1972 (6) TMI 24 - HC - Income Tax

Validity of assessment of HUF made without enquiry under section 25A and after intimation of complete partition - (1) Whether on the facts and in the circumstances of the case the assessments made by the Income-tax Officer on the Hindu undivided family of Sri Kapoorchand Shrimal for the years under reference without passing an order under section 25A were valid in law ? (2) Whether on the facts and in the circumstances of the case the sum of Rs. 42, 009 was a trading loss deductible in the assessment for the year 1958-59 ?

Issues Involved:
1. Validity of assessments made without passing an order under section 25A of the Indian Income-tax Act, 1922.
2. Deductibility of Rs. 42,009 as a trading loss in the assessment for the year 1958-59.

Detailed Analysis:

Issue 1: Validity of Assessments Without Section 25A Order

Facts:
The assessments in question pertain to the years 1955-56 and 1957-58 to 1961-62. The assessee, a Hindu undivided family (HUF), claimed that a partition of its properties occurred on July 10, 1960. This claim was communicated to the Income-tax Officer (ITO) through letters dated October 10, 1960, January 16, 1961, and March 11, 1962, requesting an order under section 25A of the Indian Income-tax Act, 1922. The ITO acknowledged these letters but did not dispose of the application before completing the assessments. Eventually, the ITO refused to record the partition, but the Appellate Assistant Commissioner (AAC) later accepted the partition with effect from July 10, 1960.

Legal Provisions:
Section 25A mandates that if a claim of partition is made during the assessment, the ITO must make an inquiry and, if satisfied, record an order recognizing the partition. If no such order is passed, the family continues to be assessed as undivided.

Arguments:
The department argued that the assessments were valid as no partition order was passed before the assessments, deeming the HUF to continue under section 25A(3). They contended that the failure to pass an order was a procedural irregularity that did not invalidate the assessments. Conversely, the assessee argued that the assessments were invalid as they were made on a non-existent entity post-partition, which was recognized by the AAC with retrospective effect from July 10, 1960.

Court's Analysis:
The court noted that section 25A is procedural and not a charging section. It emphasized that the ITO's failure to pass an order under section 25A before completing the assessments was an irregularity, not affecting the jurisdiction to make assessments. The court referenced several precedents, including the Supreme Court's ruling in Additional Income-tax Officer v. A. Thimmayya, which held that such procedural errors could be rectified by appellate authorities.

Conclusion:
The court concluded that the assessments made without an order under section 25A were valid but required modification. The ITO should follow the procedure under section 25A(2) to apportion the tax liability among the family members based on their respective shares. The Tribunal was directed to instruct the ITO to modify the assessments accordingly.

Issue 2: Deductibility of Rs. 42,009 as a Trading Loss

Facts:
For the assessment year 1958-59, the assessee claimed a deduction of Rs. 42,009 as a bad debt from Lalgirji Vinodgirji. The amount was advanced in the course of business, and a suit for recovery was mutually settled with both parties withdrawing their claims.

Arguments:
The ITO rejected the claim, but the AAC allowed it, and the Tribunal upheld the AAC's decision, recognizing the amount as a trading loss.

Court's Analysis:
The court examined the Tribunal's findings that the money was advanced during business operations and that the settlement was made wholly and exclusively for business purposes. These findings were based on evidence and were binding on the court.

Conclusion:
The court affirmed the Tribunal's decision, holding that the sum of Rs. 42,009 was a trading loss deductible in the assessment for the year 1958-59.

Final Judgment:
1. The assessments made by the ITO without an order under section 25A are valid but require modification as per section 25A(2).
2. The sum of Rs. 42,009 was a trading loss deductible in the assessment for the year 1958-59.

Each party was directed to bear its costs, with an advocate's fee of Rs. 250.

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