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Girdhari Lal Laxman Prasad v. Commissioner Of Income-Tax, U.P
Structured Summary of the Opinion (R.S. Pathak, J.)
Factual and Procedural Background
The assessee is a partnership firm composed of three partners: Girdhari Lal, Laxman Prasad and Ram Dulari Devi. For the assessment year 1958-59, the Income-tax Officer (ITO) conducted separate assessment proceedings against two partners individually (Girdhari Lal and Ram Dulari Devi) and included in each individual assessment the share of profits declared by that partner as returned. The ITO appended a remark that the amount would be rectified later under section 35 of the Income-tax Act, 1922, when the correct share was determined in the assessment of the firm. Subsequently the ITO proceeded to assess the assessee-firm itself for the same year, treating it as an unregistered firm, and made an assessment against it.
Before the Appellate Assistant Commissioner the firm argued that, since the ITO had already taxed the partners on their shares, he could not proceed to tax the profits again in the hands of the firm. The Appellate Assistant Commissioner rejected that contention. On second appeal, the Income-tax Appellate Tribunal held that the ITO was entitled to tax the profits in the hands of the firm and thereafter grant relief to the partners who had paid tax on their individual assessments, and accordingly dismissed the appeal.
The Tribunal referred the following question to this court for opinion: “Whether it is legal to make an assessment on an unregistered firm, after some of its partners have already been assessed to tax on their share income from the firm?”
Legal Issues Presented
- Whether it is legal to make an assessment on an unregistered firm, after some of its partners have already been assessed to tax on their share income from the firm?
Arguments of the Parties
Revenue's Arguments
- The revenue objected to the general, abstract phrasing of the question referred by the Tribunal and urged that the question did not arise out of the appellate order; it submitted that the court should treat the reference as academical and return it unanswered.
- The revenue contended that no option had been exercised by the ITO in this case and that the ITO intended to make an assessment of the profits in the hands of the firm. It relied on the remark in the individual partners' assessment orders that the share assessed would be rectified later under section 35 when the correct share was determined in the assessment of the firm.
- The revenue argued that if the ITO lacked jurisdiction to assess the firm after having assessed partners, the purpose of section 35(5) would be undermined (i.e., that section 35(5) permits rectification of a partner's assessment on subsequent assessment of the firm).
- The revenue further suggested that the ITO may not have had the returns of all three partners before him when he assessed two partners, implying the alleged “option” might not have been properly exercised.
- The revenue relied upon precedent (Bachu Lal Kapoor) to show circumstances where an initial assessment of individuals did not preclude later assessment of the collective entity when the officer lacked knowledge of the collective entity at the time.
Assessee's Arguments
- The assessee (through counsel P.N. Pachauri) argued that because the ITO had begun by taxing the partners on their shares in their individual assessments, the ITO had effectively exercised the option to tax in the hands of the individual partners and could not thereafter tax the profits in the hands of the firm.
- The assessee emphasised that the ITO had included each partner's returned share in their individual assessments and had acknowledged that those shares were being included subject to later rectification under section 35, which the assessee interpreted as an intention to tax in the hands of the partners (with subsequent adjustment), not to tax the firm as a separate entity.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Joti Prasad Agarwal v. Income-tax Officer, B-Ward, Mathura [1959] 37 I.T.R. 107 | If the option is exercised in favour of assessing profits in the hands of individual members of an association (or partners), the profits cannot be brought to tax in the hands of the association (or firm) as such. | The court cited this decision as part of the chain of authorities supporting the proposition that an assessing officer who opts to assess individuals may not later assess the association/firm. |
| Commissioner of Income-tax v. Raja Reddy Mallaram [1964] 51 I.T.R. 285 (S.C.) | Explained on the hypothesis that the income of an association of persons can be charged either in the hands of the association or in the hands of its individual members; described the unit of assessment as either the association or each individual member. | The court relied on this decision to support the interpretation of section 3 that treats associations and their members as distinct assessable entities and that the income can be charged on either entity. |
| Commissioner of Income-tax v. Kanpur Coal Syndicate [1964] 53 I.T.R. 225 (S.C.) | Section 3 treats an association of persons and its individual members as two distinct assessable entities; section 3 implies an option to assess either the association or the individual members. | The court quoted and relied on this case for the proposition that section 3 implies an assessing authority's option to assess either entity, and used it to support the conclusion that once the ITO opted to assess individuals, he could not thereafter charge the association. |
| Commissioner of Income-tax v. Murlidhar Jhawar and Puma Ginning and Pressing Factory | Applied the principles applicable to a partnership firm: the Supreme Court was satisfied on the material that the ITO had opted to charge tax in the hands of the individual partners rather than the firm. | The court cited this case to show that where the material discloses an option exercised in favour of charging partners, the ITO's assessment of the firm would not be permissible; it relied on the similarity of legal principle to the instant case. |
| Income Tax Officer, A-Ward, Lucknow v. Bachu Lal Kapoor | Where the ITO assessed individuals on the basis (believed to be correct at the time) that the collective unit had been partitioned or ceased to exist, but it later turns out that the collective unit continued to exist, the ITO could assess the collective entity because the officer lacked knowledge of the alternative unit when making the initial assessment. | The court distinguished this authority on its facts, stating the present case was different because the ITO in the instant case was aware of the partnership and that returned shares of profits were being included in individual assessments (subject to later rectification), indicating an exercised option to assess partners. |
Court's Reasoning and Analysis
The court began with a textual interpretation of section 3 of the Income-tax Act, 1922, observing that the section charges tax on the total income of the previous year of individuals and the groups described and that it treats a firm and its partners (and an association and its members) as distinct and different assessable entities. The statutory scheme, the court held, creates an option for the assessing authority to charge the income either in the hands of the firm/association or in the hands of the individual partners/members.
The court reviewed a chain of decisions of the Supreme Court and this court (including Joti Prasad Agarwal, Raja Reddy Mallaram, Kanpur Coal Syndicate and Murlidhar Jhawar) construing section 3 to mean that if the assessing officer opts to assess the profits in the hands of the individual partners or members, he cannot subsequently tax the same profits in the hands of the firm or association. The court relied on the clear statement in Kanpur Coal Syndicate that section 3 implies an option and treats the association and its members as distinct assessable entities.
Applying these principles to the facts, the court examined the assessment orders of the individual partners and the remark that their assessed shares would be rectified later under section 35 after the correct share was determined in the firm's assessment. The court interpreted that remark not as an indication that the ITO intended ultimately to tax the firm, but as an indication that the ITO intended to tax the partners initially according to their returned shares and later substitute the finally determined shares (found in the firm's assessment) into the partners' assessments by way of rectification under section 35.
On this factual basis the court concluded that the ITO had, from the outset, decided to tax the income in the hands of the individual partners and had exercised the option under section 3 accordingly. The fact that the ITO did not wait for the returns of all three partners was treated as a potentially imprudent administrative step but not one that negated the exercise of the option. The court therefore rejected the revenue's contention that no option was exercised.
The court distinguished Bachu Lal Kapoor on the ground that in that case the assessing officer had no knowledge of the collective entity (the Hindu undivided family) at the time of assessing individuals, whereas in the present case the ITO was aware of the existence of the partnership and the partners' declared shares.
The court also rejected the revenue's argument that section 35(5) would be rendered purposeless, explaining that section 35(5) permits rectification of a partner's completed assessment if the partner's share was omitted or incorrect, but it does not by implication permit double charging of the same profits in the hands of both partners and the firm.
Holding and Implications
Holding: The court answered the referred question in the negative — that is, it held that it is not legal for the Income-tax Officer to make an assessment on the unregistered firm after some of its partners have already been assessed to tax on their share income from the firm.
The direct consequences of the decision are:
- The assessee (the firm) prevailed; the court ruled in favour of the assessee and against the revenue on the referred question.
- The court awarded costs to the assessee: Rs. 250 for the assessee and Rs. 250 as counsel's fee.
Broader implications: The opinion applies and follows existing authority interpreting section 3 (as cited) to mean that the assessing authority's option to assess either the firm/association or the individual partners/members is binding once exercised. The opinion does not purport to announce a novel principle beyond the chain of decisions it follows; it addresses the direct effect of the ITO's exercise of option in the facts before the court.
R.S Pathak, J.:— The assessee is a partnership firm consisting of three partners, Girdhari Lal, Laxman Prasad and Ram Dulari Devi. For the assessment year 1958-59 the Income-tax Officer took separate assessment proceedings against Girdhari Lal and Ram Dulari Devi in their individual status and included therein the share of each from the profits of the assessee-firm. The share was taken in accordance with the return filed by each partner and a remark was added that the amount would be rectified later under section 35 of the Income-tax Act, 1922, when the correct share was determined in the assessment of the assessee-firm. The share was brought to tax in the assessment of each individual partner. Subsequently, the Income-tax Officer took assessment proceedings against the assessee-firm for the assessment year 1958-59 and made an assessment order against it treating it as an unregistered firm. Before the Appellate Assistant Commissioner the assessee-firm contended that, as the Income-tax Officer had already taxed the share income in the hands of two of the partners, it was not open to him to proceed to assess the profits again in the hands of the assessee-firm. The contention did not find favour with the Appellate Assistant Commissioner. In second appeal, the Income-tax Appellate Tribunal took the view that the Income-tax Officer was entitled to tax the profits in the hands of the assessee-firm and thereafter grant relief to the individual partners who had paid the tax on their separate assessments. Accordingly, the Tribunal dismissed the appeal.
2. At the instance of the assessee, the Tribunal has referred the following question for the opinion of this court:
“Whether it is legal to make an assessment on an unregistered firm, after some of its partners have already been assessed to tax on their share income from the firm?”.
3. Sri R.L Gulati, appearing for the revenue, has raised an objection to the general terms in which the question has been framed and has urged that the question as framed does not arise out of the appellate order of the Tribunal and this court, treating it as a question of academic importance, should return the reference unanswered. We are unable to accept the contention of the learned counsel. While it is true that the language in which the question is couched tends to the abstract, it must be remembered that the question has been framed by reference to a set of facts found by the Tribunal in appeal and now set out in the statement of the case. If, as is the case here, it is possible to relate the question to those facts and define the scope of the question by reference to them we must do so and not decline to answer the question. The objection is rejected. Sri P.N Pachauri, learned counsel for the assessee, urges that inasmuch as the Income-tax Officer proceeded at the outset to tax the profits falling to the share of the partners in, their individual assessments, it must be inferred that he had opted in favour of taxing the profits in the hands of the assessee. Having exercised that option and charged the profits to tax accordingly, Mr. Pachauri argues, it was not open to the Income-tax Officer to tax these profits in the hands of the assessee.
4. Section 3 of the Act provides:
“Where any Central Act enacts that income-tax shall be charged for any year at any rate or rates tax at that rate or those rates shall be charged for that year in accordance with, 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.”
5. The provision charges to tax the total income of the previous year of an individual and of the groups mentioned therein. An option is given in respect of charging to tax the total income of a firm and of an association of persons. The income of a firm may be charged to tax either in the hands of the firm or in the hands of its individual partners and in the case of an association of persons either in the hands of the association or in the hands of its individual members. A firm and its partners are treated as mutually distinct and different assessable entities. So also are an association of persons and its individual members. The option has been made available only in respect of a firm or an association of persons. It is not available in respect of other groups specified in the provision. There is a chain of decisions laying down that, if the Income-tax Officer opts in favour of charging the profits in the hands of the individual partners of the firm or members of the association, it is not open to him to tax the profits again in the hands of the firm or the association of persons. This court held in Joti Prasad Agarwal v. Income-tax Officer, B-Ward, Mathura [1959] 37 I.T.R 107., that, if the option is exercised in favour of assessing the profits in the hands of the individual members of an association of persons, the profits cannot be brought to tax in the hands of the association as such. And the view taken by the Supreme Court in Commissioner of Income-tax v. Raja Reddy Mallaram [1964] 51 I.T.R 285, 289 S.C. can be explained only on the hypothesis that the income of an association of persons can be charged to tax either in the hands of the association or in the hands of its individual members. Shah J., who spoke for the court, observed:
“The unit of assessment in respect of the income earned by the association is either the association or each individual member in respect of his share in the income. This is so when the association is existing and after it is dissolved as well.”
6. The question fell to be considered by the Supreme Court in Commissioner of Income-tax v. Kanpur Coal Syndicate [1964] 53 I.T.R 225, 228 S.C. also, and the law was clearly laid down in the following terms:
“The section (s. 3), therefore, does not in terms confer any power on any particular officer to assess one of the persons described therein, but is only a charging section imposing the levy of tax on the total income of an assessable entity described therein. The section 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.”
7. The Supreme Court held that section 3 impliedly gave an option to the assessing authority to assess the total income of either an association of persons or the members of such association individually. The Supreme Court was called upon to consider the point again in Commissioner of Income-tax v. Murlidhar Jhawar and Puma Ginning and Pressing Factory, where the question arose in the case of a partnership firm. Upon the material before it the Supreme Court was satisfied that the Income-tax Officer had opted in favour of charging the tax in the hands of the individual partners instead of in the hands of the firm. 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.
8. It is contended for the revenue that no option has been exercised by the Income-tax Officer in the instant case and that the Income-tax Officer clearly intended to make an assessment of the profits in the hands of the assessee. We are referred to the remark in the assessment orders of the individual partners to the effect that the share of profits assessed would be rectified later under section 35 when the correct share was determined in the assessment of the firm. We are unable to accept the contention. In our opinion, the Income-tax Officer decided to tax the income in the hands of the individual partners according to their respective shares. At the outset he was aware that the three individuals were members of the partnership firm, and that the returns filed by the individual partners set out their share from the profits of the firm. In the assessments of the individual partners the Income-tax Officer brought the share of profits to tax. He expressly stated that the share disclosed in the return of each individual partner was being included in his assesssment subject to rectification under section 35 after the correct share was determined upon the assessment of the firm. By that statement the Income-tax Officer clearly intended that after determining the profits in the assessment of the firm he would return to the separate assessments of the individual partners and substitute the share finally determined for the share as returned. The share as returned by the individual partners had been subjected to tax. The share as rectified would now be brought to tax. Emphasis all along was laid upon the separate assessment of the individual partners and it is the income determined in those assessments which was intended to be brought to tax. We are clear in our minds that the Income-tax Officer had decided at the outset to tax the profits of the firm in the hands of the individual partners and not in the hands of the assessee.
9. We have been referred by the revenue to the decision of the Supreme Court in Income Tax Officer, A-Ward, Lucknow v. Bachu Lal Kapoor.. In that case, however, when the Income-tax Officer made an assessment originally upon the individual members of the Hindu undivided family it was on the understanding that the family had suffered partition and indeed there was an order under section 25A accepting the claim of the family that it had been partitioned. Subsequently, the Income-tax Officer came to know that the family had never suffered partition and that it continued to exist as a separate entity. He initiated proceedings under section 34 of the Act against the Hindu undivided family. The Supreme Court repelled the contention that, as the Income-tax Officer had elected to assess the individuals as separate entities, he had no jurisdiction to assess the same income in the hands of the Hindu undivided family. It observed:
“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. If the case of the revenue be true, the Income-tax Officer at the time he assessed the individual members of the family had no knowledge that a united joint family existed; he presumably proceeded on the basis that the said family had really ceased to exist under the terms of the compromise decree. This is, therefore, not a case of election between two alternative units of assessment, but an attempt to bring to tax the income of an assessable entity which had escaped assessment.”
10. In our opinion, the decision in Bachu Lal Kapoor's case is wholly distinguishable upon its facts from the case before us.
11. It is pointed out by the revenue that, if the Income-tax Officer has no jurisdiction to make an assessment of the profits in the hands of the firm after he has assessed those profits in the hands of the individual partners, the provisions of section 35(5) of the Act would be devoid of purpose. We do not find force in this submission. Section 35(5) only enables an Income-tax Officer to rectify a completed assessment of a partner if he finds on the subsequent assessment or reassessment of the firm that the share of the partner in the profits of the firm has not been included in the assessment of the partner or if included is not correct. That is a provision merely for correcting the share of the profit of the partner included in his individual assessment. The provision does not in terms nor by implication envisage a power in the Income-tax Officer to tax the profits in the hands of the individual partners and also in the hands of the firm. The provision relates merely to the assessment of the profits and not to the levy of a charge in respect of them. It is urged that even where the profits are brought to charge in the hands of the individual partners the Income-tax Officer will find it necessary to compute the profits in an assessment of the firm. We are not concerned with that question here. The question before us is whether the Income-tax Officer can charge to tax the profits in the hands of the firm when he has already brought them to charge in the hands of the individual partners. It will be recalled that a submission sought to be based upon section 14(2) of the Act was raised before the Supreme Court in the case of Kanpur Coal Syndicate, the argument being that the Income-tax Officer was bound to charge the profits of the association of persons in the hands of the association and thereafter include the share of the member in his individual assessment. In repelling this contention the Supreme Court observed:
“There is no scope for the argument that under section 3 the assessment shall be only on the association of persons as a unit though after such assessment the share of the income of a member of that association may be added to his other income under section 14(2) of the Act. This construction would make the last words of the section, viz, ‘members of the association individually’ a surplusage. This argument is also contrary to the express provisions of section 3, which mark out the members of the association individually as a separate entity from the association of persons. Income of every person, whether he is a member of an association or not, is liable to the charge under the head ‘every individual’. Section 14(2)(b) only says that if such an individual happens to be a member of an association of persons which has already been assessed, the tax would not be payable in respect of the share of his income again.”
12. It is next contended that the Income-tax Officer had not exercised any option because there is nothing to show that the returns of all the three partners were before him when he proceeded to take assessment proceedings in respect of them. It may be that the Income-tax Officer should have waited for the returns of all the partners and then decided whether to proceed to charge to tax the profits in the hands of the partners or in the hands of the firm. He proceeded, however, against two of the partners. That he did not wait for the returns of all the partners may reflect upon the wisdom of exercising the option prematurely but cannot detract from the conclusion upon the facts of this case that the option was exercised. Upon the aforesaid consideration we are of opinion that it was not open to the Income-tax Officer to charge the profits to tax in the hands of the assessee after having charged them to tax in the hands of some of its partners.
13. We, accordingly, answer the question in the negative, in favour of the assessee and against the revenue. The assessee is entitled to its costs which we assess at Rs. 250. Counsel's fee is also assessed at Rs. 250.
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