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Choudry Brothers v. Commissioner Of Income-Tax
Structured Summary of the Opinion (P.A. Choudary, J.)
Factual and Procedural Background
The assessee was a partnership firm said to be constituted by a partnership deed dated 5 July 1962, consisting of four partners, one of whom — Sushilchand Choudary — was a minor and was represented by his mother at the time of the deed. For the assessment year 1966-67 the firm applied for registration under the Income-tax Act but the Income-tax Officer rejected the application on the ground that the partnership deed was invalid because a minor had been admitted as a full partner in contravention of Section 30(1) of the Partnership Act. The Income-tax Officer proceeded to assess the matter as an association of persons. The Appellate Assistant Commissioner confirmed the Income-tax Officer's order and the assessee appealed to the Income-tax Appellate Tribunal (the Tribunal).
Before the Tribunal the assessee relied on the fact that Sushilchand Choudary had attained majority, had elected to continue as a partner and had informed the Registrar of Firms on 25 March 1964, and that for the assessment year 1966-67 the assessee filed Form No. 12 for continuation of registration. The Income-tax Officer nonetheless refused registration referring to his earlier order.
The Tribunal held that on attainment of majority and by his conduct in signing Form No. 11 (for 1965-66) and Form No. 12 (for 1966-67) Sushilchand Choudary had elected to be a partner and that this cured the invalidity of the 5 July 1962 deed; the Tribunal directed the assessee to file Form No. 11 complying with section 184 and directed the Income-tax Officer to pass orders thereon.
The Income-tax Appellate Tribunal referred the following three questions to this Court for opinion:
- Whether, on the facts and in the circumstances of the case, the assessment in the status of association of persons is valid?
- Whether, on the facts and in the circumstances of the case, the Tribunal can direct the assessee to file Form No. 11 and comply with conditions under section 184 and directing the Income-tax Officer to pass orders thereon?
- Whether, on the facts and in the circumstances of the case, the assessee is entitled to benefits of registration?
Legal Issues Presented
- Whether the assessment of the taxpayers in the status of an association of persons (AOP) is valid on the facts and circumstances before the Tribunal?
- Whether the Tribunal could direct the assessee to file Form No. 11 and comply with conditions under section 184 of the Income-tax Act and direct the Income-tax Officer to pass orders thereon?
- Whether the assessee was entitled to the benefits of registration under the Income-tax Act?
Arguments of the Parties
Assessee's Arguments
- Sushilchand Choudary, though a minor at the time of the July 5, 1962 deed, had on attaining majority elected to continue as a partner and had informed the Registrar of Firms on 25 March 1964.
- On that basis the assessee filed Form No. 12 for continuation of registration for assessment year 1966-67, and the Tribunal found that Sushilchand had signed Form No. 11 for 1965-66 and Form No. 12 for 1966-67, thereby undertaking that he agreed to be a partner; the assessee contended that this conduct cured the invalidity attached to the original partnership deed.
- The assessee also relied upon a line of authorities (including CIT v. Murlidhar Jhawar & Puma Ginning and Pressing Factory; Ch. Atchaiah v. ITO; Deccan Bharat Khandsari Sugar Factory v. CIT; Laxmichand Hirjibhai v. CIT; R. Dhandayutham; Bhola Nath Kesari; Universal Commercial Company v. CIT and others) to support the contention that prior assessments of individual members on their share of profits can prevent subsequent assessment of the association (i.e., that prior assessments on individuals could preclude assessment of the association of persons).
Revenue's Arguments
- The partnership deed dated 5 July 1962 was void because it admitted a minor as a full partner in contravention of Section 30(1) of the Partnership Act, and therefore no lawful partnership was constituted on that deed.
- Because there was no valid instrument evidencing a legal partnership firm, registration under section 184 of the Income-tax Act could not be granted on the basis of that void deed and the Tribunal's direction to accept Form No. 12 in lieu of Form No. 11 and to treat the partnership as valid was not correct.
- The Revenue also prompted reference of questions Nos. (2) and (3) to this Court (i.e., the Revenue opposed the Tribunal’s directions and the registration claim).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Dwarakadas & Co., [1971] 80 ITR 283 (Bombay HC) | Holding that a fresh valid partnership agreement executed after expiry of an earlier void document can support registration. | Distinguished — not applicable because in that case registration rested on a fresh agreement executed on 7 November 1953; here there was no fresh valid instrument to cure the original void deed. |
| CIT v. Murlidhar Jhawar & Puma Ginning and Pressing Factory, [1966] 60 ITR 95 (SC) | Under the old Act (s.3, 1922 Act) where the Income-tax Officer exercised the option to assess either the association or members, that exercise was final and binding. | Noted as a case relied upon by the assessee for the proposition that once individuals were assessed their shares could not later be taxed as the association; court explained that such reasoning applied under the old Act but s.4 of the 1961 Act changes the position. |
| Ch. Atchaiah v. ITO, [1979] 116 ITR 675 (AP) | Held (as read by parties) that the change in wording from s.3 (old Act) to s.4 (1961 Act) did not affect the legal position regarding option of assessment. | Court rejected this view: concluded the Division Bench failed to notice the change effected by s.4 and treated that decision as per incuriam and not binding for the present case. |
| Deccan Bharat Khandsari Sugar Factory v. CIT, [1980] 123 ITR 802 (AP) | Dealt with assessment of an unregistered firm and the assessing authority's regulated discretion under section 183. | Found not directly relevant to present controversy as it concerns s.183 (unregistered firm) rather than the effect of s.4; court considered it distinguishable. |
| Laxmichand Hirjibhai v. CIT, [1981] 128 ITR 747 (Guj) | Case cited in context of whether prior assessments of partners preclude later assessment of an association. | Court noted that this decision related to s.183(b) and thus would not support the assessee's contention under s.4. |
| CIT v. R. Dhandayutham, [1978] 113 ITR 602 (Mad) | Supported the contention that an assessment on members could preclude subsequent assessment of the association. | Court observed that the Madras decision did not take into account the change introduced by s.4 of the 1961 Act and therefore could not be accepted as a correct statement of the law under s.4. |
| Bhola Nath Kesari v. Director of State Lotteries, U.P., [1974] 95 ITR 171 (All) | Cited among authorities relevant to the assessee’s submissions (no detailed rule extracted in the opinion). | Listed among cases relied upon by the assessee; the opinion does not develop a specific application from this case for the present controversy. |
| Universal Commercial Company v. CIT, [1981] 130 ITR 775 (Mad) | Dealt with assessment issues under section 183(b) regarding unregistered firms. | Court observed this case would not support the assessee under s.4 because it concerned s.183(b) (a regulated option for unregistered firms) rather than the charging provisions of s.4. |
| Income Tax Officer, A-Ward, Lucknow v. Bachu Lal Kapoor, [1966] 60 ITR 74 (SC) | Explained that where a distinct taxable entity (e.g., a HUF) exists the Income-tax Officer must assess that entity in respect of its income; there is no election between HUF and its members. | Cited to demonstrate that certain taxable units must be assessed as such (analogy used while contrasting old s.3 and new s.4 positions). |
| Mahendra Kumar Agrawalla v. ITO, [1976] 103 ITR 688 (Patna HC) | Held that under s.3 (1922 Act) once the Income-tax Officer had exercised his option to assess members individually, he could not thereafter assess the association; but under s.4 of the 1961 Act no such option exists. | Court preferred and followed this decision to support the proposition that under s.4 the assessing authority no longer has the old option to choose to assess members individually rather than the association. |
| Rodamal Lalchand v. CIT, [1977] 109 ITR 7 (P&H) | Noted difference between s.3 (1922 Act) and s.4 (1961 Act) and held that s.4 withdraws the option previously available under s.3 to the assessing authority. | Court relied on this decision as supporting the view that s.4 treats each category as distinct taxable units and removes the assessing officer's old option; the decision was followed. |
| CIT v. Kanpur Coal Syndicate, [1964] 53 ITR 225 (SC) | Case dealing with the option available under the old section 3 of the 1922 Act. | Referenced as authority on the law under the old Act (s.3) showing the position prior to enactment of s.4 of the 1961 Act. |
| CIT v. Pure Nichitpur Colliery Company, [1975] 101 ITR 79 | Supported the contention (in some benches) that prior assessments of members could preclude subsequent assessment of the association. | Not followed by the court here; the court noted that this decision was not followed by other benches and preferred Mahendra Kumar Agrawalla and Rodamal Lalchand instead. |
Court's Reasoning and Analysis
The Court proceeded by examining (a) the validity of the alleged partnership deed dated 5 July 1962 in the light of the Partnership Act and (b) the consequences under the Income-tax Act with respect to registration and the appropriate unit of assessment.
Key steps in the Court's analysis (as stated in the opinion):
- The partnership deed itself is contrary to Section 30(1) of the Partnership Act because it admitted Sushilchand Choudary as a full partner while he was a minor. The deed therefore could not constitute a partnership under the Partnership Act and is void.
- Registration under section 184 of the Income-tax Act requires an application accompanied by the instrument evidencing partnership. If there is no legally recognised partnership (i.e., no valid instrument), registration cannot be granted. Prima facie no registration could be granted on the basis of the void deed.
- The assessee’s reliance on the fact that Sushilchand became major and elected to be a partner — and his signing of Forms — was examined. The Court held that mere election by him after attaining majority did not revalidate or ratify a deed that was void ab initio under Section 30 of the Partnership Act. A void document of that character cannot be revalidated by subsequent ratification.
- The Court distinguished the decision in CIT v. Dwarakadas & Co. because in that case the assessee relied on a fresh valid agreement executed after expiry of the earlier void document; that factual situation is absent here.
- Turning to assessment, the Court analysed the change in law from section 3 of the Indian Income-tax Act, 1922 to section 4 of the Income-tax Act, 1961. Under the old s.3 the Income-tax Officer had an option to assess either the firm/association or the partners/members individually. Under s.4 of the 1961 Act the charging provisions use the term “person” (as defined in section 2(31)) and, according to the Court, remove the assessing officer’s former option in relation to associations of persons: the Income-tax Officer must assess the appropriate taxable unit and cannot elect between the association and its individual members.
- Because the income in the present case was earned by an association of persons (a group of individuals acting together to earn profits), under section 4 the appropriate unit of assessment is that association of persons. Thus, the Income-tax Officer had to levy tax on the association of persons and could not instead assess the individual members on their shares as an alternative method of assessing the same income under s.4.
- The Court considered a number of authorities relied on by the assessee and concluded that many either arose under the old Act or under provisions (like section 183 concerning unregistered firms) that afford a regulated discretion distinct from the charging provisions of s.4. The Court preferred the decisions in Mahendra Kumar Agrawalla v. ITO and Rodamal Lalchand v. CIT which emphasise the change effected by s.4 and the removal of the old option to assess individually rather than the association.
- Combining the findings on the invalidity of the 1962 deed and on the operation of s.4 of the Income-tax Act, the Court found that (i) no registration could be granted on the basis of the void partnership deed and (ii) assessment of income had to be made in the status of an association of persons (the only appropriate unit), i.e., the Tribunal’s direction to treat the deed as cured by the partner's later election and to permit registration was not sustainable on the facts.
Holding and Implications
Final Holding: The Court answered all three referred questions in favour of the Revenue and against the assessee.
More specifically, based on the facts in the statement of case, the Court held:
- No registration could be granted under section 184 of the Income-tax Act on the basis of the partnership deed dated 5 July 1962 because that deed was void under Section 30(1) of the Partnership Act for admitting a minor as a full partner.
- The Tribunal's direction that the assessee should file Form No. 11 and comply with section 184 and that the Income-tax Officer should pass orders on that basis was not justified on the facts; questions Nos. (2) and (3) were answered in favour of the Revenue.
- The assessment in the status of an association of persons was held to be the appropriate mode of assessment on the facts; the Court answered question No. (1) in favour of the Revenue (i.e., the association of persons is the appropriate unit for assessment in the present case under section 4 of the Income-tax Act, 1961).
Consequences and implications (as stated in the opinion):
- On the direct effect for the parties: the void character of the original partnership deed means no registration could be claimed on that instrument; the Income-tax Officer must treat the unit for assessment as an association of persons and levy tax accordingly; the Tribunal’s order directing registration on the basis of the alleged cure was not to be sustained.
- The Court emphasised that s.4 of the Income-tax Act, 1961 removed the assessing officer’s former option (that existed under s.3 of the 1922 Act) to choose to assess either an association or its members individually; therefore the decision has the effect of enforcing assessment on the appropriate normative unit (here, the association of persons) where income is earned by such an association.
- No costs were awarded by the Court.
Availability of Information
This summary is based exclusively on the content of the provided opinion. No information outside the opinion was used or inferred.
P.A Choudary, J.:— The following three questions are referred by the Income-tax Appellate Tribunal for obtaining the opinion of this court:
“(1) Whether, on the facts and in the circumstances of the case, the assessment in the status of association of persons is valid?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal can direct the assessee to file Form No. 11 and comply with conditions under section 184 and directing the Income-tax Officer to pass orders thereon?
(3) Whether, on the facts and in the circumstances of the case, the assessee is entitled to benefits of registration?”
2. In order to be able to answer these questions, a few facts as they appear from the statement of case are stated. The assessee is a partnership firm constituted under a deed of partnership dated July 5, 1962, consisting of four partners of which Sushilchand Choudary was a minor represented by his mother.
3. For the assessment year 1966-67, the assessee filed an application for registration of the firm before the Income-tax Officer. But the Income-tax Officer rejected the application and refused to register the firm under the Income-tax Act on the ground that the partnership deed dated July 5, 1962, was an invalid instrument. Under Section 30 of the Partnership Act, a minor can only be admitted to the benefits of a partnership and cannot be made a partner. The partnership deed on the basis of which registration was sought had one minor by name Sushilchand Choudary as a full partner. The Income-tax Officer, therefore, sought to make an assessment as association of persons. The assessee carried the matter in appeal before the Appellate Assistant Commissioner who confirmed the order of the Income-tax Officer. The assessee made a further appeal to the Income-tax Appellate Tribunal.
4. Before the Income-tax Appellate Tribunal, it was urged that the above mentioned Sushilchand Choudary had on attaining majority elected to continue as a partner and had intimated that fact to the Registrar of Firms on March 25, 1964, and that for the assessment year 1966-67, the assessee had filed on that basis an application in Form No. 12 for continuation of registration. However, the Income-tax Officer refused to register the firm in view of his order for the earlier year.
5. The Tribunal considered the question whether in the matter of continuation of registration, a fresh partnership deed is necessary after Sushilchand Choudary attained majority. The Tribunal held that since Sushilchand Choudary became major and had elected to continue to be a partner of the firm constituted by the partnership deed dated July 5, 1962, the partnership was perfectly valid. The Tribunal held that the said Sushilchand Choudary signed the application in Form No. 11 for the assessment year 1965-66 and also Form No. 12 for 1966-67 clearly undertaking that he agreed to be a partner of the firm. The Tribunal opined that this conduct of the said Sushilchand Choudary cured the invalidity attached to the partnership deed. Accordingly, the Tribunal concluded that the invalidity hitherto attached to the partnership deed was removed and that the assessee was entitled to registration under section 184 of the Income-tax Act. Accordingly, the Tribunal directed the assessee to file an application in Form No. 11 complying with the conditions under section 184 of the Income-tax Act and also directed the Income-tax Officer to pass orders thereon.
6. Thereupon the above questions Nos. (2) and (3) have been framed and referred to at the instance of the Revenue and question No. (1) at the instance of the assessee.
7. It appears to us that both questions Nos. (2) and (3) should be answered in favour of the Revenue and against the assessee on the basis of the facts appearing in the statement of case. In this case, the partnership was constituted under a partnership deed dated July 5, 1962. The partnership deed is clearly contrary to the provisions of section 30, clause (1), of the Partnership Act inasmuch as it is admitted that the abovementioned Sushilchand Choudary was a minor at the time of constitution of the partnership. The partnership can only be brought into existence in accordance with the provisions of the Indian Partnership Act. Section 4 of the Indian Partnership Act defines “partnership”. “Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Section 30 of the Partnership Act declares that a person who is a minor may not be a full partner of the firm. In the partnership deed dated July 5, 1962, it is admitted that the abovementioned Sushilchand Choudary is a minor. The partnership deed dated July 5, 1962, is, therefore, incapable of constituting a relationship of a partnership among the persons mentioned in that deed. And that deed is void.
8. Now, for the purpose of earning the benefit of tax under the Income-tax Act, a firm has to be registered under section 184 of the Income-tax Act. For that purpose, an application has to be made to the Income-tax Officer accompanied by the instrument evidencing partnership. If a partnership is legally recognised, the Income-tax Officer cannot decline registration of the firm under section 184 of the Income-tax Act. On the other hand, if the partnership is void, no registration can be granted. Prima facie no registration can be granted in this case. But the learned counsel for the assessee argues that by the time Sushilchand Choudary had come to file Form No. 12, he had become a major and elected to be a partner of the firm.
9. It appears to us that his election to be a partner alone is not sufficient to obtain registration under section 184 of the Income-tax Act. He made no application to the Income-tax Officer as required by section 184 of the Income-tax Act. According to the requirements of section 184 of the Income-tax Act, he ought to have made an application in Form No. 11 for the grant of registration. Instead, he made an application in Form No. 12 which deals not with the granting of registration but with the renewal of registration. The assessee had not produced the instrument of partnership deed along with his application filed in Form No. 12. All this could possibly have been ignored if there was, in fact, a valid partnership. In fact, there was no instrument evidencing a legal partnership firm except the one constituting an unlawful firm on July 5, 1962. On the basis of such an instrument which is void in law, no registration could be claimed under the Income-tax Act. But the argument of the learned counsel for the assessee is that after Sushilchand Choudary had become major, his election to be a partner of the firm cured the invalidity, if any, attached to the partnership deed dated July 5, 1962. We cannot accept this argument. The deed of partnership dated July 5, 1962, which described Sushilchand Choudary as a minor and admitted him as a minor, is a void document as being hit by Section 30 of the Partnership Act. Such a void document cannot be revalidated by the subsequent act of ratification by Sushilchand Choudary. It follows that no registration can be granted on the basis of such a void document.
10. The learned counsel for the assessee relied upon the judgment of the Bombay High Court in CIT v. Dwarakadas & Co., [1971] 80 ITR 283. But there the assessee derived support not from an illegal and void document of a, partnership but a fresh document which had been executed on November 7, 1953, after the expiry of the earlier document which was void. The Division Bench in that case held that the assessee was entitled for the grant of registration on the basis of a fresh agreement of partnership which was found to have been executed on November 7, 1953. That case, therefore, has no application to the facts of this case. We accordingly answer questions Nos. (2) and (3) in favour of the Revenue and against the assessee.
11. Then remains the first question referred to this court to be answered. This question is referred to this court at the instance of the assessee.
12. The assessee argues that on the facts and circumstances of the case, the assessee cannot be assessed in the status of association of persons and that the assessment should take place only as an individual person. The argument of the assessee goes directly contrary to our answers which we have already given to questions Nos. (2) and (3). Our answers in favour of the Revenue on questions Nos. (2) and (3) are based on the finding of a fact that no firm was constituted by the partnership deed dated July 5, 1962, nor could any firm be so constituted by that deed. The partnership constituted either by word of mouth or a written document brings into existence a particular relationship between the persons called partners. Such a relationship called partnership cannot be brought into existence contrary to the applicable legal provisions of the Partnership Act. Section 30 of the Partnership Act forbids the constitution of a partnership with a minor as a full member. Admittance of Sushilchand Choudary who was a minor on July 5, 1962, as a full member of partnership renders it legally impossible to constitute an association of four persons into a partnership. The result is that there can be no partnership in the eye of law. The question of such a body of persons being registered as a partnership for the purpose of the Income-tax Act cannot, therefore, arise. The association of persons in this case can neither be treated as a registered partnership nor as an unregistered partnership. It follows that this association of persons cannot be assessed to income-tax either as a registerd firm or as an unregistered firm. Nor can the assessee be assessed on the basis of individual member's income and through the association of persons because a body of individuals constituted an association of persons. A group of persons came together and acted together for doing business and earning profits. They, therefore, constitute an association of persons only. Under section 4 of the Income-tax Act, 1961, the unit for the purpose of assessment in this case can only be an association of persons. section 4 of the Income-tax Act, 1961, charges the income earned by such an association of persons called “person” within the meaning of the definition clause of section 2(31), with liability to suffer income-tax. It is no doubt true that an association of persons is a body of persons. But from this, it does not necessarily follow that in the matter of assessing the income earned by an association of persons, the Income-tax Officer has an option either to assess that body of persons called the association of persons or its individual members. Under section 4 of the Income-tax Act, 1961, the Income-tax Officer is left with no choice to assess the association of persons or alternatively the individual persons comprising that association of persons. Under section 4 of the Act, he has to levy tax only on the appropriate unit of income-tax. It, therefore, becomes necessary to find out which is the appropriate unit of income-tax in this case. The income was earned in this case not by the individuals but by an association of persons. Willy-nilly the Income-tax Officer had to levy tax on the association of persons which is the only appropriate unit of income-tax assessment in this case. In fact, the Income-tax Officer in a case of this nature would be acting contrary to law if he assesses as the assessee suggests before us on the facts of individual personal income.
13. But the argument of the assessee before us is that two different Income-tax Officers, one of Hyderabad in the year 1966, and the other of Delhi in 1967, had already assessed two of the members of the association of persons on the basis of share of income from the firm and that thereafter it would not be open to the taxing authority to tax their income as that of the association of persons. In support of this argument, the assessee placed reliance upon the following decisions:
CIT v. Murlidhar Jhawar & Puma Ginning and Pressing Factory, [1966] 60 ITR 95 (SC), Ch. Atchaiah v. ITO, [1979] 116 ITR 675 (AP), Deccan Bharat Khandsari Sugar Factory v. CIT, [1980] 123 ITR 802 (AP), Laxmichand Hirjibhai v. CIT, [1981] 128 ITR 747 (Guj), CIT v. R. Dhandayutham, [1978] 113 ITR 602 (Mad), Bhola Nath Kesari v. Director of State Lotteries, U.P, [1974] 95 ITR 171 (All) (sic) and Universal Commerical Company v. CIT, [1981] 130 ITR 775 (Mad).
14. A close reading of these judgments would show that a large number of them are inapplicable to the facts of the present case and that the argument of the assessee largely suffers from a failure to make a distinction between the scope and meaning of section 3 of the Indian Income-tax Act of 1922 and section 4 of the Income-tax Act of 1961. Section 3 of the Indian Income-tax Act of 1922 declares in part that income-tax shall be charged in accordance with the rates of the Finance 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. Thus, under section 3 of the Indian Income-tax Act, 1922, the units of assessment are: (i) individual, (ii) Hindu undivided family, (iii) company, (iv) local authority, (v) every firm, and (vi) other association of persons or the partners of the firm or the members of the association individually. Now under section 4 of the Income-tax Act, 1961, this enumeration of units of assessment is covered by the use of the single word “person” which is defined by section 2(31) as including an individual, a Hindu undivided family, a company, a firm, an association of persons, or a body of individuals, whether incorporated or not, a local authority, and every artificial juridical person. The difference between section 3 of the old Act and section 2 of the present Act, with which we are now concerned, consists in the fact that on the total income earned by a firm or other association of persons, the income-tax authority had under the old Act the choice to assess either that firm or other association of persons or the partners of the firm or the members of the association individually. Now this choice which section 3 of the old Income-tax Act conferred upon the Income-tax Officer had been completely removed so far as an association of individuals is concerned, although under section 183 of the present Act, the Income-tax Officer is still left with a discretion to assess the income-tax in the hands of an unregistered firm or its individual partners. But as we have found above that there was no legal firm in this case, we may not consider any further the question of an unregistered firm or its individual members, being assessed. The question with which we are now concerned is whether the Income-tax Officer has discretion under the new Act to assess the individual members of an association of persons instead of the association of persons. A perusal of section 4 of the 1961 Act would clearly show that the Income-tax Officer under the new Act has been left with no such discretion. The discretion which he was hitherto enjoying under section 3 of the 1922 Act was withdrawn by the Income-tax Act, 1961. It would, therefore, not be permissible today for the Income-tax Officer under the Income-tax Act, 1961, to assess the income of the association of persons individually in the hands of that association any more than it would have been permissible for the Income-tax Officer to assess the income-tax of the Hindu undivided family in the hands of its individual members.
15. In Income Tax Officer, A-Ward, Lucknow v. Bachu Lal Kapoor., [1966] 60 ITR 74, at page 80, the Supreme Court observed:
“That apart, under section 3 of the Act, in the matter of assessment, there is no question of any election between a Hindu undivided family and a member thereof in respect of the income of the family. If a Hindu undivided family exists, under section 3 of the Act, the Income-tax Officer has to assess it in respect of its income… While section 3 confers an option on the Income-tax Officer to assess either the association of persons or the members of the association individually, no such option is conferred on him thereunder in the case of a Hindu undivided family.”
16. In Mahendra Kumar Agrawalla v. ITO, [1976] 103 ITR 688, a Division Bench of the Patna High Court observed (headnote):
“Under section 3 of the Indian Income-tax Act, 1922, once the income of the association of persons was charged to income-tax in the hands of the members individually, there could be no fresh assessment of the income in the hands of the association because that would amount to double taxation of the income. Under section 3 of that Act, the Income-tax Officer had the option to assess either of the two units of assessment and once having exercised the option to assess one unit it would not be open to him to assess the other unit. But under section 4 of the Income-tax Act, 1961, no such option of election between the two taxable units has been given to the Income-tax Officer.”
17. In Rodamal Lalchand v. CIT, [1977] 109 ITR 7, a Division Bench of the Punjab and Haryana High Court also took a similar view noting the difference between the scheme of section 3 of the Indian Income-tax Act, 1922, and section 4 of the Income-tax Act, 1961. The headnote reads:
“The description of ‘person’ in section 2(31) of the Income-tax Act, 1961, makes no distinction between a firm or its partners, association of persons or body of individuals, whether incorporated or not, or the members of the association or the body of individuals in their individual capacity. The charging section of the Act, i.e, section 4, views each category of the taxable entities alike as a distinct and different unit. In the case of a firm it would mean a firm or a partner. Similarly, in the case of an association of persons or body of individuals, it would mean the association of persons or the body of individuals or the members. The option given by the word ‘or’ to the assessing authority in the charging section 3 of the Indian Income-tax Act, 1922, to proceed against any out of these has now been withdrawn in the 1961 Act. In taxation matters, it is a rule that the charging section guides the machinery sections of the Act.
Therefore, there is no prohibition in section 4 of the 1961 Act restraining the assessing anthority from proceeding against the firm which is a taxable entity even though two of its partners had been separately assessed in respect of their share of the income from the partnership business. The position, that once the income of an entity has been assessed and taxed in the hands of other taxable entities mentioned in section 3 of the 1922 Act, no tax could be levied on the first entity, cannot prevail under the 1961 Act.”
18. In CIT v. Murlidhar Jhawar & Puma Ginning and Pressing Factory, [1966] 60 ITR 95, the Supreme Court held that where the Income-tax Officer had exercised his option, that would be final and binding. Similarly, CIT v. Kanpur Coal Syndicate, [1964] 53 ITR 225 (SC), is also a case dealing with the option of the Income-tax Officer falling under the old section 3. The judgment of the Gujarat High Court in Laxmichand Hirjibhai v. CIT, [1981] 128 ITR 747, and the judgment of the Madras High Court in Universal Commercial Company v. Commissioner Of Income-Tax, Madras, [1981] 130 ITR 775 would not support the argument of the assessee, because in both the cases the question which was considered was one which fell under section 183(b) of the Income-tax Act. Under that section, a regulated option has been given to the Income-tax Officer to assess the income of an unregistered firm either in the hands of the individual members or in the hands of the unregistered firm. These cases held that once that option has been exercised, it is final and binding on the Revenue, of course, subject to alteration and variation in the regular procedure of all appeals and revisions. But those cases would not be of any use to us where section 4 had taken away that option. The really important cases which support the argument of the assessees are those in Ch. Atchaiah v. ITO, [1979] 116 ITR 675 (AP), CIT v. R. Dhanda-yutham, [1978] 113 ITR 602 (Mad) and CIT v. Pure Nichitpur Colliery Company, [1975] 101 ITR 79 (Pat). In Ch. Atchaiah v. ITO, [1979] 116 ITR 675 (AP), the distinction between section 3 of the Indian Income-tax Act, 1922, and section 4 of the Income-tax Act, 1961, was brought to the notice of the learned judges and it was urged on behalf of the Revenue that under the Income-tax Act, 1961, there was no option left with the Income-tax Officer to assess the tax either on the members of the association as individuals or the association of persons. But the learned judges summarily dismissed this contention by failing to notice that the last part of section 3 of the old Act contemplates exercise of an option by the Income-tax Officer between the association of persons or the members of the association individually. A bare comparision of the last words of section 3 would make this clear. But under section 4 of the 1961 Act, no such option has been given to the assessing authority; but he has to assess the appropriate taxable unit called, the person. Unfortunately, this vital difference between the old section 3 and the new section 4 had been missed by the learned judges. It is true that by using the word “person”, section 4 refers to all categories of assessable units. But from this, it cannot be said that the option which section 3 confers on the assessing authority is retained even in section 4. We have already seen that by omitting the words “or the members of the association individually”, section 4 has approximated the position of association of persons to that of assessable units like Hindu undivided family. The learned judges merely stated (p. 677):
“Under section 3 of the old Act, instead of stating that the tax shall be charged on every person, the categories of assessees were enumerated in the section itself and one of the categories was an association of persons. Under the present Act, instead of enumerating the categories in the body of the section, it is stated that the income will be charged on every person and in the definition of ‘person’ in section 2(31), the various categories of persons are enumerated. In our view, this change in the wording of the section does not affect the legal position.”
19. We are unable to agree with this reasoning of the learned Judges which is previously based upon the fact that it had not noticed the significant changes the charging section 3 had undergone by the omission of the words “or the members of the association individually We, therefore, consider the judgment in Ch. Atchaiah v. ITO, [1979] 116 ITR 675 (AP), as one made per incurium and would not be a binding precedent. The judgment in Deccan Bharat Khandsari Sugar Factory v. CIT, [1980] 123 ITR 802 (AP), dealt with a case where the income of an unregistered firm would be assessed in the hands of the firm after first having assessed provisionally on protective basis in the hands of the individual partners. Section 183, as we have already noted above, grants the assessing authority a regulated discretion to choose to assess either the unregistered firm or its partners depending upon his assessment as which course of action would best promote the interests of the Revenue. Earlier, the option of the Income-tax Officer to assess the individuals was not based on a full view of the facts as to the income of the firm and, therefore, it would be open for the Income-tax Officer to assess the firm under section 183(b). That case may not be of any direct relevance to the controversy before us. The decision in CIT v. R. Dhaudayutham, [1978] 113 ITR 602 (Mad), no doubt supports the contention of the assessee. But it has not considered the change that has been brought about by section 4 of the Income-tax Act, 1961, in the matter of exercise of option by the Income-tax Officer. The Madras decision had upheld the claim of the association that an assessment having been made on one of its members on his share of the profits, no assessment of association as such can be made subsequently, but without considering the question whether the Income-tax Officer would have made such an assessment under section 4 of the Income-tax Act of 1961. We cannot, therefore, consider that to be a correct view of section 4. The decision in CIT v. Pure Nichitpur Colliery Co., [1975] 101 ITR 79, no doubt supports the contention of the assessee. But that decision was not followed by a Bench of the Patna High Court in Mahendra Kumar Agrawalla v. ITO, [1976] 103 ITR 688 and was expressly dissented from in Rodamal Lalchand v. CIT, [1977] 109 ITR 7 (P&H). For the reasons which we have mentioned above, we prefer to follow the decision taken in Mahendra Kumar Agrawalla v. ITO, [1976] 103 ITR 688, and (not in?) CIT v. Pure Nichitpur Colliery Company, [1975] 101 ITR 79.
20. We accordingly answer the first question also in favour of the Revenue and against the assessee. No costs.
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