Citation Codes

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citation codes

Case Number

Civil Miscellaneous Writ No. 1975 of 1965 connected with Civil Miscellaneous Writs Nos. 1976 and 1896 of 1965

Judges

R.S Pathak, J.

Acts

section 66(1) of the Indian Income-tax Act, 1922,
INCOME TAX ACT

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Case Summary: Sheo Nath Prasad Sharma — Assessments and Revision under section 33A(2)

Factual and Procedural Background

The petitioner, Sheo Nath Prasad Sharma, was assessed to income-tax for the assessment years 1944-45, 1945-46 and 1946-47 by assessment orders dated July 31, 1950. He challenged the validity of those assessment orders and the recovery proceedings arising from them, proceeding in revision under section 33A(2) to the Commissioner of Income-tax and also challenging the Commissioner’s orders declining to interfere.

The factual matrix involves the petitioner's elder brother, Pandit Deo Sharma, who as a working partner of the firm Messrs. L.N. Gadodia Cawnpore Cotton Mills Agency was entitled to a one-fourth share of the firm's profits and was also paid a one-fourth share of net profits from a retail cloth shop he managed. By an agreement dated November 14, 1942, the petitioner agreed to perform work in relation to the firm and the shop and was to receive one-half of the income after tax which Pandit Deo Sharma received.

For the three assessment years, Pandit Deo Sharma claimed a deduction for amounts paid to the petitioner under the 1942 agreement; that deduction was disallowed by the Income-tax Officer, and Deo's appeals to the Appellate Assistant Commissioner and to the Income-tax Appellate Tribunal failed. Deo sought a reference under section 66(2) to this court and the court directed a reference.

The petitioner filed returns for 1944-45 and 1945-46 showing the amounts received under the 1942 agreement as income and was assessed accordingly. For 1946-47 he returned nil for that item, asserting that the income had already been assessed in Deo’s hands; the Income-tax Officer nonetheless treated the receipt as taxable and assessed the petitioner.

The petitioner’s appeals before the Appellate Assistant Commissioner were dismissed and when he pursued appeals to the Tribunal he did not file an appeal for 1946-47; the Tribunal refused adjournment and dismissed the appeals that were before it. Proceedings for recovery of tax were initiated but the Income-tax Officer requested a stay of recovery on the ground that the assessments had been made "as a protective measure" pending allied proceedings.

The petitioner filed revision applications under section 33A(2) to the Commissioner for all three assessment years; those were dismissed by the Commissioner on October 11, 1957 on the ground that "As the assessee has himself shown the incomes on which he has been assessed, there is no force in the present petition filed by the assessee." The Commissioner added that if Deo's assessment were confirmed by this court and the incomes assessed in the petitioner’s hands were also assessed in Deo’s hands, the petitioner could apply within one year for relief under section 33A(2).

Deo did not pursue the reference and, on February 15, 1962, the reference was returned unanswered to the Tribunal. Within one year of the court's order, on January 20, 1963, the petitioner filed a fresh revision application before the Commissioner. The Commissioner dismissed that application on April 3, 1965, taking the view that he could not pass another order on a point already covered by the earlier order under section 33A(2).

Legal Issues Presented

Whether the Commissioner of Income-tax was obliged or had jurisdiction to consider afresh the petitioner's second revision application made within one year of this Court's order, given the Commissioner’s prior dismissal and the observations in that dismissal.
Whether the Commissioner erred in dismissing the earlier revision applications solely on the basis that the petitioner had shown the income in his returns, without applying his mind to the legal question of taxability.
Whether the Commissioner was precluded by clause (c) of the proviso to section 33A(2) from revising assessments which had been the subject of appeals to the Appellate Tribunal (specifically for the assessment years 1944-45 and 1945-46).
Whether the assessments against the petitioner could be treated as merely "protective", thereby preventing recovery of tax, and whether the payment arrangement under the November 14, 1942 agreement made the petitioner's receipts non-taxable (relying on the principle in Murlidhar Himatsingka).

Arguments of the Parties

Petitioner's Arguments

The Commissioner was bound by his earlier observation that, if Deo's assessment were confirmed by the High Court and income assessed in the petitioner's hands were also assessed in Deo’s hands, the petitioner would be allowed relief under section 33A(2) if he applied within one year; consequently the Commissioner should have considered the subsequent revision application on the merits.
The assessments were made as a protective measure and therefore recovery of the tax could not be sustained.
The petitioner relied on Murlidhar Himatsingka v. Commissioner of Income-tax ([1966] 62 I.T.R. 323 S.C.) to contend that the sums were not taxable in his hands because of an overriding obligation akin to a deed of sub-partnership.

Respondents' Arguments

The revision applications were misconceived in law, in particular because clause (c) of the proviso to section 33A(2) prevents the Commissioner from revising an order if that order has been the subject of an appeal to the Appellate Tribunal; this applies to the assessment years 1944-45 and 1945-46 where appeals to the Tribunal had been filed.
For 1946-47 no appeal to the Tribunal had been filed, so the Commissioner retained revisional jurisdiction in respect of that year; consequently the Commissioner's order dated October 11, 1957 in respect of 1946-47 was liable to be quashed.
The assessments were made to protect the revenue pending allied proceedings and hence recovery could be appropriate; (the Income-tax Officer had in practice stayed recovery pending resolution of allied cases).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Murlidhar Himatsingka v. Commissioner of Income-tax [1966] 62 I.T.R. 323 S.C.	That an amount paid over pursuant to an overriding obligation under a deed of sub-partnership (obliging the assessee to pay over part of his income as it accrues) is not taxable in the hands of the payee.	The court considered this authority relied on by the petitioner but distinguished it: the November 14, 1942 agreement was not a deed of sub-partnership but an agreement for work and remuneration, and therefore the principle in Murlidhar Himatsingka did not apply to make the petitioner's receipts non-taxable.

Court's Reasoning and Analysis

The court proceeded by addressing the petitioner's contentions and the legal limits of the Commissioner's revisional jurisdiction.

On the petitioner's claim that the Commissioner was bound to decide the second revision application because of the prior observation promising relief if certain events occurred, the court held that an observation in an earlier order cannot create or confer jurisdiction where none exists. The Commissioner had no power to decide the same matter over again: if there is no jurisdiction to reconsider, an earlier observation does not convert an absence of jurisdiction into jurisdiction.

The court, however, found fault with the reasoning in the Commissioner's earlier dismissal insofar as it rested on the sole ground that "the assessee has himself shown the incomes on which he has been assessed." The court analysed the legal distinction between admission of receipt as a factual matter and the separate legal question whether that receipt is taxable. While an Income-tax Officer may accept a return as a factual admission of receipt under section 23(1), whether a particular receipt is chargeable as income is a legal determination. Thus an assessee who has admitted receipt may still legitimately challenge the taxability of that receipt before appellate and revisional authorities; the Commissioner should have applied his mind to the taxability issue rather than merely treating the return entry as dispositive.

The court also observed that the Commissioner was factually incorrect in asserting that the petitioner had disclosed the income for all three years: the petitioner had returned the income for 1944-45 and 1945-46 but had shown it as nil for 1946-47.

Turning to the respondents' reliance on clause (c) of the proviso to section 33A(2), the court accepted that clause (c) precludes the Commissioner from revising an order that has been made the subject of an appeal to the Appellate Tribunal. Because appeals to the Tribunal had been filed in respect of 1944-45 and 1945-46, the Commissioner lacked power to interfere in respect of those years. By contrast, no appeal had been filed for 1946-47, so the Commissioner did possess revisional jurisdiction for that year and his refusal to consider the revision for 1946-47 on the ground that he had already made a final order was unsustainable.

On the question whether the assessments were "protective" and therefore beyond recovery, the court noted that the assessments themselves did not disclose that they were made for the purpose of protecting revenue in the event Deo's assessments were modified. More importantly, the court emphasised that the real dispute was about Deo's entitlement to a deduction for amounts paid to the petitioner — a matter different from whether those amounts were taxable in the petitioner's hands. The considerations relevant to allowing a deduction to Deo are not necessarily the same as those relevant to taxing the petitioner on receipts from Deo.

Finally, applying the law to the November 14, 1942 agreement, the court contrasted it with the facts of Murlidhar Himatsingka. The court concluded that the 1942 agreement was an agreement for work and remuneration, not a deed of sub-partnership imposing an overriding obligation to pay income as it accrued; accordingly the Murlidhar principle was inapplicable here.

On balance, the court held that the Commissioner's order of October 11, 1957 (dismissing the revision application) was properly vulnerable in respect of 1946-47 but not in respect of 1944-45 and 1945-46, given the appeals to the Tribunal in those two years.

Holding and Implications

Primary Ruling:

Writ Petition No. 1975 of 1965 (relating to assessment year 1946-47) is allowed; Writ Petitions Nos. 1896 and 1976 of 1965 (relating to assessment years 1944-45 and 1945-46) are dismissed.

Consequent orders and directions:

The order dated October 11, 1957 made by the Commissioner of Income-tax is quashed insofar as it relates to the assessment year 1946-47.
The Commissioner of Income-tax is directed to consider and determine afresh the earlier revision application filed by the petitioner for the assessment year 1946-47.
The petitioner is entitled to his costs.

Implications: The direct effect is that the Commissioner must re-examine the revision application for 1946-47 on its merits. The opinion does not announce that it is laying down a novel, binding precedent beyond the application of established principles (for example, the limits of revisional jurisdiction under the proviso to section 33A(2) and the distinction between factual admission of receipt and legal taxability).

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Pt. Sheo Nath Prasad Sharma v. Commissioner Of Income-Tax, Lucknow, And Others

1. The pstitioner, Sheo Nath Prasad Sharma, has been assessed to income-tax for the assessment years 1944-45, 1945-46 and 1946-47 by assessment orders, all made on July 31, 1950. He challenges the validity of those assessment orders and of the recovery proceedings taken consequent thereto. He proceeded in revision under section 33A(2) to the Commissioner of Income-tax against the assessment orders, and he has also challenged the orders of the Commissioner declining to interfere.

2. Pandit Deo Sharma, elder brother of the petitioner, was a working partner in the firm Messrs. L.N Gadodia Cawnpore Cotton Mills Agency, which had been appointed as the sole selling agent of the Cawnpore Cotton Mills, Kanpur. As a working partner he was entitled to a one-fourth share in the profits of the firm. Pandit Deo Sharma was also employed to manage a retail cloth shop of the Cawnpore Cotton Mills and was paid a one-fourth share in the net profits accruing to the retail shop. On November 14, 1942, Pandit Deo Sharma and the petitioner entered into an agreement under which the petitioner undertook to look after the work of the two businesses, the partnership firm and the retail cloth shop, and in consideration therefor he was entitled to a half share of the income received after deduction of tax by Pandit Deo Sharma. For the assessment years 1944-45, 1945-46 and 1946-47, Pandit Deo Sharma claimed a deduction of the amount to be paid by him to the petitioner under the agreement of November 14, 1942. The deduction was not allowed by the Income-tax Officer, and Pandit Deo Sharma appealed without success to the Appellate Assistant Commissioner and thereafter to the Income-tax Appellate Tribunal. He was denied a reference to this court by the Tribunal under section 66(1) of the Indian Income-tax Act, 1922, and then preferred a reference application under section 66(2) to this court. The court allowed the reference application and directed the Tribunal to refer the case.

3. Meanwhile, the petitioner filed his returns for the assessment years 1944-45 and 1945-46. He entered the amount received by him under the agreement of November 14, 1942, as part of his total income. He was assessed accordingly. In his return for the assessment year 1946-47, he showed this income as nil and appended a note stating that, as the entire income earned by Pandit Deo Sharma had been assessed in his hands, any receipt by the petitioner out of that income was not liable to tax in the hands of the petitioner. The Income-tax Officer, however, treated the receipt as taxable and assessed the petitioner.

4. It appears that the petitioner filed appeals against the assessment orders before the Appellate Assistant Commissioner. The appeals were dismissed. He then proceeded in appeal to the Tribunal, but while filing an appeal in respect of the assessment years 1944-45 and 1945-46, he did not file any appeal in respect of the assessment year 1946-47. When the two appeals were called on for hearing before the Tribunal, the petitioner applied for adjournment, but the Tribunal refused to adjourn the appeals and dismissed them.

5. After the assessment had been made against the petitioner by the Income-tax Officer, proceedings were taken for recovery of the tax assessed thereby but it seems that, subsequently, the Income-tax Officer requested the Collector to stay the recovery proceedings because “the assessment was made in this case as a protective measure in order to safeguard the revenue in case some income is let off in appeal in allied cases”. This position was taken by the Income-tax Officer in respect of the recovery proceedings for all the three assessment years.

6. Now after the dismissal of his appeals by the Tribunal, the petitioner applied in revision under section 33A(2) to the Commissioner of Income-tax against the assessments for the three assessment years 1944-45, 1945-46 and 1946-47. Those applications were dismissed on October 11, 1957, on the ground that,

“As the assessee has himself shown the incomes on which he has been assessed, there is no force in the present petition filed-by the assessee.”

7. The Commissioner further added:

“However, if as a result of the decision of the hon'ble High Court, the assessment of Pandit Deo Sharma gets confirmed and the incomes which have been assessed in the hands of the petitioner are also assessed in the hands of Pandit Deo Sharma, the petitioner will be allowed necessary relief under section 33A(2) if he applied for the same within one year from the date of the High Court's orders.”

8. Upon this, it is said, Pandit Deo Sharma took no steps to prosecute the reference pending in this court and on February 15, 1962, an order was made returning the reference unanswered to the Tribunal. Then, on January 20, 1963, within one year from the order of the court, the petitioner filed a fresh revision application before the Commissioner, purporting to be in pursuance of the observations of the Commissioner mentioned in his earlier order. Unfortunately for the petitioner the Commissioner now took a different view of the matter and dismissed the revision application by his order dated April 3, 1965, on the ground that, as a final order had been made under section 33A(2), he could not pass another order in revision on a point which had already been covered by the earlier order in revision.

9. The petitioner contends that the Commissioner was bound to decide his second revision application on the merits when it had been made because of the observation of the Commissioner in the order disposing of the earlier revision application, which, specifically stated that if the assessment of Pandit Deo Sharma was confirmed as a result of the decision of this court and the income assessed in the hands of the petitioner was assessed in the hands of Pandit Deo Sharma, the petitioner would be allowed relief under section 33A(2) if he applied within one year of the date of this court's order. The contention is without force. The Commissioner had no power to decide the same matter over again upon a fresh revision application and I am not satisfied that the view taken by him in that behalf is erroneous. Any observation made by the Commissioner in the order dismissing the earlier revision application could not confer a right upon the petitioner to have his subsequent revision application on the same point considered on the merits by the Commissioner. If there is no jurisdiction in the Commissioner to consider the matter again, any observation made by him in an earlier order cannot confer jurisdiction upon him in that behalf.

10. It seems to me, however, that the order of the Commissioner rejecting the previous applications, on the mere ground that the petitioner had shown the income in his return, is erroneous. The Commissioner was bound to apply his mind to the question whether the petitioner was taxable on that income. The Income-tax Officer is entitled under section 23(1) to make an assessment on the basis of the return if he is satisfied, without requiring the presence of the assessee or the production of evidence in support of the return, that the return is correct and complete. But it may be that the assessee may have committed a mistake in treating a certain receipt as taxable. The mere circumstance that he has shown that receipt as income in his return does not make him liable to tax thereon. An assessee is liable to tax only upon such receipt as can be included in his total income and is assessable under the Income-tax Act. The law empowers the Income-tax Officer to assess the income of an assessee and determine the tax payable thereon. In doing so, he may proceed on the basis that, where an assessee discloses that a certain sum of money has been received by him, the fact of that receipt may be accepted without any thing more as constituting an admission on the part of the assessee. That would be an admission as to a state of fact. But whether the receipt can be considered as taxable income is quite another matter, and consideration of that question leads into the realm of law. If the Income-tax Officer assesses an assessee upon a receipt which is not taxable in law, it is always open to the assessee to take the case in appeal or in revision thereafter. It is then for the Appellate Assistant Commissioner or the Commissioner of Income-tax, as the case may be, to examine the matter and determine whether, although the money has been received by the assessee, it is taxable in law. The assessee is then within his rights in requiring the appellate or the revisional authority to examine the validity of the assessment to tax of a receipt which, though admitted by him, is not taxable in law. Further, the Commissioner was not right when he observed that the petitioner had disclosed the income in his return for all the three assessment years. That was done by the petitioner only for the assessment years 1944-45 and 1945-46. For the assessment year 1946-47 the petitioner specifically stated that there was no income.

11. The respondents, however, contend that the revision applications filed by the petitioner before the Commissioner were entirely misconceived in law, and reference is made to clause (c) of the proviso to section 33A(2). Now clause (c) of the proviso does say that the Commissioner shall not revise an order under section 33A(2) if the order has been made the subject of an appeal to the Appellate Tribunal, and it is, therefore, apparent that the Commissioner had no power to interfere with the assessments for the assessment years 1944-45 and 1945-46. In respect of the assessment year 1946-47, however, no appeal having been filed to the Tribunal, it was open to the Commissioner to interfere in the exercise of his revisional jurisdiction. Consequently, his order dated October 11, 1957, on the revision application for * the assessment year 1946-47 is liable to be quashed.

12. The next contention of the petitioner is that there can be no recovery of the tax because the assessments were made as a protective measure. Now, in the first place, the assessments do not disclose that they were made for the purpose of protecting the interests of the revenue in case the assessments against Pandit Deo Sharma were modified. Then, it is not a case where a doubt has arisen whether a certain receipt should be treated as income taxable in the hands of Pandit Deo Sharma or in the hands of the petitioner. There was never any dispute that the income received by Pandit Deo Sharma from the business of the partnership firm and the management of the retail cloth shop constituted his income. The only question was whether he was entitled to a deduction in respect of the amount paid by him to the petitioner under the agreement of November 14, 1942. That is quite a different matter. The considerations upon which it falls to be decided whether Pandit Deo Sharma is entitled to a deduction of the amount paid by him to the petitioner are not necessarily the same as those governing the question whether that amount is taxable as the income of the petitioner. The petitioner relies upon Murlidhar Himatsingka v. Commissioner of Income-tax [1966] 62 I.T.R 323 S.C.. In that case the amount in question was held not liable to tax in the hands of the assessee as there was an overriding obligation under a deed of sub-partnership obliging the assessee to pay over a part of his income, as it accrued, to the sub-partners. The agreement of November 14, 1942, cannot, in my opinion, be construed as a deed of sub-partnership. Upon its terms it is merely an agreement for work to be done by the petitioner and remuneration therefor by Pandit Deo Sharma. Upon all these considerations, in my judgment Writ Petitions Nos. 1896 and 1976 of 1965 which relate to the assessment years 1944-45 and 1945-46 must fail, while Writ Petition No. 1975 of 1965 relating to the assessment year 1946-47 is entitled to succeed.

13. Writ Petition No. 1975 of 1965 is allowed. The order dated October 11, 1957, made by the Commissioner of Income-tax is quashed. The Commissioner of Income-tax is directed to consider and determine afresh the earlier revision application filed by the petitioner for the assessment year 1946-47. The petitioner is entitled to his costs.

Pt. Sheo Nath Prasad Sharma v. Commissioner Of Income-Tax, Lucknow, And Others

Case Summary: Sheo Nath Prasad Sharma — Assessments and Revision under section 33A(2)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioner's Arguments

Respondents' Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Pt. Sheo Nath Prasad Sharma v. Commissioner Of Income-Tax, Lucknow, And Others

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