Judgement

SHAH, J.: In determining the taxable income of the respondent firm for the assessment year 1948-49 the Income-tax Officer added to the income returned a sum of Rs. 1,60,000 as undisclosed receipts . The order was confirmed in appeal by the Appellate Assistant Commissioner, and by the Tribunal. The Income-tax Officer had in the meantime commenced a proceeding for the levy of penalty and in exercise of the power under Section 28 (1) (c) of the Indian Income-tax Act, 1922 he directed the respondent firm to pay Rs. 60,000 as penalty. The Appellate Assistant Commissioner in appeal confirmed the order. The Income-tax Appellate Tribunal rejected the contention of the respondent that the order imposing penalty upon the firm after the original firm was dissolved was without jurisdiction.

2. The Tribunal referred at the instance of the respondent firm the following question to the High Court of Patna for opinion.

"Whether on the facts and in the circumstances of the case the imposition of penalty under Section 28 (1) (c) of the Indian Income-tax Act, upon the petitioner firm (respondent) as constitute at the time of levy of penalty was legal and valid?"

8. The High Court called for a supplementary statement of the case and pursuant thereto the Tribunal submitted a statement on the specified points raised by the order of the High Court that:

(1) The firm which carried on the business during the calendar year 1947 was dissolved on July 7, 1951 when Butto Kristo Roy, one of the partners, died.

(2) During the previous year 1947 there was no instrument of partnership in existence, but the terms of the or partnership were the same as set out in the partnership deed dated October 17, 1949.

(3) The business of the firm was continue with effect from July 8, 1951 by the new firm as successor to the business of the old firm. The terms of the partnership were the same as set out in the deed dated October 17, 1949 and the partners and their shares were also the same except that Baidyanath Roy took the place of Butto Kristo Roy.

(4) With effect from April 28, 1952 the business was carried on by a partnership constituted by Baidyanath Roy and Bijali Kanti Roy under an instrument dated August 27, 1952. There was no dissolution of the firm, which was carrying on the business; there was only a change in the constitution of the old from April 28,1952.

The High Court held that penalty could be legally levied only upon the original firm constituted in the account year relevant to the assessment year 1948-49 and not upon the new firm constituted under the deed dated April 27, 1952.

4. The Tribunal and the High Court approached the problem before them on the assumption that the source of the power of the Income-tax Officer to impose . a penalty was in Section 44 of the Indian Income-tax Act, 1922. In go assuming, in our judgment, they were in error. Section 44 of the Indian Income-tax Act, 1922 as it stood at the relevant date, in so far as it is material provided:

"Where any business, profession or vocation carried on by a firm * * * has been discontinued * * * every person who was at the time of such discontinuance * * * a partner of such firm * * * shall in respect of the income, profits and gains of the firm * * * be jointly and severally liable to assessment under Chapter IV and for the amount of tax payable and all the provisions of Chapter IV shall, so far as may be, apply to any such assessment." The section is fairly plain: it applies to cases of discontinuance of the business of a firm and not where there is dissolution of the firm but not discontinuance of its business.

5. In S.M.S. Karuppiah Pillai v. Commissioner off Income-tax, Madras, 1941-9 ITR 1 in dealing with the effect of Sec. 44 of the Indian Income-tax Act, 1922 before it was amended by Act 7 of 1939, a Full Bench of the Madras High Court observed:

"This section (S. 44) only applies when there has been discontinuance of the business, * * The section says that if a business is discontinued