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Facts
The assessee, a partnership firm, was dissolved upon the death of a partner. The surviving partner continued the business as a sole proprietor. The Assessing Officer reopened the assessment and made additions to the dissolved firm's income based on cash deposits and contract receipts linked to the firm's PAN.
Held
The Tribunal held that reopening and taxing income in the hands of a dissolved firm, whose PAN was erroneously linked to bank accounts operated by the sole proprietorship, would amount to double taxation. The assessment against a non-existent entity is void ab initio.
Key Issues
Whether the addition made to the income of a dissolved partnership firm, when the income was already disclosed and taxed in the hands of the subsequent sole proprietorship, is valid.
Sections Cited
250, 69A, 194C, 147, 144, 148, 142(1), 42(c), 143(3)
AI-generated summary — verify with the full judgment below
Order PER LALIET KUMAR, J.M: This appeal is filed by the Revenue against the order dated 16.07.2024 passed by the Ld. CIT(A), NFAC, Delhi under section 250 of the Income Tax Act, 1961, for Assessment Year 2013–14.
The sole effective grievance of the Revenue is that the Ld. CIT(A) erred in law and on facts in deleting the addition of Rs.7,59,50,015/- made under section 69A and on account of contract receipts, without appreciating that the transactions were reported under the PAN of the partnership firm.
Briefly the facts of the case are that the assessee, M/s Shivalik Filling Station, was a partnership firm comprising two partners Mr. Sandeep Bhatia and Mrs. Swaraj Bhatia. Upon the death of Mrs. Swaraj Bhatia on 29.03.2010, the partnership stood dissolved. Thereafter, Mr. Sandeep Bhatia continued the same business as sole proprietor under the same trade name. The firm’s PAN was surrendered in December 2012. 3.1 Based on AIR and NMS data, the Assessing Officer observed cash deposits aggregating Rs.7,58,89,580/- in bank accounts and contract receipts
2 of Rs.7,55,432/- under section 194C, both tagged to the PAN of the dissolved firm. Accordingly, the assessment was reopened under section 147, and reassessment was completed under section 147 r.w.s. 144, making the following additions:
Rs. 60,435/- (being 8% of contract receipts of Rs.7,55,432/-) Rs.7,58,89,580/- as unexplained cash deposits under section 69A
The Ld. DR submitted that the PAN of M/s Shivalik Filling Station remained active and reflected significant financial transactions during FY 2012–13, including contract receipts and substantial cash deposits.
4.1 It was submitted that despite issuance of notice under section 148 dated 30.03.2021, and subsequent statutory notices under section 142(1), no return of income was filed by the assessee in the name of the firm. The response received from the assessee merely stated that the firm was dissolved in 2010 and that the business was continued by Mr. Sandeep Bhatia as proprietor.
4.2 The AO, however, noted that no documentary evidence establishing formal dissolution of the firm was submitted. It was contended that the PAN remained active and was associated with substantial transactions, and therefore, it was reasonable and justified to treat the PAN-holder as the person assessable under law.
4.3 The Ld. DR emphasized that the assessee failed to explain the source and nature of the cash deposits in the bank accounts and did not provide any books of account or confirmation of these deposits in any valid return filed by the firm. Accordingly, the Assessing Officer invoked section 69A to assess the unexplained deposits as deemed income.
4.4 The Revenue contended that the explanation offered by the assessee regarding the link between the bank account and the proprietary concern was unsubstantiated, as the bank records and Form 26AS still reflected the 3 firm’s PAN. Therefore, the action of the AO in taxing the cash deposits and contract receipts in the hands of the firm was in accordance with law and ought not to have been interfered with by the CIT(A).
The Ld. AR of the assessee submitted that the partnership firm, comprising only two partners, stood dissolved by operation of law upon the death of one of the partners, Mrs. Swaraj Bhatia, on 29.03.2010.
5.1 It was pointed out that under Section 42(c) of the Indian Partnership Act, 1932, the death of a partner results in automatic dissolution of the firm unless there is a contract to the contrary. In the present case, there was no such contrary contract, and hence, no separate dissolution deed was required to be executed.
5.2 After dissolution, the surviving partner, Mr. Sandeep Bhatia, continued the business in his individual capacity as a sole proprietor under the same trade name. The assessee surrendered the PAN of the dissolved firm in December 2012, and all income from the petrol pump business was thereafter reported and taxed in the hands of the proprietary concern.
5.3 It was further submitted that the HDFC Bank account (ending in 0112), in which the cash deposits were made, belonged to the proprietary concern of Mr. Sandeep Bhatia. Though the PAN of the erstwhile firm was erroneously linked with the bank account, the business transactions, including cash sales and deposits, were accounted for in the books of the proprietary concern.
5.4 The Ld. AR also placed on record the audited financial statements and assessment order passed under section 143(3) in the case of Mr. Sandeep Bhatia for AY 2013–14. It was demonstrated that the total turnover of Rs.6.80 crore, as declared in the audited books, included the impugned cash deposits, and the return was accepted by the Department after due scrutiny.
5.5 Therefore, it was contended that the impugned deposits were already assessed and taxed in the hands of the correct legal entity, and any further
4 addition in the hands of a dissolved firm would lead to double taxation of the same income, which is not permissible under law.
5.6 In support, reliance was placed on several judicial precedents including PCIT v. Maruti Suzuki India Ltd. (2019) 416 ITR 613 (SC) and Spice Infotainment Ltd. (2012) 247 CTR 500 (Del), to contend that assessment framed against a non-existent person is void ab initio and liable to be quashed.
Upon careful consideration of rival contentions and material placed on record, we find that the core issue relates to the validity of reopening and addition made in the hands of a non-existent partnership firm, when the income had already been disclosed and taxed in the hands of the proprietary concern.
6.1 Legally, a partnership consisting of only two partners stands automatically dissolved on the death of one partner, as per section 42(c) of the Indian Partnership Act, 1932, unless there is a contract to the contrary. No such contrary contract has been brought to our notice by the Revenue. Accordingly, the firm ceased to exist upon the death of Mrs. Swaraj Bhatia on 29.03.2010. Further, the PAN of the firm was surrendered in December 2012.
6.2 The AO invoked section 69A solely on the basis that the PAN of the dissolved firm was reflected in the bank account wherein large cash deposits were made. However, it is an admitted fact that the account was operated by Mr. Sandeep Bhatia in his capacity as sole proprietor of M/s Shivalik Filling Station. The mere mention of the old PAN in the account does not alter the ownership or the taxability of the income.
6.3 The assessee has placed on record the audited books of the proprietary concern, including the said bank account, showing total turnover of Rs.6.80 crore. The return filed by Mr. Bhatia for AY 2013–14 was scrutinized and assessed under section 143(3). No discrepancy was found in respect of 5 cash deposits. Hence, the income has already been taxed in the hands of the correct and lawful entity.
We are of the considered opinion that taxing the same income again in the hands of a legally dissolved firm, merely on the basis of a technical mismatch in PAN, would amount to double taxation, which is neither warranted nor permissible under law.
7.1 Further, initiation and completion of reassessment against a non- existent entity is a jurisdictional defect rendering the proceedings void ab initio, as held by the Hon’ble Supreme Court in PCIT v. Maruti Suzuki India Ltd. (2019) 416 ITR 613 and Spice Infotainment Ltd. (2012) 247 CTR 500 (Del).
7.2 In view of the above findings, we find no infirmity in the well-reasoned order passed by the Ld. CIT(A) deleting the impugned additions. The appeal filed by the Revenue is devoid of merit and deserves to be dismissed.
In the result, appeal of the Assessee is dismissed. Order pronounced in the open Court on 04/07/2025.