Pr. Commissioner Of Income Tax, Kota v. M/S. Patel Agarwal & Company Through

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 265/2017 Pr. Commissioner Of Income Tax, Kota ----Appellant Versus M/s. Patel Agarwal & Company Through Partner Sh. Subhash Agarwal, 185,Shopping Centre, Kota. ----Respondent For Appellant(s) : Mrs. Parinitoo Jain HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 14/05/2018 Defects are waived. 1.By way of this appeal, the appellant has assailed the judgment andorder of the Tribunal whereby tribunal has dismissed the appeal preferred bythe appellant and confirmed the order of the CIT(A). 2.Counsel for the appellant has framed following substantial question oflaw:- 1.Whether the Tribunal was legally justified incancelling the assessment order passed u/s144/147 and in deleting the addition ofRs.1,17,57,820/- made on account of long termcapital gain specifically when the registered saledeed was executed by the firm and the ownershipof the plot by firm on date of sale was alsoconfirmed by RIICO? 2. Whether the Tribunal was legally justified incancelling the assessment order and in deleting theaddition of long term capital gain when one partnerwas alive till Feb.2010 and sale of plot was made on 26.9.2008, which was within financial year 2008-09? 3.The facts of the case are that on verification of internalrecord it was found that the assessee firm had sold a plot situatedat B-519(A), IPIA, Kota on 26.9.2008 for sale consideration ofRs.1,35,00,000/- but the assessee firm had not filed any returndeclaring any capital gain. The income has escaped assessment,therefore notice u/s 148 was issued on 1.3.2012 which was servedon 7.3.2012 on the partner Sh. Subhash Chandra Agarwal to filethe income tax return within 15 days from the receipt of thenotice. The assessee firm has not filed any return within the timeallowed u/s 148. On 27.3.2012 a letter has been received fromSh. Subhash Agarwal on behalf of firm in which he stated thatM/s. Patel Agarwal & Company was a partnership firm and nobusiness activity was carried out in this firm. 4.While considering the matter, the CIT(A) has observed asunder:- 4.12 Discussion and the AppellateDecisions The AO reproduced the assessment of thefirm observing as under:- On verification of internal record, it wasfound that the assessee firm had sold aplot situated at B-519(A), IPIA, Kota on26.9.2008 for sale consideration ofRs.1,35,00,000/- but the assessee firmhad not filed any return declaring anycapital gain. The income has escapedassessment, therefore notice u/s 148 wasissued on 1.3.2012 which was served on7.3.2012 on the partner Sh. SubhashChandra Agarwal to file the income taxreturn within 15 days from the receipt ofthe notice. The assessee submitted that the firm wasdissolved on 20.3.2003 and the plot wasdivided between the parties. The assessee also submitted that one ofthe partners, Sh. Mani Bhai Patel died andfiled copy of the death certificate. The AO held that there was no dissolutionof the firm and went on to assessee thecapital gain in the hands of the firm. The date of death of Sh. Mani Bhai Patelwas 13.2.2010. I have gone through AO’s findings andassessee’s submissions.assessee’s submissions. The firm was constituted on 16[th] October,1995 with two partners namely, Sh. ManiBhai Patel & Sh. Subhash Agarwal. Sh. Mani Bhai Patel dies on 13[th] February, 2010.2010. Notice u/s 148 was issued on 1.3.2012. The assessee submitted that the firm wasdissolved on 20.3.2003 and the plot wasdivided between the parties. The assessee also submitted that one ofthe partners, Sh. Mani Bhai Patel died andfiled copy of the death certificate. The AO held that there was no dissolutionof the firm and went on to assessee thecapital gain in the hands of the firm. The date of death of Sh. Mani Bhai Patelwas 13.2.2010. I have gone through AO’s findings andassessee’s submissions.assessee’s submissions. The firm was constituted on 16[th] October,1995 with two partners namely, Sh. ManiBhai Patel & Sh. Subhash Agarwal. Sh. Mani Bhai Patel dies on 13[th] February, 2010.2010. Notice u/s 148 was issued on 1.3.2012. The basic condition for existence of a firmor HUF is plurality of it’s member. The firmhad two partners and one of them died on13.2.2010. Therefore, the firm standsdissolved atleast on 13.2.2010. In view ofthe letter of RIICO, the AO had strongbelief that the land belonged to the firm,however when he was informed about thedeath of one of the partners (before issueof notice) he should have withdrawn thesaid notice and should have served thenotice to the legal representatives of thedeceased partner and the other survivingpartner. In my opinion, no notice can be issued toa firm which stands dissolved by death ofone of the partners. The assessee also argued that the firmnever filed its return, it never appliedregistration under the Income Tax Act andtherefore, the AO cannot grant it status ofregistered firm. The assessee placed itsreliance on the judgment of Hon’bleSupreme Court [218 ITR 239, ITO vs.Atchaiah (Ch.)]. The assessee submitted that all the factswere furnished before the AO during thecourse of assessment of Mr. SubhashAgarwal and they were accepted by him. The assessee submitted that capital gainarising from the above transaction wasdisclosed in the return of its partner, Sh.Subhash Agarwal. The assessee submitted that the firmstand dissolved on 20.3.2003 and the plotwas divided between the partners. It was seen that Sh. Subhash Agarwal inhis return of income placed a note asunder:- During this year the assessee has sold onesmall house with land in total ofRs.1,35,00,000/- on dated 26.9.2008. Itwas joint property purchased with LateMani Bhai Patel on 27.7.1996 inRs.6,00,000/- the assessee has receivedhalf of share of sale consideration whichcome to Rs.67,50,000/- and this entiresale amount of Rs.67,50,000/- is investedin purchase of house situated at 136,Rajeev Gandhi Nagar, Kota. There is nocapital gain liability on the assessee. From the perusal of copy of order sheet inthe case of Sh. Subhash Agarwal, it wasseen that the AO asked for details ofproperty sold and purchased withsupporting document. The AO recorded onthe order sheet that the property waspurchased on 27.7.1996 in co-ownershipwith Sh. Mani Bhai Patel. It was also notedby AO that copy of allotment letter ofRIICO allotting plot in joint name of Sh.Mani Bhai Patel and Sh. Subhash Agarwalwas furnished by A/R of Sh. SubhashAgarwal. From the above, it is clear that the issueof taxing the capital gain in the hands ofpartner was before AO and he had madedetailed enquiries before concluding theassessment in the case of Sh. SubhashAgarwal without going into the otheraspects of the case, the issue is decidedon legal grounds only. As mentioned by me earlier, the firmceased to exists on death of one of thepartners and therefore, notice u/s 148cannot be issud to a none existing person.Once this fact came to knowledge of AO,he should have withdrawn the notice andserved it on the legal representative of thedeceased partner and the sole surviving partner as representative of dissolvedfirm. From the above, it is clear that the issueof taxing the capital gain in the hands ofpartner was before AO and he had madedetailed enquiries before concluding theassessment in the case of Sh. SubhashAgarwal without going into the otheraspects of the case, the issue is decidedon legal grounds only. As mentioned by me earlier, the firmceased to exists on death of one of thepartners and therefore, notice u/s 148cannot be issud to a none existing person.Once this fact came to knowledge of AO,he should have withdrawn the notice andserved it on the legal representative of thedeceased partner and the sole surviving partner as representative of dissolvedfirm. It is also held that the capital gain arisingfrom above transaction was disclosed inthe hands of partner and was enquiredinto by the AO, therefore, reopening ofassessment in the case of firm is merelychange of opinion(it is worth mentioningthat the AO of assessee and its partner,Sh. Subhash Agarwal is same (ITO, Ward-1(1), Kota). Therefore, the reopening ofassessment is also held to be invalid. The very basis on which the assessmentorder was passed, did not survive.Therefore, order u/s 147 is cancelled. 4.2 Ground 2 The learned AO has erred in making theassessment u/s 144/147 even through allthe hearings were attended and alldocuments filed. 4.21 Assessee’s submissions The assessee vide letter dated NILsubmitted as under:- The order by the learned AO is bad in lawas submitted by us earlier and no ordercould be passed u/s 144/148 of the Act asonce the Firm had been dissolved noreturn could be filed by the erstwhilepartners for the year in question. In viewof this the order passed by the AO is badin law. Even if the AO was of the beliefthat the land belonged to a Firm, when hewas informed that the erstwhile partnerhad died on 13.2.2010 that is before thenotice was issued by him, he should havewithdrawn the said notice and notproceeded with the assessment. As suchhis proceeding to make the assessmentu/s 144/148 without serving a notice tothe legal representatives is bad in law andthe assessment deserves to be quashed. a. The firm was made on 16[th] October,1995 with two partners, namely Mani BhaiPatel and Subhash Agarwal. b. Mr. Mani Bhai Patel expired on 13[th] Feb.2010. The notice u/s 148 has beenreceived on 9.3.2012 that is much afterthe death of the said Mr. Mani Bhai Patel. c. The firm could not take up any workand did not carry out any business duringits existence and did not apply for any PANand the Sales Tax Registration wassurrendered long back. d. The Partners decided to dissolve thefirm on 20.3.2003 and did so by aDissolution Deed duly Notarised. As suchthe Firm ceased to exist because as perthe Partnership Deed clause 4 the Firmwas at will. e. It has been held in a plethora of casesthat a Firm which is at will standsdissolved the moment any partner givesnotice for the dissolution. In our case infact a dissolution deed has been executedand this was painted out to the AO and acopy filed before him during the course ofthe hearing. The governing law of Firms isthe Indian Partnership Act and not theIncome Tax Act. The Income Tax Actcannot presume a firm to exist which hasbeen dissolved much earlier. The Act onlyempowers the AO to tax any existingentity in the respective year in which itexisted. As such the action in making anassessment as a firm on an entity whichdid not exist in ultra vires in law. ThatIndian Partnership Act is the governing actis clear from the provisions of Sec.2(23) ofthe Income Tax Act. f. We also submit that as no business wasever undertaken there was no need toinform anybody about its dissolution. g. Vide our letter dt. 1.3.2013 wesubmitted that the original DissolutionDeed was being traced and was likely tobe with Mani Bhai Patel and immediatelyon finding the same would be produced tothe AO. f. We also submit that as no business wasever undertaken there was no need toinform anybody about its dissolution. g. Vide our letter dt. 1.3.2013 wesubmitted that the original DissolutionDeed was being traced and was likely tobe with Mani Bhai Patel and immediatelyon finding the same would be produced tothe AO. We refer you to sections 174, 175 and 176of the Income Tax Act which make theposition clear in this regard. We onceagain submit that the firm from itsformation to its dissolution neverconducted any business. 2. We also submit that the AO has nopower to grant registration to a firmunless an application has been made inthat regard. The erstwhile Patel Agarwal &Co. never applied for registration, never filed a return as it had no income orbusiness and stood dissolved in 2003. 4.3 Ground 3 The learned AO erred in making asassessment and holding that the amountof Rs.1,17,57,816/- being the capital gaincomputed by him was the dissolved firm’sincome even though the Dissolution deedwas on his record and at no stage did hereject the dissolution deed. 4.31 Assessee’s submissions The assessee vide letter dt. NIL submittedas under:- We have already submitted that the firmhad been dissolved in 2003 and the copyof the deed was filed before him. The onlyground taken by him was that the originalwas not filed. It was explained to him thatthe original was untraceable as one of thesignatories had expired and manydocuments were with him and would beproduced once found. Even then he didnot give any notice to the legal heirs ofSh. Mani Bhai Patel to produce thedocuments. At no stage did he dispute ourcontention that the deed had beennotarized. In view of the assessmentmade by him is bad in law. 4.4 Ground 4 The learned AO erred in taxing the sameincome twice, once in the hands of theerstwhile partners earlier and then againin the hands of the so called firm at asubsequent date. 4.41 Assessee’s submissions The assessee vide leter dt. Nil submittedas under:- We have submitted that the learned AOhas taxed the same income twice. We citebefore you the decision in RamanlalMadanlal (1979) 116 ITR 657 (copyenclosed) by Justice S. Mukerjee as hewas then which states as under:- The partners of an unregistered firm, untilthe amendment by the Taxation Laws(amendment) Act, 1970, were consideredto be distinct assessable units both underthe 1922 Act and the 1961 Act. Therefore, one income in the hands of two assessableunits should not normally be made tosuffer taxation twice unless the clearintention of the legislature is there to taxthe same income twice. The next principlethat has to be borne in mind is thatthough in fiscal law the charging section isthe most important provision, the saidcharging section must be understood andconstrued in the light of the machineryprovided, in order that the charge may beeffectuated. Bearing the said principles inmind and having regard to the intention ofParliament in introducing the change, asthere has been no substantial change inthe machinery provided for taxation underthe Act of 1961, the partners of anunregistered firm as well as the firm itselfcannot be taxed twice. In other words, inthe case of an unregistered firm and itspartners, there cannot be simultaneouslytaxation. Further, it is not so much a questionwhether the ITO could have exercised anoption or not to assess the individualpartners in the expectation that the firmwould apply for continuance ofregistration. There being an assessmenton the partners, the liability of the firm tobe assessed did not exist. If that was theoption, then the further question whetherthe ITO could have exercise any option didnot arise. Further, it is not so much a questionwhether the ITO could have exercised anoption or not to assess the individualpartners in the expectation that the firmwould apply for continuance ofregistration. There being an assessmenton the partners, the liability of the firm tobe assessed did not exist. If that was theoption, then the further question whetherthe ITO could have exercise any option didnot arise. In the result, the Tribunal was not right inholding that the ITO was justified in taxingthe income in the hands of the assessee,an unregistered firm, for the relevantassessment years when the partners werealready assesseed to income tax over thesame income individually. Again in view of this the assessment madeis bad in law. Further even, though the AOwas aware of this position he at no stagemoved the CIT u/ 263 in the individualcase of Subhash Agarwal as never did hehold any belief that the revenue hadsuffered. We also cite before you thedecision of the Hon’ble Supreme Court inthe matter of Murlidhar Jhawar (1996) 60ITR 95 which is directly applicable to ourmatter. We also submit that the courts have heldthat all the evidence has to be taken forany decision. In Rameshwar Prasad Bagla(68 ITR 653) the Allahabad High Courtheld that Evidence circumstantial totalityof circumstances to be considered proof ofa particular fact combined effect of allcircumstances determines. In a case of circumstantial evidence, thetotality of circumstances has got to betaken into consideration and the combinedeffect of all those circumstances isdeterminative of the question as towhether or not a particular fact is proved. In our case the circumstances are:- 1. There is a dissolution deed of 2003 2. The Notary who is an officer of thecourt has stated that he verified the deed. 3. The Register of the Notary so states. 4. The Bank account was not operatedfrom 1996. 5. No business was conducted by theerstwhile firm. 6. The High Court proceedings nowherenamed Patel Agarwal & Co. 7. RIICO was given information that theFirm had been dissolved. It was on themto take any action. In view of the above submissions, werequest you to kindly quash the orderpassed by the learned AO. 4.42 Discussion and the AppellateDecisions on Ground No.2,3 & 4 As per the order u/s 147 itself has beencancelled. There is no need foradjudicating these grounds. 4.5 Ground 5 The petitioner craves the right to add,alter or in any way amend the grounds ofappeal at or before the hearing. 5.The tribunal in para no.4.3 has confirmed the same observing as under:- 4.3. We have heard rival contentions,perused the material available on recordand gone through the orders of theauthorities below. We find that the ld. CIT(A) has given the finding of fact byobserving as under :- “ From the perusal of copy of order sheetin the case of Shri Subhash Agarwal, itwas seen that the AO asked for details ofproperty sold and purchased withsupporting document. The AO recorded onthe order sheet that the property waspurchased on 27.07.1996 in co-ownershipwith Shri Mani Bhai Patel. It was alsonoted by the AO that copy of allotmentletter of RIICO allotting plot in joint nameof Shri Mani Bhai Patel and Shri SubhashAgarwal was furnished by A/R of ShriSubhash Agarwal. From the above, it is clear that the issueof taxing the capital gain in the hands ofpartner was before AO and he had madedetailed enquiries before concluding theassessment in the case of Shri SubhashAgarwal. Without going into the other aspects ofthe case, the issue is decided on legalgrounds only. From the above, it is clear that the issueof taxing the capital gain in the hands ofpartner was before AO and he had madedetailed enquiries before concluding theassessment in the case of Shri SubhashAgarwal. Without going into the other aspects ofthe case, the issue is decided on legalgrounds only. As mentioned by me earlier, the firmceased to exists on death of one of thepartners and, therefore, notice u/s 148cannot be issued to a none existingperson. Once this fact came to knowledgeof AO, he should have withdrawn thenotice and served it on the legalrepresentative of the deceased partnerand the sole surviving partner asrepresentative of dissolved firm. It is also held that the capital gain arisingfrom above transaction was disclosed inthe hands of partner and was enquiredinto by the AO, therefore, reopening ofassessment in the case of firm is merelychange of opinion (it is worth mentioningthat the AO of assessee and its partner,Shri Subhash Agarwal is same (ITO, Ward1(1), Kota). Therefore, the reopening ofassessment is also held to be invalid. The very basis, on which the assessmentorder was passed, did not survive.Therefore, order u/s 147 is cancelled.” The finding of facts as mentioned above, isnot controverted by the revenue.Therefore, we do not see any reason tointerfere in the order of ld. CIT (A), sameis hereby affirmed. The ground of therevenue is rejected. 6.In view of the concurrent findings, no substantial question of law arises. 7.The appeal stands dismissed. (VIJAY KUMAR VYAS),J (K.S.JHAVERI),J Brijesh 11.