S. Sankappa Amd Others v. The Income-Tax Officer, Central Circle Ii, Bangalore

llhargarn, J. TIK>c' eighteen appeals hal'c been tiled by six persons, some of whom were partners in a firm called "The Lalitha · Silk Throwing Factory". some in another Jinn called "The Srini-vasa Textiles", and some in both thc.sc firms. The <'ppeah brought up to this Court under catificate gr<ulle<l hy the lligh Court of Mysore arc agaimt the judgment of the High Court dis· missing eighteen writ petitions hy thc.se six appellants prciying for quashing notices issued by the Income-tax Ofliccr. Bangalore. purporting to be under section l 55 of the lncomc'tax Act No. 4:1 of I 96 I, proposing to rectify the assessments of the appellants in respect of the assessment years l 958-59. 1959-60 and 1960-61. Thus. the notices challenged arc three notices for each of these asse'5mcnt years in respect of each of the six appdlants, so that there were l 8 petitions before the High Coun. The High Court decided all the petitions by a common judgment and. consequently in these appeals. all of them arc being dealt with together.

During all these three assessment years l 958-59. 1959-60 and 1960-61. both the firms filed returns declaring themselves to he regislcrcd Jinns and also presented applications for registration of the lirms under s. 26A of the Income-tax Act No. I l of 1922. The J ncomc-tax Officer refused registration of the firms and assc.'5-ed the income of the finns. treating them as unregistered. The assessments of these six appellants were also made. so that their incomes from the two firms were included in their individual assessments as if they had received the income in the capacity of II partners !n unregistered firms. The firms went up in appeal against the orders of the Income-tax Officer refusing registration. These appeals were allowed, by the Appellate Assistant Commis-

SANKAPPA v. I.T.O. (Bhargava, J.) 67 7 sioner by an order dated 26th November, 1966 in respect of the Lalitha Silk Throwing Factory, and 14th December, 1966 in respect of Srinivasa Textiles. The Income-tax Officer, in pur-suance of the appellate order of ·the Assistant Commissioner, passed a consolidated order revising the assessments of the firms for all these years on the basis that they were registered firms and also apportioned the income of the firms between these six part-ners. Subsequently, the notices impugned in. these petitions were issued on 19th January, 1967, whereby the Income-tax Officer proposed to rectify the individual assessments of the six appellants in respect of each of the three years of assessment under section 155 of the Act .of 1961. The appellants in the writ petitions challenged the validity ·Of these notices, but the High Court dis-missed the writ petitions and, consequently, the appellants have come up in these appeals before us.

It was conceded before the High Court on behalf of the Income tax Officer that proceedings for rectification of the assessments of the appellants could not be taken under s. 155 of the Act of 1961, because, admittedly, the rectifications related to assessments of tax for assessment years when the Act of 1922 was applicable, so· that proceedings could only be taken under s. 35(5) of the Act of 1922 in view of the provisions of s. 297(2) (a) of the Act of 1961. Before us, learned counsel for the appellants urged that proceedings for rectification under s. 35 ( 5) of. the Act of 1922 cannot be held to be proceedings for assessment within the mean-ing; of that expression used ins. 297(2)(a) of the Act of 1961, so that. under that provision of law, the Act of 1922 could not be resorted to by the Income-tax Officer in order to rectify the assess-ments of the appellants. On the same basis, it was further urged that,)n any case, the provisions of s. 35(5) of the Act of 1922 are not attracted, because proceedings under that section can only be taken when it is found on the assessment or reassessment of. a l}rm that the share of the partner in the profit or loss of the (irrn has not been included in the assessment of the partner .or; If iitclud· ed, is not correct; and, in the present cases, there was no assess-ment or reas_sessmeJlf-IJf the firms when the Income-tax Officer, in pursuance of the order of the. Appellate Assistant Commissioner granting registration to the firms, proceeded to pass orders rectify-ing the assessments of the firms under s. 35 ( 1) of the Act of 1922 on 20th December, 1966. It was urged· that no fresh computa-tion of income of the partners is sought to be made in pursuance of the notices issued and, similarly, no fresh computation of the income of the firms was made when the Income-tax Officer passed his orders on 20th December, 1966 to give effect to the decision of the Appellate Assistant ·commissioner granting registration to the firms. No fresh computation of income being involved, it must be held that the poceedings now sought to be taken are not proceedings for assessment, and, similarly, no proceedings for assessment or reassessment were taken by the Income-tax Officer when he passed his orders on 20th December, J 966. This submission, in our opinion, has been rightly rejected by the High Court. because it has already been explained by thi; Court that the word "assessment" is used in the Income-tax Act in a number of provisions in a c0m-prchcnsive sense and includes all proceedings, starting with the tiling of the return or issue of notice and enJing with deter-minaiion of the tax payable by the assessce. Though in some sections, the word "assessment" is used only with reference to computacion of income, in other sections it has the more compre-hensive meaning mentioned by us above. Reference may be made to the decision of this Court in Abraham v. Income-tax Officer('). The same principle has been recently reiterated in the case of Kuiall'ati Devi Har/alka v. Tire Commissioner of Income-tax, WeJt Bengal & Ors. ( ') where. dealing with the word ''assessment" used ins. 297 of the Act of 1961, the Court held:-

"It is quite clear from the authorities cited above that the word 'assessment' can bear a very comprehen-si\'e meaning; it can comprehend the whole procedure for ascertaining and imposing liability upon the tax-payer. Is there then anything in the context of s. 297 which compels us to give to the expression 'procedure for the assessment' the narrower meaning suggested by the learned counsel for the appellant? In our view, the answer to this question must be in the negative. It seems to us that s. 297 is meant to provide as far as possible for all contingencies which may arise out of the repeal of the 1922 Act. It deals with pending appeals, revisions, etc. It deals with non-completed assess-ments pending at the commencement of the 1961 Act and assessments to be made after the commencement <Jf the 1961 Act as a result of returns of income filed after the commencement of the 1961 Act."

It is clear that. when proceedings arc taken for rectification of assessment tG tax either under s. 35 (I) or s. 35 ( 5) of the Act of 1922. thc>se proceedings must be held to be proceedings for assessment. In proceeding under those provisions, what the focome-tax Officer docs is to correct errors in, or rectify orders of assessment made hy him. and orders making such corrections or rectifications are, therefore, clearly part of the proceedings for assessment.

(I) 41 I .T.R. 425. (2) Civil ApJ><al No. 1421 of 1966 decided on l.S. 1967.

SANKAPPA V. I.T.O, (Bhargava, !.) 67 9 The main stay of the argument of learned counsel for the appellants against this view was the decision of this Court in M. M. Parikh, Income-tax Officer, Special f;;vestigation Circle "B", Alzmedabad v. Navanagar Transport and Industries Ltd. and Another(') in which cas.e the Court was dealing with the question whether an order imposing: additional super-tax under s. 23A of the Act of 1922 was an order of assessment and held to the con-trary. The dedsion in that case does not, in our opinion, support the submission made on behalf of the appellants in tbe present cases.·· It was explained there that, under s. 23A of the Act of 1922, there was no computation of income or determination of tax imposed by the charging section. That section by itself empowered the Income-tax Officer to impose the super-tax by his own order, and an _order imposing such a tax could not be held to be an order of assessment. Further examples of similar orders were cited in that case and reference was made to orders under ss. 18A(l), 35(9), 35(10) and 35(11) of the Act of 1922. After referring to these provisions, the Court clearly indicated the reason for holding that proceedings under those provisions were not proceedings for assessment of tax by stating :

"The salient feature of these and other orders is that the liability to pay tax arises not from the charge created by statute, .but from the order of the Income-tax Officer."

In the present cases the orders, which have been rectified or are being taken up for rectification, are all orders under which there was assessment of incomes and determination of the charge to tax in accordance with the charging sections. The orders passed under s. 35 ( l) by the Income-tax Officer on 20th December, 1966 were all orders altering assessment orders made in the proceed-ings for assessment of the firms, while under the impugned notices the Income-tax Officer is proposing to rectify orders made for computation of income and imposition of tax under the charging section in the case of individual partners. Clearly, therefore, in these cases, s. 297 ( 2 )(a) of the Act of 1961 permits the Income-tax Officer to proceed in accordance with the provisions of tlie Act of 1922 and he has rightly proposed to take action under s. 35(5) of the Act of 1922 on the basis of rectifications made in the assessments of the firms under s. 35 ( 1) of that Act on 20th December, 1966 in pursuance of the appellate orders granting registration to the firms.

The second point raised by learned counsel was that, in any case, the orders actually made by the Income-tax Officer on 20th December, 1 966 in the cases of these firms cannot be held to be orders of assessment, because all that the Income-tax Officer did and was required to do in order to give effect to the orders of the Appellate Assistant Commissioner granting registration was to re-calculate the tax payable by the firms under s. 23(5)(aJ of the Act of 1922, and such an order would not be an order of assess-ment at all. Copies of the orders actually passed by the Tncome-tax Officer under s. 35 ( J) in the cases of both the firms have been produced before us. They show that the orders consist of two parts. In the first part, the tax payable by the firms was re-calculated on the basis that the firms were registered firms and refund was allowed, because a larger amount of tax had been assessed and realised, treating the firms as unregistered. In the second part, the share income of the assessee firms was allocated between the various partners. It appears to us that this compo-site order re-determining the tax payable by the fim1s directing refund and apportioning the income of the firms between -the partners can be held to be nothing other than an order made in proceedings for assc>smcnt of the firms.

Under the Act of I 922. the assessment of a finn is made under u s. 2~(5) which is as fodows :-

"23 ( 5). Nothwithstanding anything contained in the foregoing sub-sections. when the assessee is a firm and the total income of the firm has been assessed under sub-section(!), sub-section f'.1) or sub-section (4), as the case mav be.-·

(a) in the case of a registered firm, I i) the income-tax payable by the firm itsdf shall

be determined: and ( ii ) the total income of each partner of the firm,

including therein his share of it~ income, profits ,ind gains of the previous year, shall be assessed dnd the sum payable by him on the basis of such assessment shall be determined :

Provided that if such share of any partner is a loss it >hall be set off against his other income or carried for-1; ward and set off in accordance with the provisions of •cction 24 :

Pro\'ided further that when any of such partners is a person not resident in the taxable territories, his share ,,f the income. profits and gains of the firm shall be ii asse"c'I on the tim1 at the rates which would be applic-able if it were assessed on him personally, and the sum so detennincd as payable shall be paid by the finn:

Provided also that if at the time of assessment of any partner of a registered firm, the Income-tax Ollicer is of opinion that the partner is residing in Pakistan, the partner's share of the income, profits and gains of the tirm shall be assess~d. on the ·firm in the manner laid down in the preceding proviso and the sum so determin-ed as payable shall be paid by the firm; and

• ( b) in the case of an unregistered firm, the Income-tax Officer may, instead of determining the sum paya-ble by the firm itself, proceed to assess the total income of each partner of the firm, including therein, his share of its income, profitS'1llld gains of the previous year, and determine the tax payable by each partner on the basis of such assessment, i( in the Income-tax Officer's opinion, the aggregate amount of the tax including super-tax, if any, payable by the partners under such procedure would be greater than the aggregate amount which would be· payable by the firm and the partners individually, if separately assessed; and where the proce-dure specified in this clause is applied to any unregistered firm. the provisos to clause (a) of this sub-section shall apply thereto as they apply in the case of a. registered iirm.·· It will be noticed that, under this provision, various orders have to be made by the Income-tax Officer.· In the case of a register-ed firm, the Income-tax Officer, after computing the income, has to determine the tax payable by the firm itself, and prevision is .made that, thereafter, the share in the income of the firm of each partner· is to be included in· his total income for purposes of his individual assessment to tax. . It is true that the Income-tax Officer assessing the firm may not be the same Officer who may be dealing with the individual assessment of the partners Jllld, in any case, even if he· .be the same Officer, the proceeding for assess-ment of the partners has to be treated as a separate proceedirig; but it is. als'o clear that the ·proceedings for assessment of the firm under this section do not come to an end merely on computation of the income of the firm and determination of the tax payable by the firm on that income. The Income-tax ·Officer, who deals with the assessment of the firm, has also to apportion the income of the firm, in the case of a registered firm, between its partners and the notice of that apportionment has to be given under s. 23 ( 6) by him to the firm. This apportionment is clear;y treated as a part of the proceeding for assessment of the firm and that is why the notice is to be given to the firm. The second proviso to s. 30 ( 1) also clarifies this position by laying down that the right of appeal in respect of the apportiomnent is to be exercised by the

68~ SUPRDU: COURT Rl'PORTS (1968) ~ SCR

partner' by filing appeals against the order of assessment of t~ Jinn and no: against orders made in the course of subsequent pro-ceedings for the individual nssessmc;1ts of the partners them-selves. The second proviso to s. 23(5) (a) also brings out this position. In certain case;, after the apportionment of the income of th.: r~gisterd firm, the share of a particular partner, who is not resident in th~ ::ixable territories, is to be assess~d to tax also as if it is the income of the registered fimi. All these provisions clearly show that proceedings for assessment of a tim1 consist of computation of the income of the firm, determination of tax pay-able by the Jim1, apportioniw:m of the income of the firm between its partners in the case of a registered firm and, in appropriate cases, impositio11 of tax on the finn after including the share of the income of certain partners in the income of the firm, even though the firm is registered. The proceedings for assessment of the firm arc not completed until all these steps have been taken by the Income-tax Officer, and each one of those steps must be held to be a step in the proceedings for assc'ssmcnt of the finn. Consequently, when the Income-tax Officer passed the order; dated 20th December, 1966 and apportioned the income of the firms between the various partners. the orders which he made were clearly orders in proceeding' for assessment and it was in order to give effect to these orders in the individual a'5essrrient of the partners that the impugned notices were issued. The fir;t condi-tion precedent that the proceedings under s. 35(5) are to be taken on the basis of information de1 ;ved from orders of assessment or re-assessment of the firm was. thus, clearly satisfied.

In this connection, learned counsel drew our a~:.:ntion to a decision of the Madras High Court in V. S. Arulanandani v. Income-tax Officer, Tuticorin( 1), where that Court, dealing with section 35 ( 5) of the Act of 1922, held :-

"The respondent relied at on~ stage on section 35 ( 5) of the Act. It should be obvious that the peti-tioner's case did not come within the scope of section 35 ( 5). There was no reassessment of the income of the finn; nor was there an appeal against the assessment of the finn. The only appeal of the finn was against the order of the Income-tax Ofticer refusing registnrt.ion under section 26A. In fact, the f.nalitv of the assessment of the firm dated November 11. 1954, was left un-touchd all through. an aspect to which we shall have to ad,. ~rt again.'"

Reliance was placed on this comment. because in that case also It the finn, of which thc,asscsscc was a partner. was first rcfu!ied

(I) 43 l.T.R. 511: at p. 517.

registration and the assessment of the partner was sought to be rectified when, subsequently, registration of the firm was allowed. The facts of that case were, however, different. In that case, there was no assessment or reassessment of the firm subsequent to the grant of registration. The petition filed by the assessee in the High Court under Art. 226 of the Constitution against proceed-ings of rectification sought to be taken by the Income-tax Officer was allowed on two grounds. One was that the Income-tax Officer had given no opportunity to the assessee before complet-ing the proceedings of rectification under s. 35. The .other was that the income of the firm had already been taxed as the income of the unregistered firm and there could be no second assessment of the same income in respect of the assessee's share in his assess-ment until the assessment of that income to tax in the hands of the firm was set aside. What was thus set aside was the at.tempt to tax the same income twice. It was in these circumstances that the Court observed that there was no scope for the applitability of s. 35(1) ors. 35(5) of the Act of 1922. Section 35(5) did not apply, because, in fact, there was no assessment or reassess-ment of the income of the firm subsequent to the order granting registration. The finality of the assessment of the firm had been left untouched and while that order remained intact, the provi-sions of s. 35 (5) could not possibly be attracted. In the case before us, after registration of the firms was allowed in appeal, the Income-tax Officer in the proceedings for assessment of the· firms proceeded further to make a fresh assessment of the tax payable by the firms and also to apportion the income of the firms between various partners, so that the income of the firms no longer remained taxed as income of unregistered firms, and liabi-lity arose of the partners to be taxed in their assessments in res-pect of their shares of the income. Clearly, in these circums:ances. s .. 35 ( 5) was rightly applied.

The last point urged l\y learned counsel was that, in.s. 35(5) of the Act of 1922, there is a second condition precedent, on the· existence of which alone proceedings for rectification can be taken under it and that condition is that it should be found that the share of the partner in the profit or loss of the firm had not been included in the assessment of the partner, or, if included, was not correct: and there was no such finding in the present cases. The share of each partner was not included for the purpose of assessment of that share to tax. Inclusion contemplated by s. 35 (5) is for assessment to tax of the share. The inclusion was for only two limited purposes. One purpose was of deter-mining the exemption to which the partners were entitl-ed under s. l4(2)(a) of the Act of 1922. The other purpose was for determining the. rate at which tax was payable in the separate assessments of the partners under s. 16(1)(a) of 1ha1 Acl. The .shares of the income of the partners were never included for the purpose of bringing those shares of income to lax in their individual assessmenls. The tax was actually imposed in the assessment of the firms thc1melves treating it as the income of unregistered firm>. When· the assessments of the unregistered Jinns were set aside. the individual partners ceased to be entitled to the benefit of. s. 14(2)(a), ands. 16(1)(a) also became in-applicable. What was required to be done was to add the in-come of each partner in his individual assessment and then impose tax on it in accordance withs. 23(5)(a)(ij) of the Act of ! 922. Thus, this was a clear case where the inclusion· of the 'hare of the income of the partner in his individual assessment was not correct. If the submission made on behalf of the appcl· lants be accepted, a curious result would ensue, because the liabi-lity of the firms to p~y t.ix on the basis that they were unregister-ed firms would stand vacated, while tlie shares of the partners in :he firms would not be brought to tax in their individual assess-ments under s. 2315)(a)(ii), so that the income would escape charge to tax altogether. It is clear th al s. 35 ( 5) of the Act of 1922 is cnact•cd precisely to mccl situalions of the type that has come up in the present cases. so that when the imposition of the lax on the itnn as an unregistered firm is set aside. tax can be imposed on the shares of the income of the partners in their indi- ,.idual as;cs;i11cnts by rcGlifying them under s. 35 ( 5) of the Act of I 922. This submission, consequently. has no force.

The appeal> fail and are dismissed with costs. There shall be Ont! hearing fee.