TMI Blog1977 (7) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... nt on January 4, 1969,estimating the income at Rs. 25,000 and showing the status as " unregistered firm ". The assessee filed an appeal before the Appellate Assistant Commissioner, who dismissed it. There was a further appeal to the Tribunal and in the course of the said appeal it was contended that the assessment made in the case of the assessee-firm could not be sustained as earlier an assessment had been made in the case of one of the partners. The Tribunal, which considered a similar question in an earlier order of its, was of the opinion that the assessment on the unregistered firm could not be sustained. It is this order of the Tribunal dated 22nd August, 1970, that has given rise to the present reference in which the following question has been referred : " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessment made in the case of the assessee-firm which has not been granted registration at a stage at which an assessment had been made earlier in respect of income referable to the same source in the hands of one of the partners of the firm was without legal sanction ? " The learned counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th, and subject to the provisions of this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or the members of the association individually." The question as to whether the Income-tax Officer had an option to assess the firm or the partners individually or to assess the association or its members individually has been the subject of discussion in cases decided by the Supreme Court cited before us. There are also some High Court decisions which have dealt with this aspect more or less directly. Before referring to the High Court decisions, we shall briefly refer to the Supreme Court decisions which form the foundation for the view taken by the High Courts on this point. The earliest of the Supreme Court decisions is in relation to an association of persons in Commissioner of Income-tax v. Kanpur Coal Syndicate [1964] 53 ITR 225. The Syndicate consisted of persons combined together for the purpose of purchasing coal for supply to customers. For the assessment year 1948-49, the Income-tax Officer levied tax import the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppropriate authority to assess the total income of either the association of persons or the members of such association individually. " It was further held that the scope of the appellate power was coterminous with that of the Income-tax Officer and that the comprehensive phraseology used in the Act in relation to the appellate powers did not countenance the attempt of the revenue to restrict the powers of the Appellate Assistant Commissioner or of the Appellate Tribunal and that both of them had power to direct the assessing authority to assess the members individually instead of the association of persons as a unit. It may be seen from the above that the existence of an option to assess either the members or the association was first mooted by the counsel for the department in the case before the Supreme Court cited above. What was decided in that case has been set out by the Supreme Court in a later case reported as M. M. Ipoh v. Commissioner of Income-tax [1968] 67 ITR 106 at page 113 as follows: In Commissioner of Income-tax v. Kanpur Coal Syndicate [1964] 53 ITR 225 (SC), it was held by this court that the Appellate Tribunal has ample power under section 33(4) to set as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept the plea that the Income-tax Officer was not in possession of information, relying on which, if he desired, he could have assessed the three parties collectively as an unregistered firm and further observed that there was no warrant for the assumption which counsel for the department asked their Lordships to make, that information about the true state of affairs was not with the Income-tax Officer when the first assessment was made by him. In the course of the judgment, their Lordships pointed out at page 98 as follows : " The three parties were not a registered firm, and they could be assessed to tax collectively as an association of individuals or as an unregistered firm if the relation between them was of partners. When the Income-tax Officer assessed the three parties separately he unquestionably exercised an option knowing that they had entered into a trading transaction in which they were jointly interested. The departmental authorities have not chosen to place before the court the returns made by the three parties, and even the orders of assessment individually made against the three parties by the Income-tax Officer are not before this court. Only, the final order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce with the return filed by the said two partners, there was a remark that the assessment would be rectified later under section 35 of the Indian Income-tax Act, 1922, when the correct share of income was determined in the assessment of the firm. Subsequently, the Income-tax Officer took assessment proceedings against the firm as such and assessed it as an unregistered firm. The legality of this assessment was challenged in reference and the Allahabad High Court, after referring to the Supreme Court's decision mentioned above, held as follows : " In this state of the law it appears to us in the instant case that, having proceeded to tax the profits in the hands of the individual partners, the Income-tax Officer was not entitled to tax the profits again in the hands of the assessee. " This case was followed by the same court in Hari Om Company v. Commissioner of Income-tax [1969] 71 ITR 584 (All) and India Army and Police Equipment Factory v. Commissioner of Income-tax [1970] 75 ITR 693 (All). All of them arose under the Act of 1922. The question as to whether the same legal position applied to the assessment proceedings under the Act of 1961, has come up for consideration in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which it appears in the statute did not apparently mean to make any change in the law as such as is clear from the Notes on Clauses accompanying the Bill. The obvious purpose behind the use of the word " person " occurring in section 4 of the Act of 1961 was to shorten the provision and to eliminate repetition of the words found in section 2(31). There is no indication to show that Parliament intended to alter the powers of the Income-tax Officer in this behalf when it re-enacted section 4 in a slightly modified form. In fact, the decision of the Supreme Court or of the High Courts noticed above, where the question of option had come in for consideration, were all rendered subsequent to the passing of the Act of 1961, so that any intention to alter the law taking into account those pronouncements could not be attributed to it. However, we have to take into consideration the provision as it appears in the Act, and if the provision as it is in the statute would yield the construction of the option not being available to the Income-tax Officer as was the case under the preceding statute, then the provision will have to be given effect to. The Use of the word "or " occurring in section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion being available in the return itself furnished by the assessee, there is no question of any information reaching the Income-tax Officer subsequent to the assessment as contemplated by section 147(b). The result will be that there is no machinery for taxing the income in the hands of the partner, in case the Income-tax Officer excluded the part of the amount returned by the assessee. If the Income-tax Officer tried to take the return furnished and taxed the partner, then in the event of this conduct being taken as an exercise of the option available to him, then the firm would not pay the tax on the total of its income. Thus, this construction tends to a situation of possible tax evasion and may lead to some abuse also. There is also a further anomaly, viz., of a person with a five paise share in a firm submitting his return and getting assessed so that he could stall the assessment on the firm as such, at any time thereafter, with the result that the revenue stands to lose the tax due to it. When these anomalies were pointed out to the learned counsel appearing for the assessees, they stated that the only remedy available to the department is to be vigilant and to tax the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... awalla v. Income-tax Officer [1976] 103 ITR 688 (Pat). In that case one Agrawalla, the owner of a colliery, gifted it to two persons, viz., Mahendra Kumar Agrawalla and Yogendra Kumar Agrawalla, equally in 1953. The income from the colliery was assessed for some years in the hands of an " association of persons ". The two donees were in later years assessed as individuals in pursuance of an order passed by the Inspecting Assistant Commissioner on a representation made by them. The Income-tax Officer sought to take proceedings under section 148 of the Act of 1961 in respect of the assessment years 1960-61 to 1969-70 proposing to assess the income from the colliery in the hands of the "association of persons ". This led to a writ petition challenging the validity of the notice, and the Patna High Court dismissed the writ petition taking the view that with reference to assessment years 1962-63 onwards, the Act of 1922 was not applicable. It held that in the charging section 4 of the Income-tax Act, 1961, there was no such option or election to choose between the two taxable units given to the Income-tax Officer, as under the 1922 Act, and, as such, the Income-tax Officer was quite com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was liable to tax. The decisions of this court in writ petition and in the reference were confirmed by the Supreme Court. It is only in the course of finding out whether the discretion vested in the Income-tax Officer to tax the income either in the hands of the association or in the hands of the members individually was arbitrary or not, so as to be hit by article 14, certain observations came to be made. We do not find anything in the said decision which runs counter to the decision of the Supreme Court in Commissioner of Income-tax v. Murlidhar Jhawar and Purna Ginning and Pressing Factory [1966] 60 ITR 95, which, as already pointed out, still covers the cases arising under the Act of 1961. We consider that the question requires to be reframed as the question as placed before us appears to be somewhat confusing. We reframe the question as follows : " Whether, on the facts and in the circumstances of the case, the assessment made on the assessee-firm as an unregistered firm, after the assessment made earlier in the case of one of the partners thereof was legal ? " We answer the question as reframed in the negative and, against the revenue. The respondent will be entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X
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