PR COMMISSIONER OF INCOME TAX KOTA vs. M/S PATEL AGARWAL and COMPANY

Judgment 14/05/2018 Defects are waived.

therefore notice u/s 148 was issued on 1.3.2012 which was served on 7.3.2012 on the partner Sh. Subhash Chandra Agarwal to file the income tax return within 15 days from the receipt of the notice. The assessee firm has not filed any return within the time allowed u/s 148. On 27.3.2012 a letter has been received from Sh. Subhash Agarwal on behalf of firm in which he stated that M/s. Patel Agarwal & Company was a partnership firm and no business activity was carried out in this firm.

Discussion and the Appellate Decisions The AO reproduced the assessment of the firm observing as under:- On verification of internal record, it was found that the assessee firm had sold a plot situated at B-519(A), IPIA, Kota on 26.9.2008 for sale consideration of Rs.1,35,00,000/- but the assessee firm had not filed any return declaring any capital gain. The income has escaped assessment, therefore notice u/s 148 was issued on 1.3.2012 which was served on 7.3.2012 on the partner Sh. Subhash Chandra Agarwal to file the income tax return within 15 days from the receipt of the notice.

(3 of 11) [ITA-265/2017] The assessee submitted that the firm was dissolved on 20.3.2003 and the plot was divided between the parties. The assessee also submitted that one of the partners, Sh. Mani Bhai Patel died and filed copy of the death certificate. The AO held that there was no dissolution of the firm and went on to assessee the capital gain in the hands of the firm. The date of death of Sh. Mani Bhai Patel was 13.2.2010. I have gone through AO’s findings and assessee’s submissions. The firm was constituted on 16th October, 1995 with two partners namely, Sh. Mani Bhai Patel & Sh. Subhash Agarwal. Sh. Mani Bhai Patel dies on 13th February, 2010. Notice u/s 148 was issued on 1.3.2012. The basic condition for existence of a firm or HUF is plurality of it’s member. The firm had two partners and one of them died on 13.2.2010. Therefore, the firm stands dissolved atleast on 13.2.2010. In view of the letter of RIICO, the AO had strong belief that the land belonged to the firm, however when he was informed about the death of one of the partners (before issue of notice) he should have withdrawn the said notice and should have served the notice to the legal representatives of the deceased partner and the other surviving partner. In my opinion, no notice can be issued to a firm which stands dissolved by death of one of the partners. The assessee also argued that the firm never filed its return, it never applied registration under the Income Tax Act and therefore, the AO cannot grant it status of registered firm. The assessee placed its reliance on the judgment of Hon’ble Supreme Court [218 ITR 239, ITO vs. Atchaiah (Ch.)]. The assessee submitted that all the facts were furnished before the AO during the course of assessment of Mr. Subhash Agarwal and they were accepted by him.

(4 of 11) [ITA-265/2017] The assessee submitted that capital gain arising from the above transaction was disclosed in the return of its partner, Sh. Subhash Agarwal. The assessee submitted that the firm stand dissolved on 20.3.2003 and the plot was divided between the partners. It was seen that Sh. Subhash Agarwal in his return of income placed a note as under:- During this year the assessee has sold one small house with land in total of Rs.1,35,00,000/- on dated 26.9.2008. It was joint property purchased with Late Mani Bhai Patel on 27.7.1996 in Rs.6,00,000/- the assessee has received half of share of sale consideration which come to Rs.67,50,000/- and this entire sale amount of Rs.67,50,000/- is invested in purchase of house situated at 136, Rajeev Gandhi Nagar, Kota. There is no capital gain liability on the assessee. From the perusal of copy of order sheet in the case of Sh. Subhash Agarwal, it was seen that the AO asked for details of property sold and purchased with supporting document. The AO recorded on the order sheet that the property was purchased on 27.7.1996 in co-ownership with Sh. Mani Bhai Patel. It was also noted by AO that copy of allotment letter of RIICO allotting plot in joint name of Sh. Mani Bhai Patel and Sh. Subhash Agarwal was furnished by A/R of Sh. Subhash Agarwal. From the above, it is clear that the issue of taxing the capital gain in the hands of partner was before AO and he had made detailed enquiries before concluding the assessment in the case of Sh. Subhash Agarwal without going into the other aspects of the case, the issue is decided on legal grounds only. As mentioned by me earlier, the firm ceased to exists on death of one of the partners and therefore, notice u/s 148 cannot be issud to a none existing person. Once this fact came to knowledge of AO, he should have withdrawn the notice and served it on the legal representative of the deceased partner and the sole surviving

(5 of 11) [ITA-265/2017] partner as representative of dissolved firm. It is also held that the capital gain arising from above transaction was disclosed in the hands of partner and was enquired into by the AO, therefore, reopening of assessment in the case of firm is merely change of opinion(it is worth mentioning that the AO of assessee and its partner, Sh. Subhash Agarwal is same (ITO, Ward- 1(1), Kota). Therefore, the reopening of assessment is also held to be invalid. The very basis on which the assessment order was passed, did not survive. Therefore, order u/s 147 is cancelled.

(6 of 11) [ITA-265/2017] c. The firm could not take up any work and did not carry out any business during its existence and did not apply for any PAN and the Sales Tax Registration was surrendered long back. d. The Partners decided to dissolve the firm on 20.3.2003 and did so by a Dissolution Deed duly Notarised. As such the Firm ceased to exist because as per the Partnership Deed clause 4 the Firm was at will. e. It has been held in a plethora of cases that a Firm which is at will stands dissolved the moment any partner gives notice for the dissolution. In our case in fact a dissolution deed has been executed and this was painted out to the AO and a copy filed before him during the course of the hearing. The governing law of Firms is the Indian Partnership Act and not the Income Tax Act. The Income Tax Act cannot presume a firm to exist which has been dissolved much earlier. The Act only empowers the AO to tax any existing entity in the respective year in which it existed. As such the action in making an assessment as a firm on an entity which did not exist in ultra vires in law. That Indian Partnership Act is the governing act is clear from the provisions of Sec.2(23) of the Income Tax Act. f. We also submit that as no business was ever undertaken there was no need to inform anybody about its dissolution. g. Vide our letter dt. 1.3.2013 we submitted that the original Dissolution Deed was being traced and was likely to be with Mani Bhai Patel and immediately on finding the same would be produced to the AO. We refer you to sections 174, 175 and 176 of the Income Tax Act which make the position clear in this regard. We once again submit that the firm from its formation to its dissolution never conducted any business.

(7 of 11) [ITA-265/2017] filed a return as it had no income or business and stood dissolved in 2003.

(8 of 11) [ITA-265/2017] one income in the hands of two assessable units should not normally be made to suffer taxation twice unless the clear intention of the legislature is there to tax the same income twice. The next principle that has to be borne in mind is that though in fiscal law the charging section is the most important provision, the said charging section must be understood and construed in the light of the machinery provided, in order that the charge may be effectuated. Bearing the said principles in mind and having regard to the intention of Parliament in introducing the change, as there has been no substantial change in the machinery provided for taxation under the Act of 1961, the partners of an unregistered firm as well as the firm itself cannot be taxed twice. In other words, in the case of an unregistered firm and its partners, there cannot be simultaneously taxation. Further, it is not so much a question whether the ITO could have exercised an option or not to assess the individual partners in the expectation that the firm would apply for continuance of registration. There being an assessment on the partners, the liability of the firm to be assessed did not exist. If that was the option, then the further question whether the ITO could have exercise any option did not arise. In the result, the Tribunal was not right in holding that the ITO was justified in taxing the income in the hands of the assessee, an unregistered firm, for the relevant assessment years when the partners were already assesseed to income tax over the same income individually. Again in view of this the assessment made is bad in law. Further even, though the AO was aware of this position he at no stage moved the CIT u/ 263 in the individual case of Subhash Agarwal as never did he hold any belief that the revenue had suffered. We also cite before you the decision of the Hon’ble Supreme Court in the matter of Murlidhar Jhawar (1996) 60 ITR 95 which is directly applicable to our matter.

(9 of 11) [ITA-265/2017] We also submit that the courts have held that all the evidence has to be taken for any decision. In Rameshwar Prasad Bagla (68 ITR 653) the Allahabad High Court held that Evidence circumstantial totality of circumstances to be considered proof of a particular fact combined effect of all circumstances determines. In a case of circumstantial evidence, the totality of circumstances has got to be taken into consideration and the combined effect of all those circumstances is determinative of the question as to whether or not a particular fact is proved. In our case the circumstances are:-

In view of the above submissions, we request you to kindly quash the order passed by the learned AO.

(10 of 11) [ITA-265/2017]

(11 of 11) [ITA-265/2017] The finding of facts as mentioned above, is not controverted by the revenue. Therefore, we do not see any reason to interfere in the order of ld. CIT (A), same is hereby affirmed. The ground of the revenue is rejected.