Kumar Khandsari Works vs Assessing Officer (Assessing ...
1993 Latest Caselaw 462 Del

ORDER

M.S. BAKSHI, J.M. :

These cross appeals, one by the assessed and one by the Revenue, are disposed of by this consolidated order. We shall first take up the appeal of the assessed.

2. assessed is a firm engaged in the business of Khandsari. It had filed two separate returns of income-one for the period from 4th Oct., 1984 to 25th July, 1985 and another from 25th July, 1985 to 23rd Oct., 1985. For the first period, there were three partners, namely, Raja Ram, Narinder Kumar and Satinder Kumar, having a share of 37.5, 37.5 and 25 respectively. On 25th July, 1985, a dissolution deed was executed and the firm styled as M/s Kumar Khandsari Works was dissolved w.e.f. 25th July, 1985. By virtue of the said dissolution deed Shri Raja Ram retired from the partnership, whereby all the assets and the liabilities of the firm were taken over by Shri Narinder Kumar and Satinder Kumar on 26th July, 1985, a partnership deed was executed between Shri Narinder Kumar, Satinder Kumar and Jatinder Kumar and the assets and liabilities of the old firm taken over and business continued. The plant situated at Bilaspur Distt. Kanpur was also taken over by the reconstituted firm. assessed, accordingly, filed two returns of income in respect of these two firms. Assessing Officer was of the view that since there was a change in the constitution of the firm during the previous year, within the meaning of s. 187(2) he made a single assessment in respect of the income for the two periods. Status of the firm was taken as that of URF.

3. assessed appealed to the first appellate authority on the ground, inter alia, that two separate assessments ought to have been made by the Assessing Officer. It was also claimed that registration ought to have been granted to the firm in respect of the first period as Form No. 12 had been filed by the assessed and for the second period the Assessing Officer should have condoned the delay in filing of the application in Form No. 11/11A. The CIT(A) rejected the appeal of the assessed in respect of making of one assessment and grant of registration to the firm.

4. The learned counsel for the assessed contended that the Assessing Officer and CIT(A) were not justified in making one assessment in respect of two periods. According to the learned counsel, the first appellate authority was wrong in ignoring the fact that the assessed had furnished Form No. 12. According to the learned counsel, the assessed had filed Form No. 12 on 30th June, 1986 vide receipt No. 967745 and a photo copy of the acknowledgment has been placed at page 20 of the paper book. According to the learned counsel Form No. 12 filed on 30th June, 1986 had been duly signed by the three partners of the firm and continuation of registration had been sought up to 25th July, 1985. The CIT(A) has referred to the application filed along with the return of income and not to the other applications. It was further pointed out that there was no change in the constitution of the firm. The firm had been dissolved by a dissolution deed executed on 25th July, 1985. The fresh deed of partnership had been executed on 25th July, 1985. Registrar of Firms had been intimated about the dissolution of the firm and a gazette notification had also been issued on 31st Dec., 1985 as is evident from the copy placed at 27 of the paper book. Relying upon the decision of the Supreme Court in the case of Wazid Ali Abid Ali vs. CIT (1987) 169 ITR 761 (SC), it was contended that two separate assessments ought to have been completed in respect of the two periods and that provisions of s. 187(2) were inapplicable to the facts of this case. Learned counsel submitted that for the first period continuation of registration had been sought vide Form No. 12 and for the second period fresh registration had been sought, though, there was delay for the application for registration for the second period but the same had been explained and therefore, the Revenue ought to have granted the registration for the second period also. The learned Departmental Representative, on the other hand, relied upon the orders of the Revenue authorities.

5. We have given out careful consideration to the rival contentions. In the case of Wazid Ali Abid Ali vs. CIT (supra) their Lordships of the Supreme Court have held that where there is a change in the constitution of the firm within the meaning of s. 187(2) single assessment is to be made and profits apportioned amongst the partners of the respectively periods proportionately. It is further held that where there is a dissolution of the firm during the previous year two separate assessments shall have to be made-one up to the date of dissolution and another for the second period. In this case, assessed has claimed that the firm has been dissolved on 25th July, 1985. In support of the claim, assessed has referred to the dissolution deed executed between the parties and also the intimation given to the Registrar of Firms and notification issued in this behalf. Revenues claim is that there has been no effective dissolution and, therefore, the decision of the Hon'ble Supreme Court in the case of Wazid Ali Abid Ali (supra) is inapplicable. The facts and circumstances of this case do suggest that there has been only a change in the constitution of the firm as opposed to the dissolution of the firm and succession thereof. The evidence referred to by the learned counsel for the assessed in the form of dissolution deed and intimation to the Registrar of Firms on the other hand suggests that assessed intended to dissolve the firm. However, whether there has, in fact, been dissolution of the firm or not would be a matter of evidence. Since perusal of the dissolution deed and the partnership deed executed by the parties strongly suggest that there has, in fact, been a reconstitution of the firm, we would, in the interests of justice, remit this matter to the file of the Assessing Officer and direct him to consider this issue afresh. assessed be given reasonable opportunity to establish that there has been effective dissolution of the firm as on 25th July, 1985. In case, assessed succeeds in establishing that there was de facto dissolution of the firm on 25th July, 1985 then two separate assessments shall have to be made-one for the period up to 25th July, 1985 and another from 26th July, 1985 up to the end of previous year. However, should the assessed fail to establish that there had been de facto dissolution of the firm, then one assessment as provided under s. 187(2) would be justified.

6. In the event of two separate assessments, Assessing Officer shall consider the application in Form No. 12 filed by the assessed on 30th June, 1986 and decide the issue in accordance with law. According to the assessed, the application filed on 30th June, 1986 was duly signed by all the partners of the firm. In case the claim of the assessed is found to be correct, the assessed would be entitled to registration for the first period of the year. For the second period, however, assessed would not be entitled to registration of the firm as there was no application filed by the assessed before the assessment was made in this case. An application could be filed by the assessed at any time during the previous year and in the event of delay in filing of the application, the Assessing Officer is empowered to condone the same provided there are sufficient reasons for delay in furnishing of the application. In this case, there was neither an application for condensation of delay before the Assessing Officer nor was any application filed before the making of the assessment. An application filed by the assessed on 15th Oct., 1988 could not have been before the Assessing Officer on 30th March, 1988, i.e. the date of the assessment order. Therefore, the Assessing Officer would be justified in taking the status of the firm as that of the URF for the second period. In the event of change of constitution of the firm, application in Form No. 11 is required to be filed before the end of the previous year. That application not having been filed before the making of the assessment, there is no question of consideration of the delay in filing of the application as none had been filed before making of the assessment. Application filed on 15th Oct., 1988 is non est as far as the year under appeal is concerned. The fact that application for condensation has been accepted for asst. yrs. 1987-88 and 1988-89 as stated by the learned counsel would be on its own facts and as far as this year is concerned, there is no question of any condensation of delay as no application had been filed for registration up to the time of making the assessment.

7. In the case of Wazid Ali Abid Ali (supra) there was a firm consisting of 17 partners, which had been granted registration for asst. yr. 1964-65. One of the clauses of the partnership deed provided that on the death or demise of any partner, the firm shall not be dissolved, but shall be carried on with the remaining partners and the heir/representative of the deceased partner on mutually agreed terms. On 4th June, 1964 one of the partners died and his son joined as a partner. No new deed was executed during the previous year which ended on 7th Nov., 1964. assessed had filed a declaration in Form No. 12 for asst. yr. 1965-66 for continuation of registration. The Tribunal held that on the death of a partner and on inclusion of his son in his place involved a change in the constitution of the firm and, therefore, a fresh deed should have been executed and fresh application for registration made. The Tribunal, however, held that assessed-firm was entitled to the benefit of registration up to 4th June, 1964, since the conditions of s. 184(7) of the IT Act were satisfied. The Tribunal further held that the profits should be divided and that part pertaining to the first period assessed as registered firm and remaining part assessed as that of URF. On reference, the Allahabad High Court held that there was a change in the constitution of the firm on 4th June, 1964 and that the continued benefit of registration had to be in respect of the entire year and dividing the profit as held by the Tribunal was not permissible and that the Tribunal was not right in holding that the status of the firm be taken as that of RF up to 4th June, 1964. The High Court held that on the change in the constitution of the firm, a fresh deed has to be executed and the firm had to apply for registration afresh.

8. The Hon'ble Supreme Court reversed the decision of the High Court and upheld the view expressed by the Tribunal that the firm will be entitled to the benefit of registration up to 4th June, 1964 i.e. a part of the previous year and that the direction of the Tribunal to apportion the profits into two periods and assess the profits attributable to the first period as that of registered firm and of the second period as that of URF. Considering the aforementioned decision of the Hon'ble Supreme Court, we are of the view that in the event of Assessing Officer being satisfied that there was no de facto dissolution of the firm a single assessment shall have to be made under s. 187(2). Profits, however, shall have to be divided and that pertaining to the first period assessed as the profits of the registered firm should Form. No. 12 be found to be in order and the profits pertaining to the second period be assessed in the status of URF. This disposes of ground Nos. 1 to 4 of assesseds appeal.

8(a). Ground No. 5 is relating to disallowance of depreciation. assessed had claimed depreciation in respect of two period separately. The Assessing Officer has allowed depreciation in the year under appeal as he made a single assessment in respect of the two periods. This issue is connected with the issue of making of two separate assessments. Should the Assessing Officer find that there has been de facto dissolution of the firm, two separate assessments will have to be made by the Assessing Officer. In that event the claim of the assessed relating to depreciation for each period shall have to be considered in accordance with law.

9. The sixth ground of appeal is relating to disallowance of consumable stores amounting to Rs. 24,036. Assessing Officer had made addition of Rs. 16,151 for the first period and Rs. 24,036 for the second period on the ground that consumable stores, such as, limestone, coal, diesel had been purchased by the assessed even after the crushing season was over and such stocks should have been reflected in the closing stock as on the close of the previous year. The learned CIT(A) has deleted the addition of Rs. 16,151 on the ground that for the first period, the addition made would be allowable as a deduction in the second period as opening stock. In respect of the addition of Rs. 24,036 the learned counsel for the assessed contended that additional evidence was sought to be produced before the CIT(A), which has, arbitrarily been rejected. According to the learned counsel if the additional evidence is taken into account, no addition would be justified on account of consumable stores. Since, we have remitted some of the issues to the file of the Assessing Officer we remit this issue also to his file for fresh consideration and decision afresh in accordance with law. The assessed should get an opportunity to furnish evidence in support of the claim that the addition is not warranted on the facts and in the circumstances of this case. In the result the appeal of the assessed is partly allowed.

10. We now take up the appeal of the Revenue.

11. Ground Nos. 1 and 2 are relating to the deletion of addition amounting to Rs. 50,540. In this case, there had been a survey under s. 133A on 29th Dec., 1985. Some loose-sheets were found at the time of survey wherein expenditure of Rs. 50,540 had been recorded as payments to the labourers. The expenditure was between Nov., 1984 to Feb., 1985. The assessed claimed that on the loose-sheets the contractor Shri Onkar had recorded the payments made to the labourers. The Assessing Officer was of the view that the loose-sheets were in the hand-writing of the Munim of the assessed-firm and that since, there was nothing to show that these payments made to the labourers had been recorded in the books of accounts on the respective dates, he made an addition of Rs. 50,540 as income of the assessed as income from undisclosed sources. The CIT(A) has deleted the addition on being satisfied that the assessed had no munim for maintaining the books of accounts as the partners of the firm were maintaining the same and that the Assessing Officer had not pointed out with reference to the books of accounts that the payments to the labourers had not been recorded in the books of accounts. The learned CIT(A) has also pointed out that the payments to the labourers were in any case allowable expenditure and the assessed would not have felt shy in recording such expenditure in the books of accounts.

12. The learned Departmental Representative contended that it was for the assessed to satisfy the Assessing Officer that these payments to the lab owners had been recorded in the books of the accounts. assessed having failed to establish so, the Assessing Officer was justified in making the addition and the CIT(A) was wrong in deleting the same.

13. The learned counsel for the assessed relied upon the findings of the CIT(A).

14. In our view, the decision of the CIT(A) does not call for any interference in this regard. The learned CIT(A) has found, as a matter of fact, that the statement on account of payment to labourers was in the hand-writing of Onkar, a labour contractor and not the Munim of the assessed. The statement of Shri Onkar had been recorded at the time of survey and he had confirmed that the statements of accounts were in his hand-writing. The Assessing Officer has not been able to point out with reference to the books of accounts that the payments to the labourers had not been duly recorded. The inference drawn by the CIT(A) from the fact that the payment to labourers in any case was allowable as an expenditure and, therefore, the assessed had no reason to keep the payments outside the books of accounts is, on the facts and circumstances of this case, is justified. We agree with the reasoning as well as the conclusion arrived at by the CIT(A) in respect of addition of Rs. 50,540.

15. Next ground of appeal is relating to addition of Rs. 1 lakh having been deleted by the CIT(A) on account of FDRs found at the time of survey in the name of Shri Surinder Kumar and Shri Jatinder Kumar. Two FDRs dt. 8th July, 1985 had been found in the premises of the firm at the time of survey. Shri Surinder Kumar, who was present at the time of survey had stated that FDR of Rs. 50,000 in the name of Jatinder Kumar had been purchased by him from his own business, which was being run in the joint name of Shri Surinder Kumar and his wife Smt. Asha Lata. Smt. Asha Lata had explained that she had filed a return of income disclosing saving of Rs. 55,000 under the Amnesty Scheme and the FDR of Rs. 50,000 had been purchased from her personal savings. Assessing Officer pointed out that Smt. Asha Lata had filed the return under the Amnesty Scheme after the date of survey. Therefore, the immunity under the Amnesty Scheme was not available to the claim. Reliance was placed on the decision of the Supreme Court in the case of Jumna Prasad Kanhaiya Lal vs. CIT (1981) 130 ITR 244 (SC) and CBDT Circular No. 451 [(1986) 51 CTR (St) 82]. The addition of Rs. 1,00,000 was, accordingly, made.

16. The CIT(A) has deleted the addition in respect of these two FDRs on the ground that one FDR had been purchased by Shri Surinder Kumar when he was no even the partner of the firm (he became the partner of the firm from 26th July, 1985) whereas the FDR had been purchased on 8th July, 1985. He, accordingly, held that addition on account of FDR in the name of Shri Surinder Kumar could not be made in the hands of the firm. The learned CIT(A) has pointed out that the partner of the firm having admitted to have purchased the FDR out of his own business income, there was no justification for the Assessing Officer make the addition in the hands of the firm.

17. On consideration of rival contentions, we are satisfied that the addition of Rs. 1,00,000 made by the Assessing Officer, in this case, was uncalled for. The FDRs did not belong to the firm but to the partners of the firm in their individual capacity. The partners have owned the FDRs and explained the source of investment. Even if they fail to explain the source of investment addition could possibly be made in their hands but we see no justification in assessing the investment in these deposits in the hands of the firm. The nexus between the purchase of the deposits and the income of the firm has not been established. Moreover, it is not a case of search and seizure where presumption under s. 132(4) was available to the Assessing Officer. The decision of the Supreme Court in the case of Jamuna Prasad Kanhaiyalal (supra) is inapplicable to the facts of this case. The principle laid down in that case would be applicable only if the firm had made an investment and the source had been explained out of disclosure made by a partner. In this case, FDR is in the name of the partner and the source is explained out of the disclosed income. The immunity is claimed by the declarant and not by the firm. The addition in the hands of the firm, in our view, is uncalled for and the CIT(A) was justified in deleting the same.

18. The next ground of appeal is relating to the addition of Rs. 16,051 on account of expenses incurred on consumable stores having been deleted by the CIT(A). This issue has been dealt with by us in assesseds appeal. The addition of Rs. 16,051 had been made by the Assessing Officer for the first period and another addition of Rs. 24,036 made in the second period on the ground that the assessed had purchased consumable stores after the crushing period and the stores ought to have been reflected in the closing stock. The CIT(A) has upheld the addition of Rs. 24,036 but has deleted the addition of Rs. 16,051 on the ground that whereas the closing stock of Rs. 16,051 ought to have been disclosed by the assessed in the first period the credit would be available in the opening stock of the second period. We see reason and justification in the decision of the

CIT(A) regarding the relief of Rs. 16,051 allowed on account of consumable stores. The CIT(A) has upheld the view of the Assessing Officer that the unconsumed stores ought to have been reflected in the closing stock and therefore, addition of Rs. 16,051 would be justified. However, since the closing stock would be the opening stock for the next period, the benefit of the closing stock was available to the assessed. In our view the addition of Rs. 16,051 was rightly deleted.

19. Next ground of appeal is relating to the addition of Rs. 1,829 on account of Mandi tax and sales-tax made by the Assessing Officer under s. 43B having been deleted by the CIT(A). The learned CIT(A) has relied upon the decision of the Andhra Pradesh High Court in the case of Srikakollu Subba Rao & Co. vs. Union of India (1988) 173 ITR 708 (AP) to hold that provisions of s. 43B are not applicable as the payments were not due under the respective statutes during the previous year. The decision of the Andhra Pradesh High Court in the case of S. Subba Rao & Co. (supra) has been superseded by the retrospective amendment of s. 43B. We may point out that a proviso has been added to s. 43B , by the Finance Act, 1987 w.e.f. 1st April, 1988 providing an exception to the applicability of provisions of s. 43B in such cases, where the payment is made before the time allowed for filing of the income-tax return. This proviso, however, has been held to be applicable from 1st April, 1988 by the Hon'ble Delhi High Court being the jurisdictional High Court in this case, in the case of Sanghi Motors vs. Union of India (1991) 187 ITR 703 (Del). The benefit of the proviso was, thus, also not available to the assessed in the asst. yr. 1986-87. We, therefore, we merit in this ground of the appeal of the Revenue and restore the addition of Rs. 1,829 made under s. 43B on account of Mandi tax (Rs. 300) and Rs. 1,529 on account of sales-tax. We, however, direct that deduction be allowed to the assessed in the year of payment as provided under s. 43B. In the result appeal of the Revenue is partly allowed.