-
ment of firms contained in Chapter IV, especially sections B
23(5), 25(1), 26(1) and (2)."

In our opinion, these two decisions are conclusive on the question
arising herein. The appeals are accordingly liable to fail.

So far as the unreported decision of the Gujarat High Court is
c.
concerned, the facts of that case appear to be different. It is sufficient to
mention that even the said decision recognised that where the dissolution
of the firm resulted in disconti!'uance of its business, assessment could be
made on the dissolved firm having regard to the provisions contained in
unamended Section 44. This is what the Division Bench observed, i.e.: D
"Now if there was discontinuance of the business of the
first petitioner firm on its dissolution, it is clear that the
unamended Section 44 would have governed the question
of assessment of the first petitioner firm and having regard
E
to the decisions of the Supreme Court just referred to, the
Revenue would have been entitled to assess the first

-- petitioner firm as a firm despite its dissolution. n

The very same idea was repeated at a later stage in the following
words: F

"If there is discontinuance of the business, Section 44
would apply and the Revenue would be entitled to
proceed to assess the firm as if no dissolution had taken
place. (Vide CA. Abraham v. Income Tax Officer, Com-
1nissio11er of l11con1e Tax v. Angadi Cltettiar & Con11nis- G
sioner of btcome tax v. Rais Reddy Mal/aram (supra). But
if there is no discontinuance of the business and there is
succession, the case would fall within Section 26(2). That
section, however, does not enact a provision enabling the
Revenue to assess a dissolved firm on its pre-dissolution H
654 SUPREME COURT REPORTS (1993) 2 S.C.R. :~
A income in case of succession."

We are, therefore, of the opinion that the said decision does not lay
down any principle contrary to the one enunciated in Abraltam or Shivram
Paddar.

B In this view of the matter, we do not think it necessary to deal with
the facts and principles enunciated in the decisions of the Bombay High
Court referred to in the order under appeal. Suffice it to say that the
decisions in C./. T., Bombay v. Devidayal, 68 I.T.R. 425, Laxmidas v. C.l. T.
Bombay. 72 I.T.R. 88 and the one in Nagannal Baijnath v. CJ. T., 114 I.TR
133 affirm and follow the principle in Abraham.
c
For the above reasons, the appeal fails and is accordingly dismissed. -..~,c~
No costs.

G.N. Appeal dismissed.

-

J