TMI Blog1968 (10) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax Officer being of the opinion that it was more advantageous to the revenue to proceed under section 23(5)(b), treated the petitioner-firm, though unregistered, as registered for the purpose of assessment and assessed the three partners by carrying the share of each in the income, profits and gains of the petitioner-firm in his individual assessment. Now it appears that there were certain lands taken on lease by the petitioner-firm and sublet by the petitioner-firm to a co-operative society. A part of these lands was acquired by the Government of Bombay under the Land Acquisition Act and a sum of Rs. 5,38,547 was awarded to the petitioner-firm as compensation in respect of the lands so acquired as a result of a consent decree taken in the compensation proceedings on 8th May, 1960. The petitioner-firm incurred legal expenses amounting to Rs. 2,33,991 in fighting the comparisation proceedings. The Income-tax Officer was of the view that the amount of compensation received by the petitioner-firm was income assessable to tax but had escaped assessment and he therefore issued a notice under section 34(1)(a) seeking to reopen the assessment of the petitioner-firm for the assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3(5)(b) should have been applied as the gain to the revenue is to the extent of Rs. 1,54,000. But it appears that this aspect was not considered by the Income-tax Officer when assessment was completed. " The petitioner-firm by its letter, dated 31st December, 1965, pointed out to the Income-tax Officer that the view taken by him was erroneous and that there was no mistake apparent from the record of the assessment and requested him to adjourn the hearing of the notice with a view to enabling the petitioner-firm to submit a proper detailed answer. The petitioner-firm however felt that the action proposed to be taken by the Income-tax Officer was beyond his jurisdiction and he was not entitled to proceed with the hearing of the notice and the petitioner-firm therefore filed the present petition challenging the validity of the rectification proceedings initiated by the issue of the notice. On the admission of the petition an interim injunction was issued by this court restraining the Income-tax Officer who is the respondent before us from proceeding further with the impugned notice. The respondent, however, made an application for vacating the interim injunction on the ground that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of certiorari against the same. The petitioner-firm contended that the respondent had no jurisdiction to make an order of rectification under section 154 of the new Act since the rectification admittedly related to assessment of tax made for the assessment year 1949-50, to which the old Act was applicable and proceedings for rectification of the assessment for that assessment year could only be taken under section 35(1) of the old Act in view of the provisions of section 297(2)(c) of the new Act. The argument of the petitioner-firm was that, since the order of rectification was avowedly made under section 154 of the new Act and that section did not confer jurisdiction on the respondent to rectify the assessment order for the assessment year 1949-50, the order of rectification was without jurisdiction and hence null and void. The validity of this contention was disputed on behalf of the revenue and a two-fold answer was sought to be given to it. The first answer was that, on a true construction of section 154 of the new Act, the respondent had jurisdiction to rectify the order of assessment even though it related to the assessment year 1949-50 and, secondly, it was urged that, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not a procedural provision and it could not be construed to have retrospective effect so as to empower the Income-tax Officer to rectify an order of assessment made prior to the enactment of that section. Fortunately, however, it is not necessary for us to spend any time on a consideration of these arguments, for there is a decision of the Supreme Court in S. Sankappa v. Income-tax Officer, which directly decides this point in controversy between the parties. The notices for rectification of assessment of the partners which were impugned in that case purported to be issued under section 155 of the new Act and the question arose in the writ petition filed by the partners in the High Court of Mysore whether these notices were valid. Before the Supreme Court the Income-tax Officer did not seek to justify the impugned notices under section 155 of the new Act but relied on section 35(5) of the old Act and contended that since the rectification admittedly related to assessment of tax for the assessment years when the old Act was applicable, the proceedings for rectification could be taken only under section 35(5) of the old Act in view of the provisions of section 297(2)(a) of the new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, merely because proceedings for rectification could be initiated under section 35(5) of the old Act, that did not mean that they could not be initiated under section 154 of the new Act. The revenue urged that where the order of assessment sought to be rectified was made under the old Act, both section 35 of the old Act and section 154 of the new Act would be available to the Income-tax Officer for rectifying the order of assessment. This argument is plainly incorrect ; it fails to give due effect to the provision enacted in section 297(2)(a). What section 297(2)(a) says is that where a return of income has been filed before the commencement of the new Act by a person for any assessment year, proceedings for the assessment of that year may be taken and continued as if the new Act had not been passed. The words underlined by us clearly show that the proceedings for assessment must be taken under the old Act and cannot be taken under the new Act. And if, as held by the Supreme Court, the proceedings for assessment include proceedings for rectification, it must follow as a necessary corollary that proceedings for rectification must be taken under the old Act and not under the new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly to one decision, and that is the decision of the Supreme Court in L. Hazari Mal v. Income-tax Officer . The Commissioner of Income-tax in that case, purporting to act under section 5(5) and 5(7A) of the, Indian Income-tax Act, made an order on November 4, 1953, that the assessment of the assessee-firm would be done by the Income-tax Officer, Special Circle, Ambala, and not by the Income-tax Officer at Patiala who was the competent authority under section 64 of the Act to assess the firm. In 1955 the Income-tax Officer, Special Circle, Ambala, issued a notice under section 34 of the Patiala Income-tax Act, 2001, to reopen the firm's assessment for the accounting year 1945-46. The firm contended that the officer at Ambala had no jurisdiction as the order of the Commissioner was ultra vires, since it was not issued under the Patiala Act which applied to the assessment year 1946-47 by virtue of the Finance Act, 1950. This contention was negatived by the Supreme Court, Hidayatullah J., as he then was, observing : " The Patiala Income-tax Act contained provisions almost similar to sections 5(5) and 5(7A) of the Indian Income-tax Act. Sub-section (5) differed in this that the Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital gain in the hands of the petitioner-firm would be business income in the hands of the partners and therefore, if the petitioner-firm bad been treated as a registered firm for the purpose of assessment under section 23(5)(b), the revenue would have gained more tax and the Income-tax Officer should leave therefore proceeded under section 23(5)(b) and assessed the petitioner-firm as if it were a registered-firm. The petitioner-firm disputed the very basis of this argument and contended that it was not correct to say that capital gain in the hands of the petitioner-firm would be business income in the hands of the partners. That raises the question : when a partner receives his share in the capital gain of the firm, does it cease to bear the character of capital gain and acquire the character of income from business so as to be assessable under section 10 ? In order to determine this question it is necessary to refer to a few provisions of the old Act. " Total income " is defined in section 2(15) to mean total amount of income, profits and gains referred to in section 4(1) computed in the manner laid down in the Act. This definition is an important one since the charge of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be assessed and 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 shall be set off against his other income or carried forward and set off in accordance with the provisions of section 24 : ....... The position therefore is that in the case of a registered firm the firm itself does not pay the tax and the tax payable by the firm is therefore not determined but each partner's share of the total income of the firm computed in accordance with section 16(1)(b) is added to his other income, the tax payable by each partner on the basis of such income (including his share of the firm's total income) is determined and the demand or levy is made on the partner individually. Section 16(1)(b) provides as to how each partner's share of the total income of the firm is to be computed and it says : "16. (1) In computing the total income of an assessee- ....... (b) when the assessee is a partner of a firm, then, whether the firm has made a profit or a loss, his share (whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er be assessable as income, profits and gains of business under section 10 irrespective of the heads of income under which the income, profits and gains of the firm fall, or would it be liable to be apportioned under the various heads of income according as the income, profits and gains of the firm are determined under each head of income? Now, it is no doubt true that unlike section 67(2) of the new Act, there is no provision in the old Act which provides for apportionment of the partner's share of income, profits and gains of the firm under the different heads of income according to the determination made in respect of the income, profits and gains of the firm but when the share of the partner is sought to be assessed in his individual assessment, it is implicit in the very scheme of the Act that it must be determined under what head of income it falls. When the total income of the partner is computed, the head of income under which each item of income falls has to be determined, for there are different rules of computation appropriate to each head of income. The Income-tax Officer computing the total income of the partner would therefore have to ask himself the question as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the firm are not profits or gains of the business of the partnership but are capital gains, it is difficult to see how the share of the partner in such profits or gains can be said to represent profits or gain of the business carried on by the partner. If they are not profits or gains of the partnership business so as to be assessable under section 10 in the hands of the firm, they cannot be profits or gains of the business carried on by the partner, for the business carried on by the partner is the same as the business of the partnership. What are not profits or gains of the business in the hands of the firm, that is, of the partners, cannot become profits or gains of that business when an aliquot share of them is received by such partner. The firm, as pointed out above, is a compendious expression for the partners and when it is said that the firm received income, profits and gains it is the partners collectively who received the income, profits and gains and each one gets his share according to the partnership agreement. The share of the partner in the income, profits and gains of the firm is only a part of the whole of the income, profits and gains and the part must bear the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under section 35 of the old Act was therefore not attracted. The determination of this contention depends upon what is the true scope and meaning of the expression " mistake apparent from the record ". It is now well settled that a mistake apparent from the record must be one to point out which no elaborate argument is required. It must be a glaring, obvious or self-evident mistake. If it is a mistake which requires to be established by complicated process of investigation, argument or proof, it cannot be regarded as a mistake apparent from the record : vide Walchand Nagar Industries Ltd. v. V. S. Gaitonde, Income-tax Officer, M. Subbaraja Mudaliar v. Commissioner of Income-tax, National Rayon Corporation v. G. R. Bahmani, Income-tax Officer and Arvind v. Nafatlal v. T. A. Balakrishnan, Deputy Controller of Estate Duty. The Supreme Court pointed out in Satyanarayan v. Millikarjun , while dealing with the question as to what is an error of law apparent from the face of the record so as to invite certiorari jurisdiction of the High Court: "An error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions can hardly be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly if separately assessed " : there was no obligation on him to do so a-id his failure to do so could not therefore be regarded as a mistake apparent from the record. The argument was that, even if the condition was satisfied, namely, that the revenue would gain more tax by following the procedure set out in section 23(5)(b), the Income-tax Officer had a discretion whether or not to follow the procedure set out in section 23(5)(b) and, if in the exercise of his discretion he chose not to follow that procedure in the assessment of the petitioner-firm, it could not be said that there was my mistake apparent from the record. This contention involves a question of construction of section 23(5)(b) and much argument was devoted to that question before us but, in the view taken by us to decide it. The other contention urged on behalf of the petitioner-firm was that, even if there was a mistake, it was not apparent from the record of the assessment of the petitioner-firm for, unless reference ws made to the record of assessments of the partners, it could not be said was made to the record of assessments of the partners, it could not be said that by following the procedure set out in sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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