Full Judgment Text
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PETITIONER:
COMMSSIONER OF INCOME-TAX, BOMBAY,SOUTH POONA
Vs.
RESPONDENT:
MURLIDHAR JHAWAR & PURNA GINNING ANDPRESSING FACTORY, DHARMA
DATE OF JUDGMENT:
07/01/1966
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
SUBBARAO, K.
SIKRI, S.M.
CITATION:
1966 AIR 1536 1966 SCR (3) 219
CITATOR INFO :
D 1970 SC 778 (5)
RF 1979 SC1104 (8)
ACT:
Income-Tax Act, 1922-s. 23(3)-partners in unregistered
partnership assessed individually-then as unregistered
partnership-whether Income-Tax Officer exercised option to
assess individually-therefore whether second assessment on
unregistered partnership valid.
HEADNOTE:
M, P and G carried on business in several commodities and in
the assessment year 1954-55, the Income-Tax Officer brought
to tax a third share in Rs. 51,280., computed as profits
from the business in the hands of each of the three,
persons. Thereafter, he called upon M to submit a return of
the "income of the joint venture" on the footing that the
parties thereto constituted an unregistered firm. On a
return being filed, despite the objection of the assessees,
the Income-Tax Officer completed the assessment of the three
persons to the joint venture under section 23(3) of the
Income-Tax Act, 1922 in the status of an unregistered firm
and computed the income of the "joint venture" at Rs.
80,925. An appeal to the Appellate Assistant Commissioner
was dismissed.
In second appeal, the Tribunal held that the Income-Tax
Officer had the option to assess the individual parties to
the joint venture, and having exercised that option it was
not open to the Income-Tax Officer thereafter to reassess
the same income collectively in the hands of the three
persons as an unregistered firm. On a reference, the High
Court confirmed this view.
In appeal to this Court it was contended on behalf of the
Revenue that the Income-Tax Officer making the first
assessment of the three persons was not informed that they
constituted an unregistered firm and he was therefore in law
competent to assess the entity which was in truth liable to
be, assessed to tax; and in making the earlier order of
assessment he could not be deemed to have exercised an
option which precluded him from assessing the income of the
three persons as an unregistered firm.
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HELD : The three persons could be assessed individually or
they could be assessed collectively in the status of an
unregistered firm; the Income-Tax Officer could not seek to
assess one income twice-once in the hands of the partners
and again in the hands of the unregistered firm. [221 E]
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 persons collectively as an
unregistered firm cannot be accented.
When the, Income-Tax Officer assessed the three persons
separately, he unquestionably exercised an option knowing
that they had entered into a trading transaction in which
they were jointly interested. [222 E]
JUDGMENT:
CIVIL APPELLATE JURISDICTION Civil Appeal No.
327 of 1965.
220
Appeal from the judgment and order, dated July 4, 1962 of
the Bombay High Court in Income-tax Reference No. 46 of
1960.
A. V. Viswanatha Sastri, N. D. Karkhanis, R. H. Dhebar and
R. N. Sachthey, for the appellant.
Bishan Narain, B. R. L. lyengar, S. K. Mehta and K. L.
Mehta, for the respondent.
The Judgment of the Court was delivered by
Shah, J. In the account year ending November 6, 1953
Murlidhar Jhawar, Pannalal Lahoti and Govindbai carried on
business in groundnut, cotton and cotton-seed. In the year
of assessment 1954-55 the Income-tax Officer, Nanded,
brought to tax a third share in Rs. 51,280 computed as
profits from the business in the hands of each of the three
parties, and thereafter he called upon Murlidhar to submit a
return of the "income of the joint venture" on the footing
that the parties thereto constituted an unregistered firm.
Murlidhar complied with the requisition and submitted in
November 1957 a return, but later applied to withdraw it by
application dated December 18, 1957. The Income-tax Officer
rejected the application for withdrawal of return and
completed the assessment of the three parties to the joint
venture under S. 23(3) of the Income-tax Act, 1922 in the
status of an unregistered firm and computed the income of
the joint venture at Rs. 80,925. In appeal to the Appellate
Assistant Commissioner the order passed by the Income-tax
Officer was confirmed. In second appeal, the Income-tax
Appellate Tribunal set aside the order of the Appellate
Assistant Commissioner. The Tribunal held that the Income-
tax Officer had the option to assess the individual parties
to the joint venture, and he having exercised that option it
was not open to him thereafter to reassess the same income-
collectively in the hands of the three parties to the joint
venture in the status of an unregistered firm. But on a
concession made by counsel for the three parties, the
Tribunal directed that the assessment be "rectified so as to
restore the status quo ante."
The Tribunal submitted a statement of the case and referred
the following question to the High Court of Judicature at
Bombay :
"Whether on the facts and in the circumstances
of the case the assessment of the unregistered
firm was proper and legal, the two partners of
this partnership
221
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having been assessed in respect of their
shares of income from this partnership
business ?"
The High Court recorded an answer in the negative. With
certificate granted by the High Court, this appeal has been
preferred.
Under s. 3 of the Indian Income-tax Act, income-tax is
charged 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. This Court in Commissioner of
Income-tax, U.P. v. Kanpur Coal Syndicate(1) observed at p.
228 :
"The section (s. 3) expressly treats an
association of persons and the individual
members of an association as two distinct and
different assessable entities. On the terms
of the section the tax can be levied on either
of the said two entities according to the
provisions of the Act."
The same principle would apply to the cases of assessment of
partners individually of an unregistered firm. The partners
may be assessed individually or they may be assessed
collectively in the status of an unregistered firm : the
Income-tax Officer cannot however seek to assess the one
income twice-once in the hands of the partners and again in
the hands of the unregistered firm.
Mr. Viswanatha Sastri for the Department contends that the
Income-tax Officer making the first assessment of the three
parties to the joint venture was not informed that the three
parties constituted an unregistered firm and therefore the
Income-tax Officer was in law competent to assess the entity
which was in truth liable to be assessed to tax, and in
making the earlier order of assessment he cannot be deemed
to have exercised an option which precluded him from
assessing the income of the three parties as an unregistered
firm. It is true as pointed out by this Court in a recent
judgment: Income-tax Officer, Award, Lucknow v. Bachulal
Kapoor(2) : that in dealing with a claim made by the Income-
tax Officer to assess income into the hands of a Hindu
undivided family, after assessing it in the hands of the
members on the footing that the family was severed, the
"exercise of the option to do one or other of the two
alternatives open to an officer assumes knowledge on his
part of the existence of two alternatives". But on the
materials before the Court we are unable
(1) 53 I.T.R. 225 :[1964] 8 S.C.R 85.
(2) [1966] 3 S.C.R. 68.
222
to accept 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. There is no warrant for the assumption
which counsel for the Department asks us 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.
The transactions in various commodities were carried on by
Pannalal and Govindbai who were partners of Messrs. Purna
Ginning & Pressing Factory and by Murlidhar. The Income-tax
Officer had assessed the income of the three parties
separately and added to the individual income of each party
his or her share in the profits of the joint venture. The
Income-tax Officer had information that the three parties,
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two of whom were members of a registered trading firm had
effected transactions in groundnut, cotton and cotton-seed.
Apparently returns in respect of these trading transactions
were separately made and a third share was included in the
individual assessment of each of the three parties. Apart
from an association of individuals or a firm, the Income-tax
Act does not recognize a collection of individuals as an
entity capable of being assessed to tax. 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 Incomes Officer are not before this Court. Only the
final order of the Income-tax Officer which directs : "Add :
Joint venture income with Messrs. Puma Ginning and Pressing
Factory taken provisionally subject to rectification after
the assessment of the joint venture" is incorporated in the
order of the Appellate Assistant Commissioner.
It is common ground that the assessment made by the Income-
tax Officer was not a "provisional assessment" within the
meaning of s. 23B. It would be reasonable to hold that the
income of the three parties was assessed under s. 23(3) of
the Income-tax Act, for the income was earned in commercial
transactions in different commodities. The Income-tax
Officer in assessing the income of the joint venture, could
not have proceeded
223
without scrutinizing the accounts and other relevant
documentary evidence and without determining the skares of
the three parties to the joint venture. In determining the
shares of the three parties, he had also to determine the
contractual relation which gave rise to the right to a share
in the profit. Again the order of the Income-tax Officer
clearly indicates that he was cognizant of the fact that the
income of the joint venture was taxable collectively, but he
thought that he could in law in the first instance make an
"assessment provisionally" of the three parties separately
and then rectify the assessments later. In so holding the
Income-tax Officer may have committed an error of law, but
he does not appear to have laboured under an ignorance of
facts. A survey of the contentions raised before the
departmental authorities, the Tribunal and the High Court
makes that inference irresistible. The Income-tax Officer
who made the assessment under challenge did not state that
when the first assessment was made, the facts which had a
bearing on the true relationship between the three parties
were not placed, and it was not even argued before the
Appellate Assistant Commissioner and the Tribunal that those
facts were not placed before the Income-tax Officer. The
Tribunal held, relying upon J. C. Thakkar v. Commissioner of
Income-tax(1) and Joti Prasad Agarwal & Others v. Income-tax
Officer, B-Ward Mathura(2), that once the option is
exercised for assessing the individual partner and including
his share of profits in the firm in his assessment, it is
not open to the Department to assess the same income as
income of the unregistered firm.
The appeal therefore fails and is dismissed with costs.
Appeal dismissed.
(1) 27 I.T.R. 658.
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(2) 37 I.T.R. 107.
224