PAULSON CONSTRUCTIONS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) AT the instance of the assessee, the Income-tax Appellate Tribunal, Cochin Bench, referred, as directed by this court, the following question of law arising out of the order of the Tribunal dated January 28, 1983, in I.TA. No. 268(Coch) of 1981 :

(2.) THE assessee was a firm constituted by a deed of partnership dated August 10, 1971. This firm took up the work of completion of a tunnel from Messrs. Paily Piliai and Co., another partnership firm. THE said firm took the original contract for the tunnel work and upon its dissolution in September, 1971, the partner of the said firm, Sri P. M. Paily Pillai, was authorised to complete the unfinished portion of the work. He gave a subcontract to the assessee-firm to complete the tunnel work. At the time when Messrs. Paily Pillai and Co. executed the work, they had taken on hire from the Government a compressor for completing the work. THE compressor was continued to be used for completing the work by the assessee-firm as well. THE privity of the main contract was between Sri P. M. Paily Pillai and the Government. THE payment for work done by the assessee was used to be obtained by Sri P. M. Paily Pillai who, thereafter, passed on the proceeds to the assessee-firm after deducting his share of the payments received. For the period the compressor was used by the assessee-firm, a sum of Rs. 36,000 was deducted by the Government from the amount payable to the contractor towards hire charges of the compressor during the previous year relevant to 1972-73 assessment. As the work was done by the assessee-firm, the said hire charges were borne by the assessee-firm. THE assessee-firm, in turn, claimed it as an item of expenditure from its income for its income-tax assessment for 1972-73 which was allowed as a deduction. Since the work was over during the previous year ended on March 31, 1972, relevant to 1972-73 assessment, the assessee-firm was dissolved by an agreement of dissolution dated April 1, 1972. When the said compressor was in use for the contract work taken by Messrs. Paily Pillai and Co., the said firm applied to the Government in 1969 for selling the compressor to them. THE Government took a final decision in January, 1974. THE Government decided to sell the compressor to Messrs. Paily Pillai and Co. with effect from 1966. THE Government also decided, inter alia, to adjust the hire charges recovered in respect of the compressor against the sale price. This resulted in the accrual of an income of Rs. 36,000 to the partners of the assessee-firm also for the assessment year 1974-75 on account of the refund of the hire charges sanctioned by the Government relating to the period during which the compressor was used by the assessee-firm. THE Income-tax Officer, thereafter, initiated proceedings for assessing the assessee-firm for 1974-75 in respect of the said income of Rs. 36,000. THE partners of the assessee-firm objected to the assessment on the ground that the firm was dissolved with effect from April 1, 1972, and that, therefore, the assessment cannot be made on a dissolved firm for the year 1974-75. But the Income-tax Officer, overruling the objection, assessed the firm under Section 189(1) read with Section 41(1) of the Income-tax Act, 1961.

(3.) SECTION 47 of the Partnership Act says that on the dissolution of a firm, the authority of each partner to bind the firm and the other mutual rights and obligation 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. Therefore, for realisation of the assets, discharging the liability of the firm and settling the accounts of the partners, etc., the firm will continue to exist despite the dissolution. The firm, namely, the assessee herein, paid the hire charges when it carried on the sub-contract business which was allowed as a deduction in its assessment. The order passed by the Government in 1974 vested in the assessee-firm a right to get the refund and the refund was also realised on that basis. The said amount of refund will form an asset in the hands of the firm which has to be distributed among the partners and, therefore, by virtue of SECTION 47 of the Partnership Act, the assessee-firm continued to exist for distributing the assets.