15. The Honourable Madras High Court in CIT Vs Western Agencies Madras Pvt. Ltd. (2008) 305 ITR 301 held that if a company lakes over the business of the firm by taking over assets and liabilities of the firm, then the company cannot be assessed in respect of the income of the period prior to dissolution of the firm. The Honourable Bombay High Court in Dhannaya Silk Mills -vs. CIT (1998) 234 ITR 682 (Bom.) held that in a case, an amount received after dissolution of the firm, then firm would be assessed on its total income as if no such dissolution has taken place, in respect of the income earned prior to dissolution but received after dissolution. Further, in that case also, there was a discontinuance of business in the year of receipt. The Honourable Kerala High Court in CIT -vs.- Excel Production (19%) 217 ITR 528 (Kerala) held that in a case, where there was only a change of situation of the firm, but business continued by newly constituted firm, then subsidy granted by the Stale Government would accrue to the firm as originally constituted and section I76(3A) had no application.
16. ITAT, Thud Member Bench in ACIT Vs HYT Engineering Pvt. Ltd. (2005) 276 ITR (AT.) 199 (Pune) held in a case where cash compensatory assistance was received by a company to which business was sold for a lumpsum consideration that the sum so received cannot be taxed in the hands of the assessee-company by virtue of section 176(3A) as business continued by the successor company. It is clearly held therein that provision of section 176(3A) would be applicable when there was a discontinuance of business.
17. From a combined reading of all these authorities, we call out the following principles :-
(i) provision of section 176(3A) would be applicable only when there is a discontinuance of business. If there is a discontinuance of business then sum received after discontinuation would be taxed as income in the hands of the recipient. Receipts under the award, by the parterres after dissolution of the firm would ordinarily be capital receipts in their hands when received, but for the legal fiction created under section 176(3A) and, therefore, it has to be constituted strictly.
(ii) Section 189(1) for deeming a dissolved firm to be in existence can be invoked only for taxing a sum accrued prior to dissolution of the firm. If any sum accrues after the dissolution of the firm, then for the purpose of taxing search post dissolution, accrual of income under section 189(1) cannot be invoked. This section only supposes existence of dissolved firm for making the assessment in respect of the income already accrued or arisen to the firm prior to dissolution.
(iii) Section 170 deals the succession, which can be invoked in respect of the income accrued prior to succession and also after the succession. The predecessor entity can be taxed in respect of the income accrued or arisen prior to succession and successor firm can be taxed in respect of the income accrued or arisen after the date of succession. It pre-supposes that business continues and one entity is succeeded by another entity. In the present case, no doubt there is a succession from the firm M/s. Prabhat Construction Co. to a Limited Company, namely M/s. Rupal Construction Pvt. Ltd., but amount of the award is not the income accrued or arisen to the company. However, it has to be found oui as to when the amount of award accrued and when it was finally quantified.
In this regard, we may refer to arbitration award dated 28.04.1989 at paras 3 to 6. This dispute pertained to tender agreement No. LCB 1 of 1983-84 awarded to Prabhat Construction Co. for a tender sum of Rs.5,91,17,814. 50 in respect of construction of the dam, which were continued by the successor company namely M/s. Rupal Construction. The terms of the dispute referred to the arbitrator are as under:-
Arbitration for disputes between M/s. Prabhat Construction Co. (Claimants) and Govt, of Gujarat (Respondents) re : the work of constructing masonry dam spillway for Sipu Project as mention in CM/ID No. S1P/4487/N/342/ 13/K dated 7.9.87 and its subsequent amendment dated 31.5.88
The undersigned is appointed as Sole Arbitrator under the above quoted memoranda of Govt, of Gujarat for deciding disputes mentioned therein between the parties subject to certain conditions. One of the conditions is :-“All awards shall be in writing and in case of claims for which the amount of award is Rs. 1 lac or above the awards shall be in writing with detailed reasons for the amount awarded as per clause No.52 of the agreement”. Later on parties also entered into arbitration agreement (in the form prescribed by the Govt, of Gujarat) on 17-09-87 and 24-2-89. The following in brief are the reasons for my award.
2. LCB, tender for the above work was accepted in favour of the claimants M/s. Prabhat Construction Co.under agreement No.LCB/J of 1983-84 of the E.E. Sipu Project On, Desa. Accepted tender amount was Rs. 5,91,17,814. 50 against estimated amount of Rs. 5,06,63,000/ – put to tender. The accepted tender amount is about 16.688 % above the estimated amount put to tender. The estimate was based on SOR of 1982 -83. Work order date Was 24-2-B4 and with stipulated 48 months construction period, prescribed date of completion was 23.02.1988. Later-on claimants have applied for extension in time limit and the matter is under consideration of the respondents. The work is still in process.
3. It is stated that the claimants have been paid 82 R.A. Bills up to 31.3.1989 for cumulative total gross amount of Rs. 5,37,55,297/-. This does not include (i) extra items payment of Rs. 24,21,064/ -, secured advance payment of Rs. 2,37,671/ – and price escalation (PE) payment of Rs. 40,68,545/-. The P.E. payment indicates an overall increase of nearly 7.568% on the value of work done at tendered rates. March 88 ending quarter gives PE of 21.22% over Nov., 83 base line.
4. Main causes of disputes and claims are :_
(a)Significant increases in tendered quantities of several schedule Ii items beyond the threshold limit of 30%. Such items then become extra items as per lender clause < I.
(b)Lowering of foundation levels requiring increased de watering efforts.
(c) Chang of rubble quarry from originally envisaged Bhakodar Quarry to Dantiwada Quarry.
(d)Clearing of rock surfaces more than once for foundation of the dam.
(e) Allegations of change in work specifications.
5. It may be noted here that the quoted tendered rates have two components viz. (i) precise rate quoted plus/ minus (ii) variable rate component as per price adjustment (PA) formula under clause 32A of the tender. Hence while deciding the rates of lender items turned extra items, it has been assumed that due payments as per quoted rates with PA component have to be allowed by the respondents as per tender provisions and enhancement in rates and amounts are worked out and awarded accordingly on that assumption.
6. Further work is still in progress and final quantities of claims are only broadly assessed. Final bill may indicate some variations in claim quantities though they are not expected to be significant. However, out of abundant caution it is clarified that extra rates and amounts awarded will not be payable if in a rare case final bill quantities of Schedule B tender items do not cross the threshold limit of 30%. If however, final bill quantities exceed the claim quantities, extra amounts payable will be limited to claim quantities only.