Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 129 of 1963

Judges

Tambe
Abhyankar, JJ.

Acts

Finance Act of 1950, which repealed the Hyderabad Income-tax Act, saved the provisions of the repealed Act
sections 28, sub-section (6) of section 44E, sub-section (5) of section 44F and sub-section (1) of section 46,
sub-section (6) of section 44E or sub-section (5) of section 44F or sub-section (1) of section 46,
sub-section (2) of section 25 or section 25A, or sub-section (2) of section 26 or section 28,
sections 28, 44F, sub-section (1) of section 46 and section 18A. Sub-section (1) of section 30
Hyderabad Income-tax Act, distinct provisions
subsection (4) of section 23 or section 26A
section 66(1) of the Indian Income-tax Act
section is sub-section (1) of section 30,
sub-section (1) of section 30, the clause
INCOME TAX ACT
INCOME TAX ACT
sub-section (4) of section 23
sub-section (1) of section 46
provisions of sub-section (6)
sub-section (1) of section 30,
section 23 or section 27,
Hyderabad Income-tax Act
Act. 18. Now, section 28
rule 20 of the Rules
section 28(1)(c).

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Smart Summary

Structured Summary of the Opinion — Reference under section 66(1) of the Income-tax Act

Factual and Procedural Background

This is a reference under section 66(1) of the Income-tax Act raising four questions. The assessee is Seth Mathuradas Bulakhidas Mohta of Hinganghat. He was assessed as a Hindu undivided family (HUF) for the assessment year 1947-48 and as an individual for the assessment year 1950-51. The first two referred questions relate to assessment year 1947-48; the third and fourth refer to assessment year 1950-51. The opinion treats each question separately and identifies the relevant facts when considering each question.

In summary of key events appearing in the opinion:

Assessee claimed partition on 16 October 1944 and thereafter filed returns as an individual from 1944-45 onwards, but the Income-tax Officer (ITO) assessed him as an HUF, and appeals ensued.
For 1947-48 the ITO made a precautionary individual assessment by issuing a notice under section 34; that individual assessment was later cancelled following a Supreme Court decision confirming HUF status up to 1947-48, rendering the first question academic.
Capital gains from sale of a textile mill (sold 25 October 1946) were included by the ITO in the 1947-48 assessment; the Appellate Assistant Commissioner (AAC) held they were not assessable in 1947-48 and directed they be assessed in 1948-49, raising the second question.
For 1950-51 the ITO included amounts said to be remittances (Rs. 25,451 from Rajnandgaon and Rs. 16,910 from Bikaner) brought into Hinganghat and taxed them; the AAC accepted that the remitted sums were not income but found the assessee’s profits available from the partition limited the taxable amount, and the Tribunal disagreed, citing Annamalai Chettiar — raising the third question.
For 1947-48 the ITO charged penal interest under section 18A for failure to estimate and pay advance tax in the assessee's claimed individual capacity (although advance tax was paid as HUF); the AAC held penal interest was not chargeable; the Tribunal held the AAC lacked competence to decide the charge of penal interest — raising the fourth question.

Legal Issues Presented

Whether, in the facts and circumstances of this case, the proceedings under section 34 were valid? (Question 1)
Whether the Appellate Assistant Commissioner, while dealing with the assessee's appeal for the assessment year 1947-48, was competent to give any direction in relation to assessment of capital gains and profits arising out of the sale of the textile mills for the year 1948-49? (Question 2)
Whether the amount of Rs. 42,361 (Rs. 25,451 from Rajnandgaon and Rs. 16,910 from Bikaner) could be assessed as remittance of profits? (Question 3)
Whether an appeal to the Appellate Assistant Commissioner against the charge of penal interest (under section 18A) was competent? (Question 4)

Arguments of the Parties

Assessee's Arguments

Mr. Mulla (for the assessee) — on the remittance issue (Question 3): (1) there was no material on record showing any amount was remitted from non-taxable territories to Hinganghat; and (2) even if remittances occurred, they were not remittances of income but moneys received as the assessee's share on partition of the family estate (i.e., proceeds or assets received on partition, not income).
It was also argued (in the context of the penal interest issue, Question 4) that the assessee had paid advance tax as assessed on the HUF and that penal interest should not be charged; further, the appeal against the assessment order as a whole should permit challenge to the penal interest addition.
Mr. Thakkar (for the assessee) — on Question 4: relied on the language of section 30(1) (clauses including "denying his liability to be assessed under this Act") to contend that where an assessee denies liability to be assessed to a particular tax (here, penal interest/interest under section 18A), the assessee has a right of appeal to the Appellate Assistant Commissioner.

Department's Arguments

Mr. Joshi (for the department) — on Question 1: explained that the precautionary individual assessment under section 34 was made pending appeal and that it has now been cancelled following the Supreme Court decision; therefore the question of validity is academic.
Mr. Joshi — on Question 2: the department's position (as reflected in reliance on Tribunal decision) was that the AAC should not be confined strictly to the assessment year on appeal and that directions could be given about the appropriate year; however, the court refers to the Supreme Court decision in Income-tax Officer, Sitapur v. Murlidhar Bhagwan Das that confines AAC's jurisdiction to the assessment year under appeal.
Mr. Joshi — on Question 3: the Tribunal had followed Commissioner of Income-tax v. Annamalai Chettiar and held that amounts brought from non-taxable territories on partition were taxable; the department supported taxing the sums as income remitted under section 4(1)(b)(iii).
Mr. Joshi — on Question 4: argued that interest under sub-section (8) of section 18A is not an imposition of tax but an arithmetical addition calculated when advance tax is unpaid; therefore the clause in section 30(1) should not be given a broad meaning to permit appeals against imposition of penal interest and that the statute's detailed enumeration of appeals shows section 18A was not intended to allow a separate appeal.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Income-tax Officer, Sitapur v. Murlidhar Bhagwan Das [1964] 52 I.T.R. 335 (S.C.)	The jurisdiction of the Appellate Assistant Commissioner under section 31 (and related appellate provisions) is confined to the assessment order of the particular year under appeal; AAC cannot decide the appropriate assessment year for an item when dealing with an appeal for another year.	The court applied this authority to answer Question 2: held that AAC was not competent to direct that the capital gains be assessed in 1948-49 while deciding the 1947-48 appeal; accordingly Question 2 was answered in the assessee's favour (negative to department's position).
Veerappa Chettiar v. Commissioner of Income-tax [1950] 18 I.T.R. 396 (Madras High Court)	On partition of a Hindu undivided family, the entire family estate (capital assets and accretions in the shape of income/profits) constitutes one composite property; on partition a member receives an allotment of his share of the family estate and that share is not to be artificially dissected into capital and profits for taxation as remitted income.	The court relied on this decision for Question 3 and agreed that sums received by the assessee on general partition lost their character as income/profits arising in non-taxable territories — therefore such sums brought into the taxable territory were not taxable as remitted income.
Commissioner of Income-tax v. Annamalai Chettiar	Authority (as followed by the Tribunal) for the proposition that amounts brought from non-taxable territories to taxable territories on partition could be taxable as remitted income.	The Tribunal followed this decision to include the remitted sums in taxable income. The court considered the Tribunal's reliance but disagreed with that outcome in the present facts, preferring Veerappa Chettiar.
C.A. Abraham v. Income-tax Officer, Kottayam (Supreme Court)	Penalty (additional tax designated as penalty) imposed by the Act as part of the machinery for assessment of tax liability is in substance a tax; in examining machinery provisions the Court treated such additions as part of tax assessment.	The court cited Abraham to treat penal interest/interest under section 18A (added to tax under sub-section (8)) as an addition to tax that is part of assessment machinery, supporting the assessee's right to appeal under section 30(1) where he denies liability to be assessed under the Act.
Commissioner of Income-tax v. Bhikaji Dadabhai & Co. [1961] 42 I.T.R. 123 (S.C.)	Confirmed that provisions relating to imposition of penalty fall within the expression "levy, assessment and collection of income-tax" and that penalty is in character akin to tax for these purposes.	The court relied on this authority (and Abraham) to support the proposition that additions under machinery provisions (including interest/penalty) are to be treated as tax, thus permitting appeal when an assessee denies liability to be assessed in respect of such addition.
Commissioner Of Income-Tax, Bombay City, Bombay v. Jagadishprasad Ramnath… (Bombay decision)	Earlier decision drawing a distinction between a tax and a penal interest or penalty and suggesting that an assessee denying liability to pay penalty/pinal interest cannot be said to deny his liability to be assessed under the Income-tax Act.	The court considered this decision but observed it pre-dated Abraham and Bhikaji Dadabhai; the court held that, in light of the later Supreme Court authorities, that earlier distinction could not be maintained as an obstacle to the assessee's right of appeal where he denies liability to be assessed to interest under section 18A, particularly when appealing the assessment as a whole.

Court's Reasoning and Analysis

The court answered each referred question by applying statutory language and relevant precedents. The court's analysis proceeded as follows:

Question 1 (validity of proceedings under section 34): The court noted that the individual assessment made under section 34 had been cancelled after the Supreme Court decision confirming HUF status up to 1947-48. These facts were stated by Mr. Joshi for the department. Because there was no longer an outstanding individual assessment, the question became academic and it was unnecessary to answer it.
Question 2 (AAC competence to direct capital gains be assessed in another year): The court described the factual background (sale of textile mill on 25 October 1946; ITO included capital gains in 1947-48; AAC held not assessable in 1947-48 and directed assessment in 1948-49). The court relied on the Supreme Court decision in Income-tax Officer, Sitapur v. Murlidhar Bhagwan Das which holds that the AAC's jurisdiction under section 31 is confined to the assessment order of the year under appeal — AAC can decide whether a particular sum is income of that year but cannot decide the appropriate year for assessment of the income when hearing an appeal for a different year. Applying that principle, the court concluded AAC lacked jurisdiction to direct assessment in 1948-49 while deciding the 1947-48 appeal and answered Question 2 in the negative (in favour of the assessee).
Question 3 (whether Rs. 42,361 could be assessed as remittance of profits): The court began by setting out section 4(1)(b)(iii) and observed that to tax a sum as remitted income the department must show the sum was in the nature of income or profits accrued to the assessee outside the taxable territories. The court analyzed the legal effect of a general partition of a Hindu undivided family: on partition the family estate (capital assets, cash, outstanding profits) is pooled and divided; the share allotted to a member on partition becomes his share of assets and does not retain its character necessarily as income/profits. The court found no material that partition separately allocated capital and profits; the partition was general. The court relied on Veerappa Chettiar v. Commissioner of Income-tax (Madras) which held that sums received on partition are the recipient's share of the family estate (composite property) and are not taxable as remitted profits. The Tribunal had followed Commissioner of Income-tax v. Annamalai Chettiar to hold the sums taxable; the court disagreed with the Tribunal and, following Veerappa Chettiar, held the sums were not income/profits brought in from non-taxable territories and thus were not taxable as remittances. Accordingly the court answered Question 3 in the negative (in favour of the assessee).
Question 4 (competence of AAC to hear appeal against charge of penal interest under section 18A): The court examined the statutory appeal provision, section 30(1), and competing constructions. Mr. Thakkar argued that where an assessee is "denying his liability to be assessed under this Act" the clause provides a right of appeal and that the levy under section 18A is a tax. Mr. Joshi argued the charging of interest under section 18A is not an imposition of tax but a mechanical arithmetical calculation and that the statute's detailed enumeration of appealable items (including explicit references to certain penalty sections) excludes section 18A. The court considered controlling Supreme Court authorities: C.A. Abraham and Bhikaji Dadabhai & Co., which treated penalties/additions imposed by machinery provisions of the Act as being in the nature of tax (part of the assessment machinery). Section 18A(8) expressly provides that the amount of interest determined shall be added to the tax as determined on regular assessment; thus the interest is an addition to tax under the legislative assessment machinery. On this basis the court concluded that the amount of interest under section 18A is a tax (or addition to tax) for purposes of appeals, and that when an assessee denies liability to be assessed to that addition he has a right of appeal under the clause in section 30(1). The court addressed Bombay decisions (e.g., Jagadishprasad) that drew a distinction between tax and penal interest, but observed those decisions pre-dated Abraham and Bhikaji Dadabhai; in light of the later Supreme Court decisions the distinction could not be maintained as a bar. The court also rejected reliance on subordinate rules (rule 20) to narrow statutory meaning. The court further noted that where an appeal is filed against the assessment as a whole (not solely an appeal limited to section 18A), it is open to the assessee in that appeal to challenge penal interest. On these grounds the court answered Question 4 in the affirmative (in favour of the assessee).

Holding and Implications

Final Disposition:

Question 1: The question is now academic and the court did not answer it.
Question 2: Answered in the negative — in favour of the assessee (AAC was not competent to direct assessment of the textile mill capital gains for 1948-49 while deciding the 1947-48 appeal).
Question 3: Answered in the negative — in favour of the assessee (the amounts of Rs. 25,451 and Rs. 16,910 received on partition were the assessee's share of assets and were not taxable as remitted profits under section 4(1)(b)(iii)).
Question 4: Answered in the affirmative — in favour of the assessee (the assessee had the right to raise before the AAC, in an appeal against the assessment as a whole, the validity of the imposition of penal interest under section 18A, because interest under section 18A is an addition to tax under the assessment machinery and the assessee was denying his liability to be assessed to it).

Immediate consequences for the parties:

The assessee succeeds on Questions 2 and 3 (negative answers) and on Question 4 (affirmative answer). Question 1 is academic and not decided.
The department is ordered to bear half the costs of the assessee.

Broader implications:

The court applied Supreme Court authorities (notably C.A. Abraham and Bhikaji Dadabhai & Co.) to treat additions made under assessment machinery (including interest under section 18A(8)) as additions to tax for purposes of appeal rights under section 30(1). The opinion considered earlier authorities (including a Bombay decision) but explained that later Supreme Court decisions altered the legal landscape. The opinion does not expressly state that it establishes a new precedent beyond its application of those authorities to the facts before the court.

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Mathuradas B. Mohta v. Commissioner Of Income-Tax, Poona.

Tambe, J.:— This is a reference under section 66(1) of the Indian Income-tax Act and four questions have been referred to us. The first two questions relate to the assessment year 1947-48, and the third and the fourth questions relate to the assessment year 1950-51. The first question now has remained only academic and the answer to the second question is concluded by the decision of the Supreme Court. We will deal with each question separately and consider the facts relevant to that question while dealing with these questions.

2. The assessee before us is Seth Mathuradas Bulakhidas Mohta, Hinganghat. He had been assessed in the status of Hindu undivided family in the assessment year 1947-48 and has been assessed in the status of individual in the assessment year 1950-51. The first question that has been referred is in the following terms:

“Whether, in the facts and circumstances of this case, the proceedings under section 34 were valid?”

3. The facts relevant to this question in brief are: In the assessment year 1944-45 Seth Mathuradas Mohta filed his return in the status of an individual, and since then he had been filing his return every year in the status of individual all through. His claim was that there was a partition among the members of the Hindu undivided family on October 16, 1944, and therefore from the year 1944-45 he was liable to be assessed as an individual. The Income-tax Officer did not accept this contention of Seth Mathuradas and he was being assessed in the status of a Hindu undivided family. In the assessment year 1947-48 also Seth Mathuradas had been assessed in the status of Hindu undivided family. There had been an appeal by Seth Mathuradas against the decision of the Income-tax Officer. The Income-tax Officer, therefore, thought it proper to take precautionary measure by having the precautionary assessment made against Seth Mathuradas in his capacity as individual also. The Income-tax Officer, therefore, issued a notice under section 34 for that purpose, and ultimately an assessment against him in his capacity as an individual also has been made for the same income for which there had been an order of assessment in his capacity of a Hindu undivided family. The matter has ultimately been decided by the Supreme Court, and it appears that as a result of the Supreme Court decision Seth Mathuradas is liable to be assessed in the status of Hindu undivided family till the assessment year 1947-48. We are here concerned with the assessment year 1947-48. This being the final result flowing from the decision of their Lordships of the Supreme Court, the Income-tax Officer has now cancelled the assessment of Seth Mathuradas in his individual capacity. Mr. Joshi for the department has stated these facts before us in the course of proceedings of this reference. That being the position, and there being now no outstanding assessment against Seth Mathuradas in his capacity as an individual, the question whether the notice issued under section 34 was valid or otherwise has become only academic. In the circumstances it is no more necessary to answer question No. 1.

4. The second question is in the following terms:

“Whether the Appellate Assistant Commissioner, while dealing with the assessee's appeal for the assessment year 1947-48, was competent to give any direction in relation to assessment of capital gains and profits arising out of the sale of the textile mills for the year 1948-49?”

5. The facts relevant for the purpose of answering this question, in brief, are: The textile mill belonging to Seth Mathuradas had been sold on October 25, 1946. The sale resulted in capital gain. The Income-tax Officer included the capital gains in the total income of the assessee for the assessment year 1947-48. Feeling aggrieved, the assessee had taken an appeal to the Appellate Assistant Commissioner, and the Appellate Assistant Commissioner, in dealing with the assessee's appeal for the assessment year 1947-48, held that the amount of capital gain was not assessable in the assessment year 1947-48. After recording his finding the Appellate Assistant Commissioner further gave a direction that the said capital gains and profits arising out of the sale of the textile mills were taxable in the assessment year 1948-49, The second question has arisen out of this direction. The question that arises to be considered is whether, in dealing with the case for the assessment year 1947-48, the Appellate Assistant Commissioner was competent to give direction in respect of this capital gain to assess it in the assessment year 1948-49. The matter stands concluded by the decision of their Lordships of the Supreme Court in Income-tax Officer, Sitapur v. Murlidhar Bhagwan Das [1964] 52 I.T.R 335 S.C.. Their Lordships have held that the jurisdiction of the Appellate Assistant Commissioner under section 31 of the Act was strictly confined to the assessment order of that particular year under appeal. The Appellate Assistant Commissioner no doubt was competent to hold whether a particular item or a particular amount was income of that assessment year, but he has no jurisdiction further to decide in that appeal the appropriate year in which the said income would fall. That being the position, the answer to the second question will have to be in favour of the assessee. We, accordingly, answer the second question in the negative.

6. The third question is in the following terms:

“Whether, in the facts and circumstances of this case, the amount of Rs. 42,361 (Rs. 25,451 from Rajnandgaon and Rs. 16,910 from Bikaner) could be assessed as remittance of profits?”

7. Before we state the facts it may be stated that in the question which has been referred to, the respective figures given are Rs. 97,954, Rs. 51,035 and Rs. 46,910. At the time the statement of the case was prepared, the assessee had made a suggestion that these figures be corrected, but the suggestion does not appear to have been accepted by the Tribunal. Before commencing the argument on the third question, Mr. Joshi, learned counsel for the department, stated that the correct figures are Rs. 42,361 instead of Rs. 97,945, Rs. 25,451 instead of Rs. 51,035, and Rs. 16,910 instead of Rs. 46,910. In view of the statement of Mr. Joshi, we have reframed the question as stated above by giving the correct figures.

8. Facts relevant for the purpose of this case are: In dealing with the assessment for the assessment year 1950-51, the Income-tax Officer has included the amount of Rs. 25,451 as income brought by the assessee from Rajnandgaon (as territory outside the taxable territory) into the taxable territory, and Rs. 16,910 from Bikaner (another territory outside the taxable territory) into the taxable territory and had included these two amounts in the total income of the assessee in the assessment year 1950-51. An appeal was taken by the assessee, challenging the validity of the order of the Income-tax Officer including these two amounts in the total income of the assessment year 1950-51.

9. Now, the contentions raised by Mr. Mulla who appeared for the assessee before the Appellate Assistant Commissioner were two-fold. In the first instance he contended that there was no material on record showing that any amount was remitted from the non-taxable territories to Hinganghat, the head office of the assessee. His second contention was that the remittances, even if any from the non-taxable territories to Hinganghat, were not remittances of his income. In short, the remittances were of moneys which he had received as his share in the partition of the joint family. The Appellate Assistant Commissioner did not accept Mr. Mulla's first contention that there were no remittances. The other contention, however, the Appellate Assistant Commissioner accepted. He has agreed with Mr. Mulla that what could be taxed in the hands of the assessee who was an individual, was only the amounts of his income brought from non-taxable territories to Hinganghat. He then went into the question as to the extent of the profits available to the assessee in respect of his business from October 16, 1944, i.e, the date on which the partition had taken place, up to 1949-50. The amount found by him was Rs. 49,287. He further found that up to the assess-met year 1949-50 about a lakh of rupees were brought by the assessee from non-taxable territories to Hinganghat. On these findings he held that in the assessment year 1950-51 the amounts brought by him were not liable to be included in the total income of the assessee. The department took an appeal against this decision of the Appellate Assistant Commissioner to the Tribunal. The Tribunal did not disagree with the finding of the Appellate Assistant Commissioner that when in a partition an assessee takes several business concerns as a result of partition, the profits thereof are capitalized, turning them into assets. The Tribunal, however, following the decision in Commissioner of Income-tax v. Annamalai Chettiar, came to the conclusion that even in such a case the amounts when brought from nontaxable territories to taxable territories would be taxable and are liable to be included in the total income of the assessee. The Tribunal has observed that in the absence of any other decision it was following the decision in Commissioner of Income-tax v. Annamalai Chettiar. On this finding of the Tribunal, at the intance of the assessee, the aforesaid third question has been referred.

10. The question that arises is whether the amount which the assessee gets in a general partition between different members of a Hindu undivided family is income and profits accruing or arising to him in his capacity as a separated member. It is not in dispute that the aforesaid amounts have been included by the Tribunal under the provisions of sub-clause (iii) of clause (b) of sub-section (1) of section 4 of the Act. The material part of the section is in the following terms:

“4. (1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which—………

(b) if such person is resident in the taxable territories during such year,—………

(iii) having accrued or arisen to him without the taxable territories before the beginning of such year and after the 1st day of April, 1933, are brought into or received in the taxable territories by him during such year……….,”

11. On the language of this section, when the department claims that a particular sum brought from non-taxable territories to the taxable territories is taxable, it must establish that the sum was in the nature of income or profits of the assessee accrued to him or arisen to him in non-taxable territories. The question to be considered is whether the amount, though originally formed part of the profits of the Hindu undivided family, when on a general partition it is received by a member, still retains its original character of profit or income. In our opinion, the original character undergoes change. What happens in a partition is, all the family properties, in whomsoever hands they may be, are thrown in a hotchpot; capital assets, ready assets, profits, all together are thrown in a hotchpot, and it is the totality of these things which is then divided among the members of the joint Hindu family in accordance with their share. The character of the property in the hands of members of the family on being received on partition is his share of assets of the family property, whatever its original character may be. It is not now in dispute that there was a general partition and in the general partition the assessee had received certain amounts, and the aforesaid amounts brought in the assessment year from Bikaner and Rajnandgaon to Hinganghat are out of those amounts. On the view taken by us, what was brought by the assessee to Hinganghat was a part of his assets that had fallen to his share on partition and was not therefore in its nature income or profits that had accrued to him in non-taxable territories. The view taken by us finds support in a decision of the Madras High Court, Veerappa Chettiar v. Commissioner of Income-tax. In that case the facts were, two brothers who were members of a Hindu undivided family, carried on a money-lending business in Colombo. They partitioned their property at some time. Under the partition deed, the elder brother took over the entire assets of the Colombo business consisting of its properties outstanding and profits that had been earned by the business till then and agreed to pay to his younger brother, the assessee, a certain sum as for his half share of the family properties including the money-lending business. During the relevant accounting year the assessee brought one lakh of rupees from Colombo to British India. The income-tax authorities held that out of the sum of rupees one lakh at the time of the partition, Rs. 36,000 and odd was the share which the assessee had obtained in the profits of the Colombo money-lending business. They therefore held that amount to be taxable. The High Court held that the amount was not taxable. The reasons given by the learned judges for this view are in the following terms at page 401 of the report:

“On a partition all that a member can claim is an allotment of his proper share of the family estate with reference to the existing assets and the number of coparceners and this allotment may be made in meal or in malt. One sharer may get the landed properties of the family for his share, another may get the outstandings and a third member may get the cash and movables. What is divided at a partition is the entire family estate consisting of the original family estate with all subsequent accretions to that estate in the shape of income or profits, the whole thing constituting one composite property without allocation to capital or profits. On a partition the sole right of a member of the family is to get an allotment of his share in the assets available after discharging the family debts. For the purpose of ascertaining the assets existing at the date of the partition it is quite immaterial whether the family possessed them by way of capital or by way of subsequent accretions in the shape of profits. The sums earned by the family as profits might be applied in discharge of capital, liabilities and capital assets of the family might be applied in discharge of current liabilities of the family. What is distributed amongst the sharers at the partition is the net residue of the estate after payment of family debts and no artificial dissection of the allotments into capital and profits is necessary and in many cases would be impossible.”

12. Such exactly is the position here. There is no finding here that there was at the partition separate division of capital assets and profits. The division of properties appears to be a general one. That being the position, in our opinion, the Tribunal was, with respect, in error in holding that the said two amounts were taxable. It is true that the decision on which the Tribunal has placed reliance appears to be supporting the contention of the department, but it is clear from the observations made at the concluding portion of the judgment in Veerappa Chettiar v. Commissioner of Income-tax, at page 402, that the view is not adhered to. With respect, we are in agreement with the view expressed in Veerappa Chettiar v. Commissioner of Income-tax.

13. From the observations of the Tribunal in paragraph 12 of its order, it appears that the Tribunal has followed the decision in Commissioner of Income-tax v. Annamalai Chettiar because the decision in Veerappa Chettiar v. Commissioner of Income-tax [1950] 18 I.T.R 396. or any other decision was not brought to its notice. For the reasons stated above, in our opinion, the answer to the third question will have to be in favour of the assessee. We accordingly answer the third question in the negative.

14. This brings us to the fourth and the last question as follows:

“Whether, in the facts and circumstances of this case, an appeal to the Appellate Assistant Commissioner against the charge of penal interest was competent?”

15. Facts giving rise to the question, in brief, are: We have already said that in the assessment year 1947-48 the assessee was claiming that he should be assessed in that year in his status as an individual. Advance tax however was not paid by him in his capacity as an individual, but as the department was insisting on taxing him in his status of a Hindu undivided family advance tax has been paid by him in that capacity. The Income-tax Officer took the view that the assessee in his status as an individual was a distinct independent entity. He was in this year claiming the status as an individual and, therefore, under sub-section (3) of section 18A of the Act there was an obligation on him to submit an estimate of his income and pay an advance tax. He not having done so, he was liable to pay interest as provided in sub-section (8) of section 18a. The Income-tax Officer accordingly calculated the amount of interest at Rs. 24,214-11-0 and added it to the demand of the amount due from the assessee. The assessee had taken an appeal against the assessment order and one of the grounds taken was that the Income-tax Officer was in error in holding that in the circumstances of the case penal interest was chargeable. It was argued on behalf of the assessee that the full payment of advance tax was made under section 18A, as at that time the authorities had held that there was no partition and the department had been assessing the assessee as a Hindu undivided family. The Appellate Assistant Commissioner accepted this contention and held that the penal interest was not chargeable. In an appeal taken by the department before the Tribunal, this finding of the Appellate Assistant Commissioner was challenged, and the contention raised was that the Appellate Assistant Commissioner was incompetent to entertain an appeal on the question of charge of penal interest. The Tribunal upheld this contention of the department and held that the Appellate Assistant Commissioner was not justified in entertaining that contention. In this view of the matter, the Tribunal set aside the order of the Appellate Assistant Commissioner in this respect. What the Tribunal observed in paragraph 13 of its order is as follows:

“We would therefore set aside the Appellate Assistant Commissioner's order on that point on the ground that he was incompetent to go into the contention of the assessee in regard to charge of interest of Rs. 24,215.”

16. On this finding arises the fourth question. The question to be considered is whether in the circumstances the Appellate Assistant Commissioner had jurisdiction to entertain an appeal as regards the validity or otherwise of the imposition of penal interest under section 18A of the Act. It is a well settled principle of law that a right of appeal is a creature of statute and no person can claim by way of right a right to appeal. An appeal therefore from a certain order would not lie unless a right to file an appeal against it has been conferred by law. Section 30 is the relevant section in the Act relating to appeals to the Appellate Assistant Commissioner against the assessment order. The material section is sub-section (1) of section 30, and it is in the following terms:

“30. (1) Any assessee objecting to the amount of income assessed under section 23 or section 27, or the amount of loss computed under section 24 or the amount of tax determined under section 23 or section 27, or denying his liability to be assessed under this Act, or objecting to the cancellation by an Income-tax Officer of the registration of a firm under sub-section (4) of section 23 or to a refusal to register a firm under subsection (4) of section 23 or section 26A or to make a fresh assessment under section 27, or objecting to any order under sub-section (2) of section 25 or section 25A, or sub-section (2) of section 26 or section 28, made by an Income-tax Officer, or objecting to any penalty imposed by an Income-tax Officer under sub-section (6) of section 44E or sub-section (5) of section 44F or sub-section (1) of section 46, or objecting to a refusal of an Income-tax Officer to allow a claim to a refund under section 48, 49 or 49F, or to the amount of the refund allowed by the Income-tax Officer under any of those, sections, and any assessee, being a company, objecting to an order made by an Income-tax Officer under sub-section (1) of section 23a, may appeal to the Appellate Assistant Commissioner against the assessment or against such refusal or order:

Provided that no appeal shall lie against an order under sub-section (1) of section 46 unless the tax has been paid:

Provided further that where the partners of a firm are individually assessable on their shares in the total income of the firm, any such partner may appeal to the Appellate Assistant Commissioner against any order of an Income-tax Officer determining the amount of the total income or the loss of the firm or the apportionment thereof between the several partners, but in respect of matters which are determined by such order, may not appeal against the assessment of his own total income:

Provided further that a shareholder in a company in respect of which an order under section 23A has been passed by an Income-tax Officer, may not in respect of matters determined by such order appeal against the assessment of his own total income.”

17. It is the contention of Mr. Thakkar that this section in express terms confers a right to an assessee when the assessee has been “denying his liability to be assessed under the Act.”. The argument of Mr. Thakkar is that the penalty provided under section 18A of the Act is a tax within the meaning of the Act. The Income-tax Officer had assessed the assessee to this tax and has imposed this tax on him. The assessee had been denying his liability to be assessed to this tax. The contention of the assessee had not been accepted by the Income-tax Officer. In these circumstances the assessee had a right of appeal to challenge before the Appellate Assistant Commissioner this part of the order of the Income-tax Officer. Mr. Thakkar further argues that apart from it and even assuming that the assessee had no right to file an appeal only in respect of imposition of penal interest, it is open to the assessee to challenge the Income-tax Officer's finding in this respect when he has filed an appeal against the assessment order as a whole. He has placed reliance on certain ‘observations in Commissioner Of Income-Tax, Bombay City, Bombay v. Jagadishprasad Ramnath…Assessee., the decision on which the Tribunal itself has relied. Mr. Joshi on the other hand contends that charge of interest under sub-sec tion (8) of section 18a is not imposition of any tax. Sub-section (8) deals only with arithmetical calculations to be made in accordance with the provisions of the Act when it is found that the assessee who was liable to pay an advance tax has failed to pay the advance tax. If the assessment stands, the amount added by way of interest must stand.’ If the assessment fails or is modified, the amount of interest would accordingly be either deleted or modified. The assessee, therefore, has no right of appeal against the levy of interest under the clause “denying his liability to be assessed under this Act” occurring in section 30 of the Act even when the assessee had filed an appeal against the order of assessment made under section 23 of the Act. The first question that arises is whether the levy of interest under section 18A is levy of tax under the Act. Now “tax” has not been defined in the Act. In considering this question the decision of their Lordships of the Supreme Court in C.A Abraham v. Income-tax Officer, Kottayam, affords guidance. Their Lordships in that case were considering the question whether the penalty provided for in section 28 of the Act could be levied on a partner of a dissolved firm under section 44 of the Act. Section 44 enabled the Income-tax Officer to assess a partner of a dissolved firm in respect of an income of the firm that has been dissolved or discontinued. The assessee was assessed in respect of the income of the dissolved partnership and a penalty under section 28 also had been levied against him under section 28(1)(c). The contention raised on behalf of Abraham before their Lordships was that though section 44 may enable the Income-tax Officer to levy tax on him in respect of income of the dissolved partnership, there was no provision in the Act enabling the income-tax authority to levy penalty under section 28 on him. The question that was being considered by their Lordships was whether the penalty is tax within the meaning of the Act.

18. Now, section 28 provided that an assessee who fell under that section was liable to pay penalty and that the amount of penalty imposed was to be added to the amount of income-tax assessed. Considering the question their Lordships at page 430 of the report observed:

“By section 28, the liability to pay additional tax which is designated penalty is imposed in view of the dishonest contumacious conduct of the assessee. It is true that this liability arises only if the Income-tax Officer is satisfied about the existence of the conditions which give him jurisdiction and the quantum thereof depends upon the circumstances of the case. The penalty is not uniform and its imposition depends upon the exercise of discretion by the taxing authorities; but it is imposed as a part of the machinery for assessment of tax liability.”

19. Another decision of their Lordships in Commissioner of Income-tax v. Bhikaji Dadabhai & Co. also affords guidance. In that case the question considered was whether in spite of repeal of the Hyderabad Income-tax Act power was saved in the Income-tax Officer to levy penalty on an assessee. The Finance Act of 1950, which repealed the Hyderabad Income-tax Act, saved the provisions of the repealed Act relating to “levy, assessment and collection of income-tax”. The question was whether the provisions relating to imposition of penalty fell within the expression “levy, assessment and collection of income-tax”. Their Lordships upheld the contention of the department that the provisions relating to imposition of penalty were saved. Their Lordships, referring to their earlier decision in Abraham's case, observed at page 128 of the report as follows:

“This court regarded penalty as an additional tax imposed upon a person in view of his dishonest or contumacious conduct. It is true that under the Hyderabad Income-tax Act, distinct provisions are made for recovery of tax due and penalty, but that in our judgment does not alter the true character of penalty imposed under the two Acts.”

20. In our opinion, the ratio that emerges from these two decisions of their Lordships of the Supreme Court is that whatever addition is made in the amount of tax by reason of the provisions of the Act which formed part of the machinery of assessment of tax liability, is a tax. Chapter IV of the Income-tax Act relates to deduction and assessment and contains the various provisions relating to the machinery for assessment of tax liability. section 18a as well as section 28 fall under this very Chapter. In Abraham's case, when examining the provisions of various sections relating to the machinery for assessment of tax liability, their Lordships have referred to section 18a also. sub-section (8) of section 18a provides that the amount of interest determined in accordance with the provisions of sub-section (6) “shall be added to the tax as determined on the basis of the regular assessment.” It is thus clear that the amount of interest determined under subsection (8) of section 18a is an addition to the tax. This addition to the tax has been made by reason of the provisions of the section which form part of the general machinery for assessment of tax liability created by the Income-tax Act. That being the position, in our opinion, the amount of penalty is a tax within the meaning of the Act. The assessee had been disputing his liability to pay interest under section 18A. In other words, the assessee was denying his liability to be assessed to tax which is designated as interest under section 18A of the Act. In our opinion, therefore, the assessee would have a right to file an appeal under clause (1) “denying his liability to be assessed under this Act” occurring in section 30 of the Act.

21. Mr. Joshi, however, argues that having regard to the terms of sub-section (1) of section 30, such a construction would not be permissible inasmuch as sub-section (1) provides in detail wherever the legislature intended to confer a right of appeal on an assessee, whether it be in respect of imposition of tax, amount of tax or the imposition of penalty or its amount. Sums added to the amount of tax under the provisions of the Income-tax Act on account of some acts of omission or commission on the part of the assessee are contained in sections 28, 44F, sub-section (1) of section 46 and section 18A. Sub-section (1) of section 30 in express terms mentions sections 28, sub-section (6) of section 44E, sub-section (5) of section 44F and sub-section (1) of section 46, but has made no mention of section 18A. That being the language used in sub-section (1) of section 30, the clause “denying his liability to be assessed under this Act” cannot be given a meaning of wider amplitude as contended for by the assessee. It is no doubt true that subsection (1) of section 30 confers a right of appeal in respect of orders under section 28 and other sections which empower the Income-tax Officer to add certain amounts to tax and does not in express terms make reference to section 18A. That by itself, in our opinion, would not be a sufficient ground for giving a limited meaning to the clause as contended for by Mr. Joshi. Mr. Joshi has also made a reference to the two decisions on which the Tribunal has placed reliance in this respect and has contended that no appeal lies against the order made under section 18A. These decisions no doubt to a certain extent support the contention of Mr. Joshi, but the view taken by this court in Commissioner Of Income-Tax, Bombay City, Bombay v. Jagadishprasad Ramnath…Assessee. Was that there was a clear distinction between a tax and a penalty or penal interest, and, therefore, an assessee who merely denies his liability to pay penalty or penal interest cannot be said to deny his liability to be assessed under the Income-tax Act. It is to be noticed that the decision in Abraham's case and Bhikaji Dadabhai's case [1961] 42 I.T.R 123. were then not available. In view of the decision of their Lordships, it can hardly be said that any material distinction between “tax” and “penalty” has remained. However, it is not necessary for us to go into the question further. All that has been held by this court is that the assessee is not entitled to a right of appeal merely against an order of the Income-tax Officer imposing penal interest under section 18A of the Income-tax Act for failure to pay advance tax. In the instant case the appeal has not been filed by the assessee merely against an order made by the Income-tax Officer under section 18A of the Act, but the appeal is filed against the order of assessment as a whole and one of the grounds therein is that the addition of interest is bad in law. In Jagdish Prasad's case, the learned Chief Justice in delivering the judgment of the court observed at page 199:

“Therefore, the scheme of the Act is that penal interest must follow upon the regular assessment. The appeal should be against the regular assessment and in the regular assessment it should be open to the assessee to take all points which may legitimately not only reduce the taxable income or the tax to be paid, or with regard to the proper head under which the income should fall, but also reduce the quantum of penal interest, and the legislature having provided for this in the regular appeal itself, did not think it necessary that a separate right of appeal should be given to the assessee to appeal against the quantum of penal interest.”

22. Having regard to these observations, all that can be said on the basis of this decision is that an appeal merely against the order under section 18A would not lie but in an appeal against an order of assessment it should be open to the assessee to challenge the order of the Income-tax Officer under section 18A of the Act. This decision therefore does not come in the way of the assessee. The other decision to which Mr. Joshi made a reference is also a decision earlier than Abraham's case; a distinction has been drawn between a tax and a penal interest and it has been held that merely because the interest is added to the tax it cannot be said that the provision relating to the addition of interest is a process of assessment of the income. In view of the decision of their Lordships of the Supreme Court, in our opinion, similar line of reasoning cannot any more be pursued.

23. Mr. Joshi also referred us to rule 20 of the Rules and on the basis of that rule he argued that the amount of interest is added only after the net amount as tax has been determined by the Income-tax Officer, and this shows that the amount of interest is not tax. It is difficult to accept the suggestion made by Mr. Joshi that the provisions of the Act should be construed with the aid of rules framed under the Act.

24. For the reasons stated above, in our opinion, the answer to the fourth question will also have to be in favour of the assessee. We accordingly answer the fourth question in the affirmative.

25. In the result, the first question is now academic and it is not necessary to answer that question, the second question is answered in the negative and in favour of the assessee, the third question is answered in the negative and in favour of the assessee, and the fourth question is answered in the affirmative and in favour of the assessee. In the circumstances, the department shall bear half the costs of the assessee.

Mathuradas B. Mohta v. Commissioner Of Income-Tax, Poona.

Structured Summary of the Opinion — Reference under section 66(1) of the Income-tax Act

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Department's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Mathuradas B. Mohta v. Commissioner Of Income-Tax, Poona.

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