TMI Blog1962 (10) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... they were good friends. Viswanathan Chettiar purchased from Volkarts United Press Co. Ltd. a ginning factory at Nallatinpudur. The business, started in the name of Viswanathan Ginning Factory, was intended to serve as a feeder to Sri Meenakshi Mills Ltd., Madurai, of which Thiagarajan Chettiar was the managing agent. Viswanathan Chettiar was also the director in Meenakshi Mills Ltd. The partnership agreement between Viswanathan Chettiar and Thiagarajan Chettiar provided that the business at Nallatinpudur was to be run in the name and style of Karunganni Factory for a period of twenty years and that the profits were to be divided equally between them and that inasmuch as Viswanathan Chettiar had paid the purchase price for the acquisition of the factory the share of profits of Thiagarajan Chettiar was to be adjusted towards the partnership capital till it was made up. Thereafter, the profits were to be divided equally. The factory was to be managed by Thiagarajan Chettiar who was to maintain proper accounts and send copies of account and balance-sheet every month to Viswanathan Chettiar. Viswanathan Chettiar died in January, 1937. The partnership business, however, continued between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Karumuthu in favour of Palaniappa Chettiar was a real lease or was it a bogus transaction with a view to defeat the assessee. The learned Subordinate Judge who tried the suit held that the said lease was not a bona fide lease and passed a preliminary decree for dissolution of partnership and rendition of accounts as prayed for by the assessee. Karumuthu Thiagaraja preferred an appeal to this court in A.S. No. 565 of 1950 and a Division Bench of this court affirmed the finding of the Subordinate Judge in regard to the nature of the lease. It is not necessary to refer to the actual decree passed by this court on appeal, as it is not relevant for the present purpose. In paragraph 15 of the judgment of this court Ramaswami J. observed thus (dealing with the lease): On this point we are in entire agreement with the learned Subordinate Judge that the so called leases are not bona fide leases binding upon the plaintiff but only colourable and fraudulent transactions entered into by the defendant, running the factory himself through namke vasthe persons of his own. In this tax reference we are not concerned with the further course of the proceedings in that suit. As a resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re dismissed. The assessee took the matter by way of further appeals before the Appellate Tribunal. The Tribunal by its order dated January 10, 1957, set aside the Appellate Assistant Commissioner's orders and directed the Assistant Commissioner to re-hear the appeals and dispose them of according to law. The Assistant Commissioner re-heard the appeals and again reached the conclusion that the orders of reassessments made by the Income-tax Officer were correct and proper. One of the contentions raised by the assessee before the Appellate Assistant Commissioner was that the assessee's share income could not be determined or computed by way of reassessment without a reassessment of the firm itself determining the total income of the firm. We have already stated that in respect of the assessment year 1944-45 there were no section 34 proceedings at all against the firm and, consequently, there was no reassessment of the firm's income for that year. In respect of the other years 1945-46, 1946-47 and 1947-48 reassessments on the firm were made only on February 28, 1955, while the reassessments of the assessee's share income in respect of his individual assessments were ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of the assessments on the firm...Undoubtedly, there is power with the Income-tax Officer to resort to the machinery provided by section 35(5). In this view of the matter there is no substance in this objection raised by the learned counsel. The assessee raised a further contention before the Tribunal that the proceedings under section 34 only fall, if at all, under section 34(1)(b) and not under section 34(1)(a) of the Act, and that four years having lapsed the bar of limitation operated. This contention was repelled by the Tribunal in these terms: His contention is that the assessments were made out of time, i.e., beyond the four years limit, and that eight year rule cannot apply because the assessee did not conceal any particulars but actually wanted to be assessed on his share of income from the firm. In our opinion there is no force in this objection because the case is governed by the present section as modified by the amendment in 1948...In our opinion, the case is quite clearly governed by section 34(1)(a) because the correct share income of the assessee escaped assessment by reason of the omission or failure on the assessee's part to disclose fully and tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section. It may be noted that the cases falling within section 34(1)(b) have to be dealt with within the period of four year limitation as prescribed while cases falling under clause (1)(a) are not restricted by such period of limitation. In the present case the proceedings having been commenced on March 27, 1953, would be barred by limitation if the department were to treat the case of the assessee as falling within clause (1)(b). The assessment years are 1944-45, 1945-46, 1946-47 and 1947-48, and it is obvious that even with reference to the last of the assessment years the period of four years, if the case is one within section 34(1)(b), lapsed on March 30, 1952. Mr. S. Ranganathan, learned counsel for the department, made it quite plain that the proceedings would be time-barred if they did not fall within section 34(1)(a). Now this sub-section cannot operate unless there be an omission or failure on the part of the assessee to make return under section 22 or to disclose fully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts have no legal connotation and the undisclosed facts are material or not according to the circumstances of the assessment in the particular case. The Supreme Court has given the words the meaning primary relevant facts . It is the duty of the assessee to reveal the major facts which have a bearing on the assessment to be made. He must of course make a clean breast of all the sources of his income and the income derived therefrom. He must not hide any books of account or documents which would help the computation of the income. He is not expected to do more than this. He cannot delve into the mind of the Income-tax Officer and try to fathom it and predicate what are material facts in the view of the officer. The facts must be such that if taken into account, they would have an adverse effect on the assessee by the passing of a greater assessment than the one actually made. The rule of full and true disclosure of material and necessary facts should not be so fastidiously construed as would enable the department to say that non-disclosure of a fact which may have a remote bearing on the assessment attracts the section, as the assessing officer would have material use of it to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Palaniappa may be held to be in truth and in fact the income of the firm. But the question is whether the assessee was suppressing material facts when he failed to tell the Income-tax Officer, Karaikudi, that he had his own suspicions about the lease in favour of Palaniappa. He stated that he had a half share in the firm and he invited the assessing officer to include in his total income the share income from the firm. Why should the assessee assume that the Income-tax Officer, Tuticorin, would not have discharged his duties properly and that he should be suitably prompted by the Karaikudi officer? In our opinion it cannot be said that the assessee was acting irrationally in presuming that the share income of the firm would have been properly determined by the competent officer. The assessee has done all that he need or could do and there is not an iota of evidence to charge him with non-disclosure of material facts in terms of section 34(1)(a). The finding of the Appellate Tribunal that the assessee failed to disclose the correct state of affairs, namely, that he was entitled to a half share in the income from the firm is not supported by learned counsel for the departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputed from the date of the final order passed in the case of the firm. Sub-section 5 was inserted by the Income-tax (Amendment) Act of 1953 with effect from April 1, 1952. Sub-section 5 deals with assessment or reassessment on the partners of a firm and provides that if the share of a partner in the profit of the firm has not been included at all or not correctly included the inclusion of the share or the correct share shall be deemed to be rectification of a mistake apparent from the record within the meaning of sub-section (1) of section 35. It is now settled law that section 35(1) would not enable the department to rectify the individual assessment of a partner based upon the assessment of the firm as it cannot be said that there is any mistake apparent from the record of the assessment by reason of the assessment on the firm which is not part of that record. This has been laid down in Lakshminarayana Chetty v. First Additional Income-tax Officer, Nellore [1956] 29 I.T.R. 419, 424 , where Subba Rao C.J., as he then was, observed as follows: The mistake is not in the record but by a subsequent assessment of the firm, it was discovered that the earlier assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le income of the assessees. The assessments of the two firms were not completed by that date. The firms were assessed by order dated October 16, 1954, and then it was known that the aggregate shares of the income from the two firms in the case of each of the assessees were more. The original assessment of the assesses were rectified under section 35 of the Act and they moved the High Court of Andhra Pradesh under article 226 of the Constitution to quash that order of rectification. The High Court issues the writ and the matter was taken up by the department to the Supreme Court by way of an appeal. It must be noted that in this case the assessments on the firm were made only after April 1, 1952. The Supreme Court following the principle laid down by it in Habibullah's case [1962] 44 I.T.R. 809 (S.C.) held that even in a case where the firm is assessed after April 1, 1952, section 35(5) cannot be resorted to. At page 612 Hidayatullah J. observed thus: In S.K. Habibullah's case [1962] 44 I.T.R. 809 (S.C.) the assessments of the partners as well as of the firms were completed before April 1, 1952, and the amended provision was not held applicable. Here, the original ..... X X X X Extracts X X X X X X X X Extracts X X X X
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