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1968 (11) TMI 17

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..... by the family was allocated to Sool Chand and Ramsewak. These two members thereafter constituted a partnership and carried on the business under the firm name of Sool Chand Ramsewak. This firm is the assessee in the present reference. The assessee-firm filed returns of its income for the assessment years 1951-52, 1952-53 and 1953-54. These returns were filed on the 2nd November, 1951, 4th August, 1952, and 24th September, 1953, respectively. It may be noted that each of these returns had been filed within the respective assessment years and the incomes returned were Rs. 3,471, Rs. 2,260 and Rs. 2,200 respectively. The Income-tax Officer who did not accept the claim of partition of the family took no action whatever on these returns and he included the income returned by the firm in the assessments of the Hindu undivided family for the said assessment years. Against the assessments made by the Income-tax Officer the Hindu undivided family filed appeals to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner did not accept the claim of total disruption but he held that there had been a partial partition in respect of the business only and the firm was duly c .....

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..... 1) were issued no action could be taken on the returns filed by the assessee as the time limit for normal assessment had already expired. The returns already on record had, to all intents and purposes, become mere scraps of paper and, thus, income had escaped assessment, so that, section 34 of the Act was applicable. He further held that, in view of the decision of this court in the case of Pt. Hazari Lal v. Income-tax Officer, Dist. II (ii), Kanpur, the Appellate Assistant Commissioner was competent to give the impugned direction for the consequential assessment of the assessee-firm. In view of the difference of opinion between the two members, the case was referred to the President of the Tribunal under section 5A(7) of the Act. The President agreed with the view taken by the Accountant Member and held that the assessments under section 34 of the Act for the three years under appeal were valid and competent. In accordance with the view taken by the majority, the three departmental appeals were allowed by the order of the Bench dated 30th June, 1962. At the instance of the assessee the Tribunal has referred the following question of law for the opinion of this court : " Are th .....

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..... were invalid to that extent. Subsequently, the Supreme Court had again to decide the same question in the case of Income-tax Officer, 'A' Ward, Sitapur v. Murlidhar Bhagwan Das. In this case the Supreme Court considered its earlier decision in Prashar v. Vasantsen Dwarkadas and observed as follows : " The expression 'any person' in its widest connotation may take in any person, whether connected or not with the assessee, whose income for any year has escaped assessment ; but this construction cannot be accepted, for the said expression is necessarily circumscribed by the scope of the subject-matter of the appeal or revision, as the case may be. That is to say, that person must be one who would be liable to be assessed for the whole or a part of the income that went into the assessment of the year under appeal or revision. If so construed, we must turn to section 31 to ascertain who is that person other than the appealing assessee who can be liable to be assessed for the income of the said assessment year. A combined reading of section 30(1) and section 31(3) of the Act indicates the cases where persons other than the appealing assessees might be affected by orders passed by the A .....

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..... oner accepted the contention that they formed a partnership and directed that the income of the business should be excluded from that of the family and assessed in the hands of the firm. When the assessment was made on the firm, the assessee objected and contended that the assessment could not be proceeded with on account of the bar of section 34(3) of the Act. The Supreme Court rejected the contention of the assessee and held that the assessment was valid in view of the decision of the same court in the earlier case of Murlidhar Bhagwandas. The facts of the present case are in pari materia with those in the latest Supreme Court case referred to above. A firm is not a separate legl entity as laid down by the Supreme Court in the case of Dulichand Laxminarayan v. Commissioner of Income-tax ; it is an association of individuals. It is manifest that if the income of the business of the assessee-firm is assessed as the income of the Hindu undivided family, such assessment or any modification thereof in appeal would necessarily affect the assessment and the liability of the two members as partners of the firm. The case, therefore, falls within the rule laid down by the Supreme Court i .....

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..... ere issued after the expiry of four years which is the ordinary period of limitation prescribed under section 34(3) of the Act for making an assessment. The time limit for making the assessments having expired, the learned standing counsel contended, there was an escapement of income which could not be brought to tax except by resort to the provisions of section 34. The contention of the learned standing counsel, though attractive, does not bear scrutiny. It is true that in the case of Ranchhoddas Karsondas, when the notice under section 34(1) was issued the normal period of limitation for an assessment had not expired but that case was not decided on the basis that when a return filed by an assessee has not been acted upon and the usual period of limitation for assessment has expired, income escapes assessment and it is open to the Income-tax Officer to issue a notice under section 34(1). In that case, an assessee had filed a voluntary return under section 22(3) of the Act, showing a non-taxable income of Rs. 1,935. The return, which related to the assessment year 1945-46, was filed on January 5, 1950, that is, less than three months before the expiry of the normal period of lim .....

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..... nvalid notice under section 34, and issue a notice under section 34. The Supreme Court observed that, " whatever the impelling cause or motive, if a return otherwise valid is filed by an assessee before the receipt of a valid notice under section 34, it is to be treated as a return within section 22(3) " and notice under section 34 cannot be issued in disregard thereof. The principle which emerges from these decisions of the Supreme Court is that when a valid return has been filed by an assessee, there is no question of income escaping assessment and it is not open to the Income-tax Officer to issue a notice under section 34(1) whether before or after the expiry of the period of four years from the end of the relevant assessment year. The learned standing counsel conceded that, in the present case, it was not competent on the part of the Income-tax Officer to take action under section 34(1)(a) as the assessee had committed none of the defaults mentioned therein. Section 34(1)(a) applies when there is an omission or failure on the part of an assessee to make a return of his income for any year or to disclose fully and truly all material facts necessary for his assessment for tha .....

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..... g parts not material here) : 34. (1) If . . . (b) Notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year . . . . he may . . . . serve on the assessee . . . . a notice under sub-section (2) of section 22 and may proceed to assess or reassess such income, profits or gains . . . " In the case of Maharaj Kumar Kamal Singh, Gajendragadkar J. (as he then was), observed as follows on the conditions for the applicability of section 34(1)(b) (at pages 5 and 6 of the report) : " It is clear that two conditions must be satisfied before the Income-tax Officer can act under section 34(1)(b). He must have information in his possession, which, in the context, means that the relevant information must have come into his possession subsequent to the making of the assessment order in question and this information must lead to his belief that income chargeable to income-tax has escaped assessment for any year . . . . . . " Evidently, therefore, sectio .....

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..... of Maharaj Kumar Kamal Singh v. Commissioner of Income-tax. We are, therefore, of the opinion that the Income-tax Officer was not competent to issue the notices under section 34 of the Act on the 12th January, 1959. Our answer to the question referred to us is that, though the assessments made by the Income-tax Officer in pursuance of the notices under section 34(1) were within time, they cannot be sustained as legal and valid assessments. The assessee will get from the Commissioner of Income-tax the costs of this reference which we assess at Rs. 200. OAK C.J.--I have read the judgment prepared by my learned brother Mukerjee J. I wish to add a few words, as I was a member of the Division Bench which took a different view in Jawahar Lal Mani Ram v. Commissioner of Income-tax (I.T.R. No. 243 of 1959, decided on 24-5-1968). The present reference covers two questions. The first question is whether in the instant case action taken under section 34 of the Indian Income-tax Act, 1922, was within time. The second question is whether action under section 34 was permissible in spite of the fact that the assessee had filed returns at the proper time. The two questions may be considere .....

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