1971 (9) TMI 45 - HC - Income Tax

It is clear that the allocation reports received from the Income-tax Officers having jurisdiction over the three firms conveyed information to the Income-tax Officer assessing the assessee that the correct share of the assessee in the profits of the three firms to the extent to which it was in excess of that declared in the return had escaped assessment at the time of the original assessment and it must therefore be held that the conditions for the applicability of section 147(b) were satisfied and the Income-tax Officer was entitled to reopen the assessment of the assessee under that section.

Issues Involved:
1. Whether section 35(5) excludes the applicability of section 147(b) when action under section 35(5) is time-barred.
2. Whether the conditions requisite for the applicability of section 147(b) were satisfied in this case.

Detailed Analysis:

Issue 1: Inter-relation between Section 35(5) and Section 147(b)
The primary issue is whether section 35(5) of the old Act (corresponding to section 155 of the new Act) and section 147(b) are mutually exclusive. The court emphasized that once an assessment is made, it is final and conclusive unless a provision allows its finality to be disturbed. Several provisions, including sections 146, 147, 154, and 155 of the new Act, permit interference with the finality of an assessment under different conditions and within different time-limits.

The court clarified that each section is independent, with its own conditions and time-limits. If the conditions of one section are satisfied and action is taken within its time-limit, it opens the door for interfering with the finality of the assessment. The court rejected the contention that section 35(5) and section 147(b) are mutually exclusive, stating that the conditions for their applicability are different, and they serve distinct purposes. Section 35(5) is for correlating the partners' assessment with the firm's assessment, while section 147(b) aims to bring to tax escaped income. The court concluded that even if action under one section is time-barred, the other section can still be availed of if its conditions are met and time is available.

Issue 2: Conditions for Applicability of Section 147(b)
The second issue concerns whether the conditions of section 147(b) were satisfied, justifying the reopening of the assessment. The court first addressed the contention that the record of the firm should be deemed to have merged with the record of the assessee due to the fiction in section 35(5). The court clarified that section 35(5) is a limited fiction for deeming a mistake apparent from the record, not for merging the records of the firm and the assessee. Thus, information from the allocation reports was considered extraneous, justifying the initiation of proceedings under section 147(b).

The court also addressed the argument that the income had not escaped assessment but suffered non-assessment due to the Income-tax Officer's inaction under section 35(5). The court ruled that what matters is whether the income escaped assessment at the original assessment time, not whether it could have been brought to tax under another provision. The correct share of the assessee in the firms had indeed escaped assessment, and the inaction under section 35(5) did not convert escaped income into non-assessed income.

The court concluded that the allocation reports provided information that the correct share of the assessee in the firms' profits had escaped assessment, satisfying the conditions for section 147(b). Therefore, the Income-tax Officer was entitled to reopen the assessment under section 147(b).

Conclusion:
The court answered the reference question in the affirmative, holding that proceedings under section 147(b) were validly initiated. The assessee was directed to pay the costs of the reference to the Commissioner.

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