ARTHI BALIGA,CHENNAI vs. ACIT, NFAC, , DELHI

On verification of the assessment records, the ld. PCIT noted that the Assessing Officer completed the assessment by not making any addition in respect of the share of capital gains arising in the hands of the assessee on account of sale of the said immovable property at Bangalore, whereas, in the case of two of the other legal heirs of Shri Mahesh Baliga, Mrs. Premalatha U. Baliga and Ms. Gayathri Baliga, the Assessing Officer in their respective assessment orders dated 30.03.2022, made additions of their shares of capital gains on account of sale of the said immovable property at Bangalore. Therefore, according to the ld. PCIT, the assessment order passed under section 147 r.w.s. 144B of the Act dated 30.03.2022 is erroneous since the Assessing Officer did not make any addition on account of the share of the capital gains arising in the hands of the assessee in the capacity of one of the legal heirs of the deceased partner. Accordingly, the assessee was given an opportunity to explain as to why proceedings under section 263 of the Act should not be initiated. After considering various submissions made by the assessee as could be evident from para 4 to 6 of the impugned order, the ld. PCIT partly set aside the assessment order and directed the Assessing Officer to make necessary enquiries as per the discussions contains in para 7 to 9 of the impugned order and pass a fresh order within the stipulated time after providing due opportunity to the assessee of being heard.

On being aggrieved, the assessee preferred an appeal before the Tribunal. The ld. AR Shri Ravi Kannan, Advocate filed paper book and also filed detailed written submissions. The ld. AR submits that the assessment of the assessee was reopened for the reasons stated in Page No. 2 of the assessment order under section 147 r.w. 143(3), dated 30.03.2022 and argued that the reason stated for reopening was escapement of the Income in the form of Capital Gains arising out of the sale of Land relating to M/s Baliga Lighting Company- a Partnership Firm, in which the assessee was the legal heir to the deceased partner- Shri Mahesh Baliga. It is also not in dispute that the capital gains arising out of the sale of land was paid by the firm M/s. Baliga Lighting Company in the Assessment Year 2017-18 and drew our attention to the acknowledgement of return of income and computation of total income of M/s. Baliga Lighting Company at Page No. 203 and 201 of the Additional Paper book. The ld. AR further submits that the National Faceless Assessment Centre passed an assessment order under section 147 r.w.s. 143(3) of the Act accepting the return of income submitted by the assessee and argued that the PCIT, in his order under section 263 of the Act held that the assessment order is erroneous in so far as it is prejudicial to the interest of the revenue by referring para 7 & 9 of the impugned order. The ld. AR submits that in the impugned order, the reasons are summarized into two categories:- a. The Assessing officer has failed to conduct appropriate enquiries as regards the taxability of the assessee's share of Capital Gains in respect of the sale of the Factory Building of the dissolved Firm. b. The Assessing officer has failed to examine the applicability of the section 50C in respect of the said transaction of sale of the Factory Building of the dissolved Firm.

The ld. AR argued vehemently that the ld. PCIT does not have Jurisdiction to invoke revisionary proceedings under section 263 of the Act as the assessment order is neither erroneous nor prejudicial to the interest of the Revenue which are the twin conditions to exercise jurisdiction under section 263 of the Act. The reasons stated by the ld. PCIT in his order that the assessment order is erroneous and prejudicial to the interest of the revenue is because the capital gains for the sale of immovable property of the firm M/s. Baliga Lighting Company was not taxed in the hands of the assessee (in her capacity as the legal heir of the "Deceased Partner") as the firm ceased to exist when one of the two partners (Shri. Mahesh Baliga) passed away on 14.12.2015, is erroneous and does not have any merits as the assessment order is not erroneous because the capital gains for the sale of immovable property of the firm M/s. Baliga Lighting Company has to be taxed in the hands of the Firm. He also argued that it is settled position as per Section 47 of the Partnership Act, 1932 that mere dissolution of the Partnership firm does not bring complete extinction of the partnership firm itself. The Partnership Firm continues to exist until its affairs are completely wound up. This is because only after the dissolution of the firm, the affairs of the firm can be wound up. He referred to section 47 of the Partnership Act, 1932. Section 47 "CONTINUING AUTHORITY OF PARTNERS FOR PURPOSES OF WINDING UP After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise Provided that the firm is in no case bound by the acts of a partner who had been adjudicated insolvent, but this proviso does not affect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent."

The ld. AR referred to the decisions in the case of Narendra Bahadhur Singh v. Chief Inspector of Stamps (AIR 1972 All 1) (at Page 79, Paragraph 22 of the ADP), in the case of Chaturbhuj Durga Das Factory v. Damodar Jamndas Zawar and Others. (AIR 1960 Bom 424) (at Page 60, Paragraph 8 of the ADP) and in the case of Motilal Chimanram and Anr v. Sarupchand Prithiraj and others (AIR 1937 Bom 81) (at Page 40, Paragraph 6 of the ADP). He vehemently argued that the term "transaction" under section 47 of the Partnership Act, 1932 also includes all matters relating to the affairs of the business which includes "to sell the partnership assets", this proposition is accepted in the case of Saligram Ruplal Khanna and Anr v. Kanwar Ranjath (1974) 2 SCC 642 and referred to Para 30 at page 123 of the additional paper book. He submits that the firm M/s. Baliga Lighting Company continues to exist even after the death of Mahesh Baliga on 14/10/2015 and continues till the affairs of the firm are completely wound up which would obviously include liquidating the assets of the firm, it is only after the sale of land on 02/03/2017 (which falls on AY 2017-18), that the partnership firm ceases to exist. Further, even for purpose of the Income Tax Act, the partnership firm is the correct and only assessee from whom capital gains can be charged for the assessment year 2017-18. The above argument illustrates as to why capital gains should be charged in the hands of the firm whereas the following argument illustrates as to why Capital gains cannot be charged in the hands of the assessee (i.e. Legal Heir of the deceased partner). Even in the case of Motilal Chimanram and Anr v. Sarupchand Prithiraj and others (AIR 1937 Bom 81) (Ref: Page 40, Paragraph 6), the Hon’ble High Court of Bombay held that the partnership continues to exist for the purpose of adjusting the rights and obligations of the partners inter se. This proposition attains significance because, immediately after the dissolution of the firm, the assessee (in her capacity as legal heir of the deceased partner) does not become the beneficiary of the assets of the firm and referred to section 46 of the Partnership Act, 1932. "Section 46 RIGHT OF PARTNERS TO HAVE BUSINESS WOUND UP AFTER DISSOLUTION On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or which representatives according to their rights."

The ld. AR submits that section 46 of the Partnership Act, 1932 clarifies that the partner or their representative (the appellant in this case) is only entitled to the surplus which remains after the payment of debts and liabilities of the firm and this proposition is supported by the decisions in the case of Sunder Devi v. Brij Lal and Ors. ILR (1981) 1 Delhi (Ref: Page 131 paragraph 16 of the ADP) and in the case of Manohar Das and Others v. Board of Revenue U.P (AIR 1971 All 523) (Ref: Page 71 Paragraph 16 of the ADP). He submits that the assessee (the legal heir of the deceased) only acquires the surplus amount after all the liabilities of the firm have been paid, which includes the tax liability of capital gains also and the assessee cannot be taxed for the liability of the capital gains arising out of the sale of the immovable property of the firm because it is only the residue after the payment of tax liability.

The ld. AR further submits that the settled principles of Partnership Law, even under the Income Tax Act, 1961, section 45(4) r.w. section 189, lays down the same proposition that the capital gains must be taxed in the hands of the firm. He referred to section 45(4) as amended by Finance Act 2017 on 01/04/2017 and also section 189 of the Act.

He argued that even as per section 45(4) r.w.s 189, the capital gains are liable to be assessed only under section 45(4) r.w. section 189 of the Income Tax Act, 1961. Assuming the view of the PCIT is accepted that the firm ceased to exist and the tax liability must be assessed in the hands of the legal heirs of the deceased partner, then section 45(4) and section 189 would be rendered otiose. He referred to decision in the case of Joint Receivers of United Film Exhibitors v. CIT (1989) 177 ITR 518 (Kerala) (at paragraphs: 5 & 6) and in the case of Paulson Constructions v. CIT (1990) 181 ITR 476 (Kerala) (at Paragraphs: 5, 6 & 13) and argued that the firm continues to exist for the purpose of winding up was also raised before the PCIT vide Response dated 28/12/2024 which has been extracted in Pages No. 4 and 5 of the PCIT Order as internal Paragraphs 2 and 7, wherein the assessee has inter alia contended that the partnership firm continues for the purpose of winding up and further stated the firm was a party in the sale, that the sale consideration was only deposited in the bank account of the firm and TDS was also deducted in the name of the firm, this has not been duly rebutted in the impugned order. He vehemently argued that there is no error in not taxing the capital gains in the hands of the assessee (in her capacity as the legal heir of the deceased partner), Hence the assessment order is not erroneous.

The ld. AR submits that the assessment order is not prejudicial to the interest of the Revenue since the tax was offered by the firm, the interest of the revenue stands protected and any further tax in would result in double taxation. The assessment order could not be said to be prejudicial to the interest of revenue because, if the capital gains are taxed in the hands of the assessee (i.e. Individual), the same is taxable at the rate of 20% as per section 112(1)(a) and similarly, if the tax is assessed in the hands of the firm, the same is taxable only at the rate of 20% as per section 112(1)(d). Therefore, in either way, there is no prejudice to the interest of the revenue as the Income Tax Act, 1961 does not create a distinction between the rate at which Capital Gains is charged in the hands of the Individual and Partnership Firm as and the revenue's has been protected because the Capital Gains has been paid by the Firm vide its Return of Income dated 31/03/2017 (at Page No. 203 of the ADP). Therefore, any further tax would only amount to double taxation, as there is no prejudice caused to the interest the revenue, the proceedings lack jurisdiction and referred to section 112 of the Income Tax Act, 1961. He referred to the decision of the Hon'ble Supreme Court in the case of ITO v. Bachu Lal Kapoor (1966) 60 ITR 74 (at Page 143 Paragraph 8-10 of ADP), held that the charge is to be levied on an income only once and held that there could not be fresh assessment in the hands of the Association of Persons, when the income has been charged in the hands of the members of the association. The Hon'ble Supreme Court has further held that if under some mistake, the income of a member has been wrongly assessed instead of assessing it in the hands of the Association, appropriate adjustments had to be made by the Income Tax Officer, in respect of the tax realised by the revenue. Therefore, even in such case, it the burden of the department to adjust the tax realised by it.

This argument along with the copy of the decision was submitted during the Assessment proceedings (at Page 150 of ADP) as response to the notice under section 142(1) of the Act and this response has also been acknowledged in Paragraph 3 of the assessment order in Page 3 of the assessment order. It is only considering this submission; the Assessing officer has come to the conclusion that the assessee is not liable to pay capital gains as it has already been assessed in the hands of the firm. Therefore, the Contention of the PCIT in Paragraph 9 of the Order that the assessing officer had not made any enquiries with respect to capital gains for the assessee's share does not have any merit. Further, the question of invoking the provisions of Section 50C (determination of the value of the property) would not even arise as the capital gains is not even chargeable in the hands of the assessee. If at all the question, the question of valuation of the property arises, it must be dealt with in the assessment of the firm, if the same is otherwise permissible within the law and prayed to quash the order under section 263 of the Act passed by the ld. PCIT, as the same is without Jurisdiction.

Against the above written submissions, the ld. DR Shri Nilay Baran Som, CIT filed written submission and narrated the undisputed facts that the Baliga Lighting Company had two partners, viz, Shri Ramesh Baliga and Shri Mahesh Baliga, Ramesh Baliga passed away on 14.12.2015, i.e., during the previous year 2015-16 relating to assessment year 2016-17 and the land & building belonging to the partnership firm was transferred during the financial year 2016-17 pertaining to assessment year 2017-18. In the above factual matrix, the provisions of the Partnership Act, 1932 and certain case laws in relation to rights and obligation of partners in the context of statues other than the Income tax Act, 1961 have found place in the submissions referred to above and pointed out that the partnership deed of the erstwhile partnership firm Baliga Lighting Company was not brought on record. He drew our attention to section 42 of the Partnership Act and the same is reproduced as under for ready reference: Section 42 DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES. Subject to contract between the partners a firm is dissolved (a) if constituted for a fixed term, by the expiry of that term (b) if constituted to carry out one or more adventures or undertakings, by the completion thereof (c) by the death of a partner, and (d) by the adjudication of a partner as an insolvent.

Further, the ld. DR drew our attention to the decision of the Hon’ble High Court of Madras in the case, S. Parvathammal vs. CIT reported in [1987] 163 ITR 161(Mad) and the relevant portion of the decision is reproduced hereinbelow for ready reference: Besides, as noticed earlier, in a case where a partnership consists of two partners, on the death of one of them, the partnership stands dissolved and, thereafter, there is no question of the legal representative of the deceased partner stepping into his place and attaining the status of a partner. Indeed, to recognise such a situation would have the effect of almost compelling the surviving partner of a dissolved partnership to take in the legal representative of the deceased partner, even against his wishes and that would be the negation of the very basis of partnership which is traceable to a contract between the parties. We may also mention that partnership is not a matter of heritable status, but purely one of contract and no heir of a deceased partner can claim to have become a partner without the consent ex pressed or implied of the other Further, under the provisions of section 46 of the Indian Partnership Act, 1932, on the dissolution of a firm, every partner or his representative as against the other partners or their representatives, has the right to have the property of the firm applied in payment of the debts and liabilities of the firm and to have a distribution of the surplus amongst the partners or their representatives, according to their rights. The right, therefore, of a legal representative of a deceased partner in a partnership consisting of two partners which is dissolved on the death of one of them, would only normally be the right conferred by section 46 of the Indian Partnership Act, 1932, referred to earlier. (i) And now we notice a few decisions on the aforesaid facets of the matter. M. T Sughra v Babu considered the effect of death of one of two partners in a partnership. The position in such cases was summed up by Justice Agarwala at page 507 thus: "The general rule is that a partnership is dissolved after the death of a party. This rule is, however, subject to a contract to the contrary. When it is said that a partnership will not be dissolved by the death of one party, what is meant is that the partnership will continue between the surviving partners, even after the death of a partner. It follows that in order that the exception to the general rule may apply, the original partnership must consist of more than two partners. In the case of a partnership consisting of only two partners, no partnership remains on the death of one of them and, therefore, it is a contradiction in terms to say that there can be a contract between the two partners to the effect that on the death of one of them, the partnership will not be dissolved, but will continue. Nor is the position affected by bringing in the heirs of the deceased partner on the scene. One partner, cannot, by his own contract, impose a partnership upon his heirs or legal representatives. Partnership is not a matter of status, it is a matter of contract. No heir can be said to become a partner with another person without his own consent, express or implied.

The ld. DR further drew our attention to the decision of the Hon’ble Supreme Court in the case Mohd. Laiquiddin & Anr. Vs. Kamala Devi Misra (Dead) By Lrs. & Ors on 5 January, 2010 duly affirming the above decision of the Hon’ble High Court of Madras with regard to the singularity of the position on the death of one partner on a firm comprising two partners and relevant portion of the order is reproduced herein below: 25. In order to arrive at the conclusion that the partnership firm stood dissolved on account of death of one of the partners, the High Court had rightly placed reliance on Smt. S. Parvathammal v. CIT (1987 Income Tax Reports 161), wherein this Court held that in a firm consisting of two partners on account of death of one of the partners, the firm automatically dissolved and observed as follows: "A partnership normally dissolves on the death of the partner unless there was an agreement in the original partnership deed. Even assuming that there was such an agreement in a partnership consisting of two partners on the death of one of them the partnership automatically comes to an end and there is no partnership which survives and into which a third party can be introduced. Hence on the death of S, the original partnership was dissolved. The subsequent taking in of the assessee as a partner was only as a result of entering into of a new partnership between R and the assessee. Partnership was not a matter of heritable status but purely one of contract." 26. In the light of aforementioned case, it is clear that when there are only two partners constituting the partnership firm, on the death of one of them, the firm is deemed to be dissolved despite the existence of a clause which says otherwise. A partnership is a contract between the partners. There cannot be any contract unilaterally without the acceptance by the other partner. The Appellants, the legal representatives of original plaintiff (since deceased) was not at all interested in continuing the firm or constitute a fresh firm and they cannot be asked to continue the partnership, as there is no legal obligation upon them to do so as partnership is not a matter of heritable status but purely one of contract, which is also clear from the definition of partnership under Section 4. Therefore, the trial court was justified in holding that the firm dissolved by virtue of death of one of the partners and the first appellate court as well as the High Court have taken the correct view in upholding the same.

The ld. DR drew our attention to the provisions of section 189 of the Act and argued that the implication of the above section is that, if any business or profession carried on by a firm has been discontinued or if it is dissolved, the Assessing Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution took place, and all the provisions of the Act, including the provisions relating to the levy of penalty or any other sum chargeable under the provisions of this Act, shall apply so far as may be, to such assessment. Thus, the above section provides for a different mechanism for assessment of a partnership firm on the event of discontinuance of business or dissolution including dissolution or death of a partner. However, from the wordings of section 189 of the Act, it is clear that 'such assessment' refers to the assessment for the previous year in which the firm is dissolved and it cannot refer to assessment in perpetuity and relied on the decision of the Hon’ble High Court of Gujarat in the case of Banyan & Berry vs. CIT 222 ITR 831(Gujarat) and the decision of the Hon’ble High Court of Rajasthan in the case of CIT v. United Trading Co 212 ITR 532 (Rajasthan). Referring to section 46 of the Partnership Act with reference to entitlement of partners to the surplus of the firm after debts and liabilities of the firm, without mentioning what were debt and liabilities of the firm in question were, the ld. DR argued that contractual liabilities of partners cannot be extended to assessability of the firm in a year subsequent to the year of dissolution. Further, relying on the reference of section 47 of the Partnership Act made by the ld. AR, the ld. DR argued that the sale of the asset comprising land and building in Bengalaru was not a transaction which was unfinished at the time of dissolution, since it was a subsequent event. Further, to canvass that capital gains out of sale of partnership property is assessable in the hands of the firm and not in the hands of the partners he drew our attention to section 45(4) of the Partnership Act and relevant provision is reproduced herein below: (4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of Individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.

Thus, he submits that section 45(4) creates a deeming fiction by treating with distribution of capital assets on dissolution of a firm among the erstwhile partners and it is not a proposition that capital gains arising out of transfer of a capital asset belonging to the firm will be taxable in the hands of the firm post dissolution of the same. He further submits that the learned PCIT in his order has correctly pointed out that the proceeds of the capital gains on transfer of the land and building is taxable in the hands of the legal heirs and the assessment order passed by the Assessing Officer by accepting the view point of the assessee was an order which is erroneous in so far it is prejudicial to the revenue. The ld. PCIT has pointed out that the Assessing Officer has passed the order without making inquiries and verification which should have made, as such, defect of the assessment order is directly hit by clause (b) of Explanation 2 below section 263 of the Income-tax Act. The ld. PCIT has pointed out in particular, among others, failure of the Assessing Officer to see the applicability of section 50C of the Income Tax Act and the possibility of making reference to the Valuation Officer. Thus, he prayed to dismiss the grounds raised by the assessee and sustain the revision order passed by the ld. PCIT.

Heard both the parties, perused the material available on record. We note that the partnership firm, in question, by name M/s. Baliga Lighting Company had two partners by name Shri Ramesh Baliga and Shri Mahesh Baliga. One of the said two partners i.e., Shri Mahesh Baliga expired on 14.12.2015 relating to assessment year 2016-17. According to the ld. PCIT, the partnership firm M/s. Baliga Lighting Company sold factory building at Bengaluru for a total consideration of ₹.5,30,00,000/- vide sale deed dated 02.03.2017 [FY 2016-17 relevant to AY 2017-18] bearing Doc. No. 7223/2016-17. Further, the ld. PCIT observed that since the said partnership firm ceased to exist on 14.12.2015 on the death of Shri Mahesh Baliga, the return of income filed by the partnership firm for AY 2017-18 taking into account long term capital gain is ab initio void/ infructuous. Further, he observed that the Assessing Officer made addition in the case of two other legal heirs of Shri Mahesh Baliga Mrs. Premalatha Baliga and Ms. Gayathri Baliga of their shares of capital gains on account of sale of property at Bengaluru. Therefore, he held the reassessment dated 30.03.2022 in the case of the assessee passed under section 147 r.w.s. 144B of the Act is erroneous and prejudicial to the interest of Revenue. Accordingly, a show-cause notice was issued ot the assessee seeking explanation as to why the said reassessment order dated 30.03.2022 should not be treated as erroneous and prejudicial to the interest of Revenue by invoking the provisions of section 263 of the Act. The assessee filed written submissions vide 2 letters dated 20.08.2023 and 05.01.2024 which are reflected in para 3 & 4 of the impugned order. The ld. PCIT, considering the said submissions, asked for further details as reflected in para 5 of the impugned order and the assessee replied another letter dated 29.01.2024, which are reproduced from para 7 to 9 of the impugned order. We find the submissions as made by the assessee before the ld. PCIT are similar to the submissions made before us by the ld. AR. We find the ld. PCIT acknowledged offering of long term capital gains in the hands of the partnership firm and held that the said capital gains were required to be taxed in the hands of surviving partner and the legal heirs of the deceased partner, but, not in the hands of the partnership firm, which ceased to exist from 14.12.2015. The ld. AR vehemently contested before us, that if the said view of the ld. PCIT is accepted, then there will be double taxation in the hands of the assessee, which is not justified. We note that the ld. PCIT’s case is that the long term capital gain is to be taxed in the correct hands, i.e., in the hands of surviving partner and the legal heirs of the deceased partner. Further, we note from the impugned order that the assessment order was passed by making addition on account of capital gains in the hands of two other legal heirs i.e., Mrs. Premalatha U Baliga and Ms. Gayathri Baliga of their respective shares of deceased partner. According to the ld. PCIT that the said legal heirs of deceased partner accepted the addition on account of long term capital gains on their shares in their respective assessment orders in the same year under consideration i.e., 2017-18. By holding so, the ld. PCIT held that the Assessing Officer has failed to conduct appropriate enquiries as regards taxability of share of capital gain in respect of the sale of factory building of dissolved firm and the applicability of provisions of section 50C of the Act. Further, the assessee is advised to take up the matter with the Jurisdictional Assessing Officer of the dissolved firm seeking refund of taxes paid, etc. by following due procedure of law.

The ld. AR Shri Ravi Kannan, Advocate drew our attention to the return of income and computation of total income reflecting to partnership firm at page 203 and 201 of the additional paper book and argued that the reassessment proceedings in the hands of assessee may be erroneous, but, not prejudicial to the interest of Revenue as the partnership firm accounted the long term capital gain and paid taxes thereon. As we discussed above that there is no doubt the partnership firm knowing the long term capital gains in the hands of the partnership firm, but however taxation should be in the hands of the legal heirs, but not in the hands of existing firm. Further, we note that similar additions attracting the respective shares were made in the hands of the legal heirs of the deceased partner and no appeal preferred against the said addition, which clearly demonstrates that the additions on account of long term capital gains were rightly made in the hands of the legal heirs Mrs. Premalatha U Baliga and Ms. Gayathri Baliga for the same assessment year 2017-18. Therefore, when the long term capital gains were accounted in the wrong hands i.e., non-existing firm, does not amount to double taxation. Further, it is prejudicial to the interest of Revenue being not taxed in the correct hands. Anyway, the ld. PCIT advised the assessee to seeking refund of taxes if any paid in the hands of non-existing partnership firm.

Further, the ld. AR submits that mere dissolution of partnership firm does not bring complete extinction of partnership firm itself and continues to exist until its affairs are completely wound up. He referred to section 47 of the Partnership Act, 1932 in support of the same. On plain reading of the provisions of section 47 of the Partnership Act, 1932, yes it is correct that the mutual rights and obligations of partners would continue notwithstanding the dissolution to wind up the affairs of the firm only to complete transactions begun but unfinished at the time of the dissolution, but not otherwise. Coming to the facts of the case in hand, we note that there was no transaction exists and remains unfinished affairs at the time of dissolution i.e. on the date of death of one of the partners and therefore, in our considered opinion, the provisions under section 47 of the Act are not applicable to the facts on hand only for the reason that the transaction of sale of factory building of the partnership firm is a subsequent event was caused effected in subsequent financial year, but not, in the previous year relating to the year under consideration. Therefore, the case law as relied on by the ld. AR in the case of Narendra Bahadhur Singh v. Chief Inspector of Stamps (supra), Chaturbhuj Durgadas Factory v. Damodar Jamndas Zawar and Others (supra) and Motilal Chimanram and Anr. V. Sarupchand Prithiraj and others (supra) for the proposition the term “transaction” under section 47 of the Partnership Act, 1932 includes all matters relating to the affairs of the business, which includes “to sell the partnership assets”, is not applicable. In this regard, we find force in the arguments of the ld. DR in placing reliance on the provisions of section 42 of Partnership Act, 1932. On plain reading of the provisions of section 42 of Partnership Act, which explains the dissolution on the happening of certain contingencies therein in clause (a) to (d). We find, clause (c) is relevant to the facts on hand, which clearly explains the dissolution of partnership firm by the death of partner, in our opinion, is applicable to the facts on hand. In support of his arguments, the ld. DR Shri Nilay Baran Som, CIT referred to the decision of the Hon’ble High Court of Madras in the case of S. Parvathammal v. CIT (supra). For ready reference, the relevant portion is reproduced herein below: Besides, as noticed earlier, in a case where a partnership consists of two partners, on the death of one of them, the partnership stands dissolved and, thereafter, there is no question of the legal representative of the deceased partner stepping into his place and attaining the status of a partner. Indeed, to recognise such a situation would have the effect of almost compelling the surviving partner of a dissolved partnership to take in the legal representative of the deceased partner, even against his wishes and that would be the negation of the very basis of partnership which is traceable to a contract between the parties. We may also mention that partnership is not a matter of heritable status, but purely one of contract and no heir of a deceased partner can claim to have become a partner without the consent ex pressed or implied of the other Further, under the provisions of section 46 of the Indian Partnership Act, 1932, on the dissolution of a firm, every partner or his representative as against the other partners or their representatives, has the right to have the property of the firm applied in payment of the debts and liabilities of the firm and to have a distribution of the surplus amongst the partners or their representatives, according to their rights. The right, therefore, of a legal representative of a deceased partner in a partnership consisting of two partners which is dissolved on the death of one of them, would only normally be the right conferred by section 46 of the Indian Partnership Act, 1932, referred to earlier. (i) And now we notice a few decisions on the aforesaid facets of the matter. M. T Sughra v Babu considered the effect of death of one of two partners in a partnership. The position in such cases was summed up by Justice Agarwala at page 507 thus: "The general rule is that a partnership is dissolved after the death of a party. This rule is, however, subject to a contract to the contrary. When it is said that a partnership will not be dissolved by the death of one party, what is meant is that the partnership will continue between the surviving partners, even after the death of a partner. It follows that in order that the exception to the general rule may apply, the original partnership must consist of more than two partners. In the case of a partnership consisting of only two partners, no partnership remains on the death of one of them and, therefore, it is a contradiction in terms to say that there can be a contract between the two partners to the effect that on the death of one of them, the partnership will not be dissolved, but will continue. Nor is the position affected by bringing in the heirs of the deceased partner on the scene. One partner, cannot, by his own contract, impose a partnership upon his heirs or legal representatives. Partnership is not a matter of status, it is a matter of contract. No heir can be said to become a partner with another person without his own consent, express or implied.

On careful reading of the above, we note that the Hon’ble High Court of Madras pleased to hold that the partnership stands dissolved in the case of partnership consisting of two partners on the death of one among them and there is no question of the legal representative of deceased partner stepping into his place and attaining the status of a partner. Further, it held that on the dissolution of firm, every partner or his representative as against the other partners or their representatives, has the right to have the property of the firm applied in payment of the debts and liabilities of the firm and to have a distribution of the surplus amongst the partners or their representatives, according to their rights. Therefore, it is clear that in the case of partnership firm consisting of only two partners on the death of one of them, no partnership remains as held by the Hon’ble High Court of Madras in the above case (supra). Coming to the facts on hand, as discussed above, the subjected partnership firm M/s. Baliga Lighting Company is admittedly consisting of two partners and one of them died, no partnership remain and it is non-existent firm from the day of death of one of the two partners. Thus, the argument of the ld. AR is not acceptable to hold that the partnership exists even after the dissolution under section 47 of the Partnership Act, 1932.

The ld. DR Shri Nilay Baran Som, CIT drew our attention to the decision of the Hon’ble Supreme Court in the case of Mohd. Laiquiddin & Anr. V. Kamala Devi Misra (Dead) by Lrs. & Ors (supra), wherein, the Hon’ble Supreme Court held as under: 25. In order to arrive at the conclusion that the partnership firm stood dissolved on account of death of one of the partners, the High Court had rightly placed reliance on Smt. S. Parvathammal v. CIT (1987 Income Tax Reports 161), wherein this Court held that in a firm consisting of two partners on account of death of one of the partners, the firm automatically dissolved and observed as follows: "A partnership normally dissolves on the death of the partner unless there was an agreement in the original partnership deed. Even assuming that there was such an agreement in a partnership consisting of two partners on the death of one of them the partnership automatically comes to an end and there is no partnership which survives and into which a third party can be introduced. Hence on the death of S, the original partnership was dissolved. The subsequent taking in of the assessee as a partner was only as a result of entering into of a new partnership between R and the assessee. Partnership was not a matter of heritable status but purely one of contract."

On careful reading of the said decision dated 05.10.2010, we note that the Hon’ble Supreme Court was pleased to affirm the principle laid by the Hon’ble High Court of Madras in the case of Smt. S. Parvathammal v. CIT (supra). The Hon’ble Supreme Court was pleased to observe that on the death of one of the partners, the original partnership was dissolved and the subsequent taking in of the assessee therein as a partner was only as a result of entering into a new partnership between the surviving partner and the assessee therein. Further, it was held that the partnership was not a matter of heritable status but purely on contract.

The reference to the provisions of section 189 r.w.s. 45(4) of the Act, made by the ld. AR regarding the applicability of section 189 r.w.s. 45(4) of the Act, we find the applicability is with regard to assessment of previous year, but, not subsequent year. We agree with the contention of the ld. DR that from the working of section 189 of the Act, it is clear that such assessment refers to the assessment of the previous year in which the firm is dissolved and cannot refer to assessment in perpetuity.

Further, we also agree with the contention of the ld. DR with reference to sub-section (4) of section 45 of the Act which creates a deeming fiction by treating with distribution of capital assets on dissolution of a firm among the erstwhile partners and it is not a proposition that capital gains arising out of transfer of a capital asset belonging to the firm will be taxed in the hands of the non-existing partnership firm. Therefore, in view of our discussion above, with reference to the provisions of section 189 r.w.s. 45(4) of the Act could be rendered otiose, but, placing reliance in the case of Joint Receivers of United Film Exhibitors v. CIT (supra) and Paulson Constructions v. CIT (supra) as relied on by the ld. AR for the proposition that the partnership continues to exist for the purpose of winding up is not acceptable.

In view of our above discussions, we find support from the decision of the Hon’ble High Court of Rajasthan in the case of CIT v. United Trading Co. [1995] 212 ITR 532 (Raj), the relevant part is reproduced below for ready reference: We have considered the matter. A deeming fiction is created by section 189 in respect of a business or profession carried on by the firm which is discontinued or the firm is dissolved as if there is no such discontinuance or dissolution. The provisions contemplate that assessment could be made and all the provisions of the Act shall apply to such an assessment. This section refers to the business or profession carried on by a firm which has been discontinued or where the firm is dissolved. The power to make an assessment in such a case is in respect of that period for which the business or profession was carried on by the firm. Section 42 of the Partnership Act contemplates the contingency of dissolution of the firm and under section 42(c), the firm stands dissolved by death of a partner. The provision of section 189 has been made for the limited purpose that any firm which is dissolved may not escape the liability to tax after its dissolution. It is not the power of recovery of tax which is to be examined, but as to whether there could have been any assessment of tax by invoking the provisions of section 189 when the firm had not carried on any business and was not in existence (because it was dissolved). Section 2(31) of the Act defines "person" and a firm has been included in the definition of person. It has not been brought on record as to who are the persons on behalf of the deceased partners who have inherited the property of such deceased partners. If the firm is not in existence then assessment could be made of the persons who are the legal heirs. The fact that the firm was not in existence during the assessment year 1982-83 has not been stressed and the finding which has been recorded by the Tribunal is that "the undisputed fact in the instant case is that the remaining two partners who comprised the firm from 1953 also died about 5- 10 years back". Section 189, therefore, cannot be invoked in such a situation where the firm was not in existence and had not carried on any business. The finding which has been recorded by the Income-tax Appellate Tribunal that no business was carried on by the firm in the assessment year 1982-83 and the provisions of section 189 cannot be invoked is unassailable. For the purpose of capital gains also, the same position of law is applicable. The assessment in respect of capital gains could not have been made on the firm which has not carried on any business during the year 182-83 when the sale of the property was effected. In view of the above, we are of the view that the Income-tax Appellate Tribunal was right in holding that the firm stood dissolved and further in holding that the capital gains arising from the sale of property is not chargeable in the hands of the firm.

On perusal of the above, the section refers to the business or profession carried on by a firm which has been discontinued or the firm is dissolved. The power to make an assessment in such a case is in respect of that period for which the business or profession was carried on by the firm. Further, we find the said provisions under section 189 of the Act has been made for the limited purpose that any firm, which is dissolved may not escape the liability to tax after it’s dissolution. In the present case also, we find the subjected partnership dissolved on the contingency of death of a partner under section 42(c) of Partnership Act. Therefore, the provision of section 189 of the Act cannot be invoked in such a situation where the firm was not in existence and had not carried any business in AY 2017-18. Admittedly, the factory building of the partnership firm sold in subsequent financial year, in which, the partnership had no business carried on and therefore, section 189 of the Act cannot be invoked. Therefore, we find no infirmity in the order of the ld. PCIT in holding the reassessment order dated 30.03.2022 passed under section 143(3) r.w.s. 147 r.w.s. 144B of the Act is erroneous and prejudicial to the interest of the Revenue, consequently in directing the Assessing Officer to make necessary enquiries in respect of the discussion made in para 8 and 9 of the impugned order. Thus, the order is justified in invoking the provisions under section 263 of the Act and the ground raised by the assessee fails and are dismissed.

In the result, the appeal filed by the assessee is dismissed. Order pronounced on 28th February, 2025 at Chennai.