Citation Codes

Equivalent Citations

citation codes

Case Number

Case Referred No. 15 of 1960

Judges

Chandra Reddy, C.J
Jaganmohan Reddy, J.

Acts

section 16 of the Income-tax Act offended article 19(1) of the Constitution
INCOME TAX ACT
SECTION 22 INCOME TAX ACT 1922
section 34(i)(a) (second part). Failure to conform to section 22(5)
provisions of section 16(3)(a)(ii) of the Income-tax Act.
year.7. Sub-section (5) recites:22. (5)
sub-section (1) of section 22.
section 34 or of section 16
rule 19 of the Rules

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Smart Summary

Judgment Summary — Chandra Reddy, C.J.

Factual and Procedural Background

This reference concerns assessment years 1949-50, 1951-52 and 1952-53 and raises two specific questions about the validity of reassessments under section 34 of the Income-tax Act and the tax treatment of interest paid on capital contributed by minor sons admitted to the benefits of a partnership.

The assessee was a partner in the firm Messrs. Akula Venkata-subbaiah Chetty & Sons, carrying on business at Cuddapah, together with two adult partners and four minor sons. The assessee and his sons had been a Hindu undivided family; they effected a partition on 1 April 1946 and applied for recognition of that partition under section 25A of the Income-tax Act. The male coparceners constituted themselves, from 1 April 1946, as a firm (Akula Venkatasubbaiah & Sons) and the four minor sons were admitted to the benefits of the partnership. The instrument of partnership bears date 19 June 1946.

The Income-tax Officer granted registration (noted as on 31 March 1951) for assessment year 1947-48 and for subsequent years upon applications made on behalf of the partnership. In the returns filed by the assessee, income derived by the minors from the partnership was not included and therefore was not assessed for the relevant years. Proceedings under section 34(i)(a) were initiated by notice dated 6 September 1956 (served 10 September 1956). Assessments under section 34 were completed on 31 August 1957 for 1948-49 and on 28 October 1957 for the assessment years 1949-50 to 1955-56 (both inclusive).

The assessee's appeals to the Appellate Assistant Commissioner and to the Income-tax Appellate Tribunal were unsuccessful as regards the three years in question. On the assessee's request the Tribunal referred the two stated questions to this Court for opinion under section 66(1) of the Act.

Legal Issues Presented

Whether the assessments were validly made under section 34 in respect of the assessment years 1949-50, 1951-52 and 1952-53.
Whether the interest paid by the firm on the capital contributed by the four minor sons of the assessee, who were admitted to the benefits of the partnership, is includible in the total income of the assessee under section 16(3)(a)(ii) of the Act.

Arguments of the Parties

Assessee's Arguments (counsel: Sri Srinivasa Rao)

General contention: Section 34 cannot be invoked for the assessment years in which the assessee had filed returns and disclosed all material facts necessary for assessment.
Specifically, for the years other than 1951-52 (the text notes a concession by counsel that section 34 was properly invoked for 1951-52 because no return had been submitted), the assessee argued that returns contained all required particulars and therefore there was no omission or non-disclosure under section 34.
With regard to the second question, the assessee contended (by implication in the discussion) that there was no duty on him to include minors' incomes in his total income if the return contained the material facts necessary for the officer to compute total income.

Department's Arguments (counsel: Sri Kondiah)

The department's position was that the assessee had not submitted a valid return and had not furnished particulars necessary for assessment in certain years, thereby attracting section 34(i)(a).
Sri Kondiah contended that because Form Part III (prescribed under the rules to give particulars required by section 22(5)) was not filled up for some years, there was no valid return within the purview of section 34.
On the second question, the department argued that interest paid to the minors on the capital they supplied is incidental to their admission to the benefits of the partnership and therefore must be included in the assessee's total income under section 16(3)(a)(ii).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ram Kissendas Bagri v. Commissioner of Income-tax, 1927 2 I.T.C 324	Establishes that an incomplete return may permit the Income-tax Officer to assess to the best of his judgment under the provision then applicable (analogous to assessment under section 23(4)).	The Court observed these decisions show consequences of incomplete returns, but held they do not assist the department here because the department had accepted the return under section 23(1); having accepted the return as correct, it could not later invoke the first limb of section 34(i)(a) based on omission to make a return.
A.R.A.N. Chettiyar Firm v. Commissioner of Income-tax	Included among authorities that an incomplete return allows assessment under best-judgment provisions (section 23(4) analogues).	Grouped with the above authorities; Court treated them as not controlling because the department had made an assessment under section 23(1) on the basis that the return was correct.
Lal Mohammed Sardar Mohammad v. Commissioner of Income-tax [1934] 2 I.T.R. 358	Also cited for the principle regarding consequences of incomplete returns (assessment under best judgment provisions).	Same application as above—these cases did not help the department given the factual position that the return had been accepted under section 23(1).
Balaji v. Income-tax Officer, Special Investigation Circle, Akola (Supreme Court)	Concerned constitutional challenge under Article 32 whether section 16 offended Article 19(1) — a different issue.	The Court held that Balaji was not helpful to the present controversy and did not shed light on the questions before it, because Balaji concerned a constitutional challenge unrelated to the specific assessment/reassessment issue here.
D.R. Dhanwate v. Commissioner of Income-tax (Bombay High Court)	Decided an identical point concerning the inclusion of minors' incomes when material particulars were furnished in the return.	The Court found itself fortified by this decision; the Bombay High Court had answered the identical point against the department and in favour of the assessee, supporting the present conclusion in respect of the assessment year 1952-53.
Chouthmal Kejriwal v. Commissioner of Income-tax (Sinha C.J. and Mehrotra J.)	Held that where a minor admitted to the benefits of a partnership supplied capital, income accruing to the minor as interest on that capital was an indirect result of admission to partnership benefits and had to be included in the father's total income under section 16(3)(a)(ii).	The Court expressed respectful assent to this principle and followed it, applying it to hold that interest paid to the minors on capital contributed is includible under section 16(3).

Court's Reasoning and Analysis

The Court examined the statutory framework and applied it to the facts in sequence.

Statutory framework:
- Section 34(i)(a) applies where the Income-tax Officer has reason to believe that either (a) an assessee omitted or failed to make a return under section 22 for any year, or (b) the assessee failed to "disclose, fully and truly all material facts necessary for his assessment for that year".
- Section 22 requires notices calling for returns and section 22(5) prescribes that the return form for an assessee engaged in business must require particulars including names and addresses of partners and the shares of all partners.
- Section 23(1) provides that if the Income-tax Officer is satisfied that a return made under section 22 is correct and complete, he shall assess on the basis of that return.
- Section 16(3)(a)(ii) permits the inclusion, in computing an individual's total income, of so much of the income of a minor child as arises from the admission of the minor to the benefits of a partnership in which the individual is a partner.
Application to 1949-50:
- Fact: For assessment year 1949-50 the assessee omitted to fill in Part III of the prescribed form (which contains particulars required by section 22(5)).
- The department had, however, assessed the return under section 23(1) on the footing that the return was correct and complete. Because the department had accepted the return under section 23(1), it could not now invoke the first limb of section 34 (omission to make a return).
- Thus only the second limb of section 34(i)(a) — failure to disclose fully and truly all material facts — could be relied upon. The Court held that failure to furnish the particulars required in Part III (per section 22(5) and the prescribed form) amounted to non-disclosure of material facts within the contemplation of the second part of section 34(i)(a).
- Conclusion: For 1949-50 the department correctly resorted to section 34(i)(a) on the ground of non-disclosure.
Application to 1952-53:
- Fact: For assessment year 1952-53 the return did include Part III particulars: the assessee specifically stated that four minor sons had been admitted to the benefits of the partnership and gave the shares of each partner.
- The return, therefore, contained the material facts necessary for the officer to compute the assessee's total income and to include any income of the minors that falls to be included under section 16(3).
- The Court held that section 34 was inapplicable for 1952-53 because there was no failure to disclose material facts; consequently the proceedings and reassessment made under section 34 for that year were held invalid.
Duty to include minors' income and the treatment of interest:
- The Court analyzed section 16(3) and the phrase "in computing the total income", concluding that it authorizes (and imposes a duty on) the Income-tax Officer to include "artificial incomes" such as those arising from admission of a minor to partnership benefits.
- The Court found nothing in the language of section 16 or section 34 that imposes an obligation on the assessee to include the minors' income in his return; rather, it is the officer's duty to include such incomes if the return contains the material facts necessary for computation.
- On the specific point of interest paid to minors on capital contributed: the Court held that contribution of capital is a necessary corollary to admission to partnership benefits; interest on that capital is incidental to admission and therefore cannot be properly excluded from the minor's income. Consequently interest paid is includible under section 16(3).
- The Court expressly followed the reasoning in Chouthmal Kejriwal, which treated interest on capital supplied by a minor admitted to partnership benefits as an indirect result of admission and includible under section 16(3)(a)(ii).

Holding and Implications

Holding (core rulings):

The assessments under section 34 were valid for the assessment year 1949-50: the department properly invoked section 34(i)(a) (second limb — failure to disclose material facts) because the assessee omitted to furnish particulars required in Part III of the prescribed return form.
The reassessment under section 34 for the assessment year 1952-53 is invalid: the return for that year contained Part III particulars stating admission of the four minor sons and the shares of partners, so there was no failure to disclose material facts and section 34 did not apply; the proceedings and reassessment for 1952-53 under section 34 are therefore not valid.
Interest paid by the firm on capital contributed by the four minor sons is includible in the total income of the assessee under section 16(3)(a)(ii): contribution of capital is incidental to admission to the benefits of partnership and interest accruing to the minors is an indirect result of such admission and must be included in the assessee's total income as per section 16(3).

Implications for the parties:

The department was entitled to reassess for 1949-50 under section 34 on the ground of non-disclosure of material facts (omission to furnish Part III particulars).
The department's reassessment for 1952-53 under section 34 is set aside as invalid because the return for that year contained the material particulars required by section 22(5).
The income-tax consequence that interest on capital supplied by minors admitted to partnership benefits is to be treated as includible under section 16(3)(a)(ii) stands confirmed; the Tribunal's view on this question was held to be correct.
No order as to costs was made by the Court.

Questions answered accordingly.

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Akula Venkatasubbaiah v. Commissioner Of Income-Tax.

Chandra Reddy, C.J:— In this reference relating to the assessment years 1949-50, 1951-52 and 1952-53 we are called upon to determine the following questions:

“(1) Whether the assessments were validly made under section. 34 in respect of the assessment years 1949-50,1951-52 and 1952-53; and

(2) Whether the interest paid by the firm on the capital contributed by the four minor sons of the assessee admitted to the benefits of partnership is includible in the total income of the assessee under section 16(3)(a)(ii) of the Act?”

2. The assessee is a partner in the firm of Messrs. Akula Venkata-subbaiah Chetty & Sons carrying on business in Cuddapah with two adults and four minor sons. He and his sons constituted a Hindu undivided family. On April 1, 1946, they effected a partition of the joint family properties and applied to the department for recognition of the partition under section 25A of the Income-tax Act (hereinafter referred to as the Act). Immediately thereafter, the erstwhile male coparceners constituted themselves from April 1, 1946, into a firm known as Akula Venkatasubbaiah & Sons and the minor sons of the assessee were admitted to the benefits of the partnership. On the basis of the instrument of partnership made on June 19, 1946, the concerned Income-tax Officer granted registration on March 31, 1951, for the assessment year 1947-48 and for subsequent years also on applications made on behalf of the partnership. In the returns submitted by the assessee, the income derived by the minors from the partnership was not included with the result that it was not brought to assessment for the relevant assessment years. Subsequently, the Income-tax Officer started proceedings under section 34(i)(a) of the Act to include such income in the assessment of the assessee by a notice issued on September 6, 1956, which was served on, the assessee on September 10, 1956. The assessment was completed under section 34 on August 31, 1957, for the assessment year 1948-49 and on October 28, 1957, for the assessment years 1949-50 to 1955-56 both inclusive.

3. The appeals carried by the assessee to the Appellate Assistant Commissioner and further appeals to the Income-tax Appellate Tribunal proved unsuccessful so far as the three years are concerned. On the request of the assessee, the Tribunal referred the two questions set out above for the opinion of this court under section 66(1) of the Act.

4. It may at the outset be mentioned that it was conceded by the learned counsel for the petitioner that so far as the assessment year 195T-52 was concerned, the department properly initiated proceedings under section 34(i)(a) of the Act as no return was submitted by the assessee. But he urges that, as regards the other two years, there was no case for the department to invoke section 34(i)(a) of the Act. It is argued by him that the present case does not fall within the ambit of section 34, since the assessee had filed his returns and had disclosed all the material facts necessary for the assessments for the concerned years. According to the learned counsel, the returns contained all the particulars as required by the relevant section of the Act and, therefore, section 34 could not be attracted to this case.

5. In order to appreciate the relative contentions advanced on behalf, of the parties, it is necessary to examine the relevant provisions of the Act. Section 34, in so far as it is of immediate relevancy, says:

“34.(i)(a) If the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under section 22 for any year or to disclose, fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under assessed, or assessed at too low a rate, or have been made the subject of excessive relief, under the Act, or excessive loss or depreciation allowance has been computed, or………”

6. We shall now read section 22 of the Act to the extent it has an impact on this enquiry:

“22. (1) The Income-tax Officer shall, on or before the 1st day of May in each year, give notice, by publication in the press and by publication in the prescribed manner, requiring every person whose total income during the previous year exceeded the maximum amount which is not chargeable to income-tax, to furnish, within such period not being less than sixty-days as may be specified in the notice, a return, in the prescribed form and verified in the prescribed manner, setting forth (along with such other particulars as may be required by the notice) his total income and total world income during that year.”

7. Sub-section (5) recites:

“22. (5) The prescribed form of the returns referred to in sub-sections (1) and (2) shall, in the case of an assessee engaged in any business, profession or vocation, require him to furnish particulars of the location and style of the principal place wherein he carries on his business, profession or vocation and of any branches thereof, the names and addresses of his partners, if any, in such business, profession or vocation and the extent of the share of the assessee and the shares of all such partners in the profits of the business, profession or vocation and any branches thereof.”

8. It is manifest from section 34 that it comes into play when there is omission or failure on the part of the assessee to make a return of his income under section 22 or to disclose fully and truly all the materia] facts necessary for his assessment for that year.

9. Before we proceed to discuss the applicability of these sections, it is useful to mention here that, while for the assessment year 1952-53, Part III of the prescribed form was filled up, the assessee omitted to do it for the assessment year 1949-50. We will now consider the applicability of section 34 to the assessment year 1949-50. It is urged by Sri Srinivasa Rao that as the assessee had submitted his return under section 22 and given all the particulars necessary for the computation of the income of the assessee, section 34 could not be applied to either of the assessment years. On the other hand, the stand taken by the learned counsel for the department is that as the assessee had neither submitted a valid return nor furnished particulars that were necessary for the assessment of that year, the assessee brings himself within the mischief of section 34. Sri Kondiah suggests that, since Form No. Ill was not filled up, there was no valid return within the purview of section 34.

10. To substantiate this proposition, he relies on Ram Kissendas Bagri v. Commissioner of Income-tax 1927 2 I.T.C 324. A.R.A.N Chettiyar Firm v. Commissioner of Income-tax and Lal Mohammed Sardar Mohammad v. Commissioner of Income-tax [1934] 2 I.T.R 358.. These decisions lay down that an incomplete return will entail the consequence of the income being brought to tax under section 23(4) of the Act. In other words, the Income-tax Officer could make the assessment to the best of his judgment on the assumption that there was a failure to make a return as required by the notice given under sub-section (1) of section 22. These rulings do not really come to the rescue of the department for the reason that in this case the assessment was made under section 23(1) on the footing that the return submitted by the assessee was correct. Section 23(1) enacts:

“23. (1) If the Income-tax Officer is satisfied without requiring the presence of the assessee or the production by him of any evidence that a return made under section 22 is correct and complete, he shall assess the total income of the assessee, and shall determine the sum payable by him on the basis of such return.”

11. That being so, it is not now open to the department to fall back upon the first part of section 34(i)(a) of the Act. It is true that it was competent originally for the department to ignore the return and to proceed to determine the assessment under section 23(4) but, having chosen to accept the return as correct, the department cannot now suggest that since the return was incomplete the assessee falls within the sweep of section 34(i)(a). That being so, we must take it that there was no omission or failure to make a return. Consequently, it is only the second part of section 34(i)(a) that applies to this case.

12. With regard to this part, the point sought to be made by Sri Srinivasa Rao on behalf of the assessee is that there was no obligation on the part of the assessee to give any particulars regctrding the partnership or to describe the minors as having been admitted to the benefits of the partnership, since all the material necessary to enable the department to include the income of the minors in the total income of the assessee was available to them. Inthat position, the omission on his part to mention those facts could not bring the case within the second part of section 34(i)(a). In support of this argument, our attention was drawn to section 23(5) of the Act which says:

“23.(5) Notwithstanding anything contained in the foregoing subsections, when the assessee is a firm and the total income of the firm has been assessed under sub-section (1), sub-section (3) or sub-section (4), as the case may be—

(a) in the case of a registered firm,…

(ii) the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined.”

13. On the strength of this section, the argument advanced on behalf of the assessee is that every data that was required to enable the department to include the income of the minors was before them and, as such, it was not incumbent on the assessee to reveal the facts relating to the partnership in his return. We are unable to accede to this proposition. It is pertinent to note that section 22 lays emphasis on the submission of the return in the prescribed form. The form prescribed under rule 19 of the Rules framed by the Central Board of Revenue under section 59 of the Act consists of several parts of which Part III expressly relates to “particulars required under sub-section (5) of section 22 of the Income-tax Act, 1922”. Section 22(5), which has already been extracted, requires the assessee to furnish particulars regarding the shares of all the partners in the buissness, profession or vocation and any branches thereof, etc. If so, it could not be argued that the assessee has disclosed fully and truly all the facts necessary for his assessment when he has failed to set out the particulars in Part III of the Form. The particulars described in Form III must be furnished as they are all material facts within the contemplation of section 34(i)(a) (second part). Failure to conform to section 22(5) will amount to non-disclosure of all material facts necessary for the assessment of that year. It follows that so far as the assessment year 1949-50 is concerned the department acted correctly in having recourse to section 34(i)(a) of the Act.

14. But the assessment year 1952-53 stands on a different footing. As we have already stated, in the return sent for that year, the assessee pointed out that, in addition to two adult partners, four of his minor sons were admitted to the benefits of the partnership. He also mentioned the shares of each of the partners. In short, he stated all the material facts which would enable the department to determine the assessable income of the assessee. There was no obligation on the part of the assessee to include the income of the minors within his total income for computation under section 16(3).

15. In this connection, it is convenient to look at the terms of section 16 in so far as it bears on the present enquiry.

“16.(3) In computing the total income of any individual for the purpose of assessment, there shall be included—

(a) so much of the income of a wife or minor child of such individual as arises directly or indirectly—…

(ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner.”

16. Does this section cast any duty on the assessee to include the income of the minors within his total income? In examining the scope of that clause it is useful to remember the phraseology “in computing”. The import of the section is that the concerned Income-tax Officer is authorised to take into account the income of the minors in determining the total income of the assessee.

17. We are unable to find anything in the language of either section 34 or of section 16 which warrants the conclusion that it is incumbent on the assessee to include the income of the minor partners in his total income. Section 16 authorises and even casts a duty on the officer concerned to include all the artificial incomes in the total income of the assessee. If the return contains all the material facts, which would put the officer in a position to compute the total income, it is his duty to include the income contemplated by section 16. There is ndfnrther obligation laid on the assessee.

18. In this connection, Sri Kondiah calls our attention to the judgment of the Supreme Court in Balaji v. Income-tax Officer, Special Investigation Circle, Akola. We do not think that the department could derive any assistance from that case, as it does not shed any light on the problem to be solved by us. The question that posed itself in the application under article 32 of the Constitution is whether section 16 of the Income-tax Act offended article 19(1) of the Constitution or not. They were not concerned with the controversy which we have to resolve now. We, accordingly, hold that so far as the assessment year 1952-53 is concerned, section 34 is inapplicable and the proceedings under that section and the reassessment made for that year are not valid.

19. In this view of ours, we are fortified by the judgment of the Bombay High Court in D.R Dhanwate v. Commissioner of Income-tax. In that case, an identical point arose for consideration and a Bench of the Bombay High Court answered it against the department and in favour of the assessee.

20. Coming now to the second question, we have no hesitation in answering it in favour of the department. The interest paid to the minors on the capital contributed by them cannot be deducted out of the income earned by them. The contribution of capital by a minor is a necessary corollary to the admission of the benefits of the partnership. Consequent upon his being admitted to the benefits of the partnership, he is required to supply the capital and, this being incidental to the admission of the benefits of the partnership, interest paid cannot be properly excluded from the income of the minors. Consequently, the interest paid also is includible in the income of the minors under section 16(3) of the Act. In Chouthmal Kejriwal v. Commissioner of Income-tax Sinha C.J and Mehrotra J. decided that when a minor was admitted to the benefits of the partnership in a firm in which his father was a partner and the minor had supplied capital, any income accruing to the minor as interest in the capital was an indirect result of his being admitted to the benefits of partnership and had to be included in the total income of his father under the provisions of section 16(3)(a)(ii) of the Income-tax Act. We express our respectful assent to this principle. It follows, on this question, the view of the Income-tax Appellate Tribunal is correct.

21. The second question is answered accordingly.

22. There will be no order as to costs.

23. Questions answered accordingly.

Akula Venkatasubbaiah v. Commissioner Of Income-Tax.

Judgment Summary — Chandra Reddy, C.J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments (counsel: Sri Srinivasa Rao)

Department's Arguments (counsel: Sri Kondiah)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Akula Venkatasubbaiah v. Commissioner Of Income-Tax.

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