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Commissioner Of Income-Tax v. Naraindas Dwarkadas.
Factual and Procedural Background
This reference arises under section 66(1) of the Income-tax Act, 1922. The core question posed to the Court was whether, on the facts and circumstances, the Income-tax Officer (ITO) had validly reopened the assessments of the firm M/s. Naraindas Dwarkadas for the assessment years 1951-52 and 1952-53 (previous years Samvat 2006 and 2007).
The firm consisted of three partners, one being Bhagwandas Naraindas. Bhagwandas's sources of income were: (1) his individual share of the firm's profits and (2) dividends. For the relevant years Bhagwandas filed personal returns declaring himself a resident and was assessed at resident rates. After the initial assessments, the ITO learned that Bhagwandas had left India on August 31, 1949 and remained abroad until December 2, 1958. The ITO concluded Bhagwandas should have been assessed as a non-resident and at the maximum rate, and therefore reopened Bhagwandas's assessments under section 34.
In reassessment proceedings Bhagwandas filed returns indicating non-resident status and, belatedly, a declaration under section 17(1) (filed 20 January 1960). The ITO refused to condone the delay and completed revised assessments taxing Bhagwandas at the non-resident maximum rate. Bhagwandas appealed; the Appellate Assistant Commissioner (AAC) accepted Bhagwandas's contention that a non-resident partner's share should be assessed on the firm under the second proviso to section 23(5)(a), cancelled the revised assessments against Bhagwandas, and directed that the income of the non-resident partner be assessed on the firm at non-resident rates (order dated 20 March 1961).
Pursuant to that direction, the ITO issued notices under section 34 on 2 March 1961 in the name: “Shri Bhagwandas Naraindas, non-resident, as represented by the firm, M/s. Naraindas Dwarkadas, Picket Road, Bombay”. The ITO then assessed the firm's accounts by adding Bhagwandas's share and taxed it at the maximum rate. Those reassessment orders were set aside by the Tribunal, which found multiple jurisdictional defects; the revenue referred the question to this Court under section 66(1).
Legal Issues Presented
- Whether, on the facts and circumstances of the case, the Income-tax Officer had validly reopened the assessments of the firm M/s. Naraindas Dwarkadas for the assessment years 1951-52 and 1952-53.
- Who was the proper assessee against whom reassessment proceedings were initiated pursuant to the Appellate Assistant Commissioner's direction of 20 March 1961 (the individual partner Bhagwandas or the firm)?
- Whether the notices issued under section 34 (dated 2 March 1961) satisfied the condition precedent of serving notice upon the entity to be reassessed (i.e., whether the firm itself was properly served).
- Whether the ITO was required to obtain the prior permission of the Commissioner under section 34(1)(a) for reopening assessments and, if so, whether such permission was obtained (this was a contention raised before the Tribunal and considered in the proceedings).
Arguments of the Parties
Revenue's Arguments (Mr. Hajarnavis)
- The words “assessed”, “assessment” and “assessee” in section 23(5)(a)(ii) must be read flexibly; the term “assessee” can mean the person whose income is computed, and in a registered firm the assessment of the firm and the partners is a single operation — therefore the notice addressed as it was is a valid notice on the firm.
- Reassessment proceedings were, in fact, initiated against the individual partner Bhagwandas, and the Tribunal erred in treating the reassessment as against the firm.
- Initiation of proceedings against Bhagwandas was not time-barred in view of section 34(3), since the initiation followed a direction given by the Appellate Assistant Commissioner under section 34.
- Alternatively, even if the reassessed entity is the firm, the reassessment order is valid because a proper notice was given (the notice's wording was said to be sufficient to indicate it was on the firm).
Assessee's / Tribunal's Contentions
- When a partner is a non-resident, his share of the firm's income must be assessed on the firm under the second proviso to section 23(5)(a); therefore reassessment against the individual was improper.
- Because the reassessment was undertaken under section 34(1)(a), the ITO should have obtained prior permission of the Commissioner for reopening assessments for the two years; such permission was not obtained.
- The notice for reassessment (dated 2 March 1961) was not served on the firm but on the individual Bhagwandas (served “as represented by the firm”), and serving such a notice on the individual, rather than on the firm itself, failed the condition precedent for valid reassessment against the firm. On these grounds the Tribunal set aside the reassessment orders against the firm.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax v. Kanpur Coal Syndicate [1964] 53 ITR 224 SC | The Income-tax Officer must in the first instance exercise the option under section 3 to assess either the firm or the partners; where the ITO assesses the firm instead of partners, the same income cannot later be reassessed in the hands of the partners. | The Court treated the decision as establishing the settled principle that the option to assess firm or partners must be initially exercised by the ITO, and applied that principle to explain assessment mechanics under section 23 and to situate the present dispute about who (firm or partner) is the proper entity to be assessed. |
| Badridas Daga v. Commissioner Of Income Tax (Privy Council) | Observations that the words "assessment", "assessee" and "assess" in the Act can have different meanings depending on context; in section 23 'assessee' may mean the person whose income is being computed. | The Court relied on and quoted the Privy Council passage but distinguished it: for a non-resident partner of a registered firm, the operative language of section 23(5) and its second proviso leaves no ambiguity — the firm is the assessee and the Court held the Privy Council's observations were not helpful to the revenue's argument in this context. |
Court's Reasoning and Analysis
The Court first analysed the statutory text, focusing on section 23(5) and, in particular, the second proviso to clause (a). The operative starting point is the non-obstante clause in subsection (5): the subsection applies "when the assessee is a firm and the total income of the firm has been assessed under" earlier subsections. For a registered firm the subsection directs that the firm's sum payable not be determined but that the total income of each partner (including his share of the firm's income) be assessed; the second proviso modifies this where a partner is non-resident, by requiring that the non-resident partner's share "shall be assessed on the firm" at the rates applicable to the non-resident and the sum so determined be paid by the firm.
Applying that textual analysis, the Court concluded that where the second proviso applies (as here) the assessee, the entity to be assessed and the entity liable to pay is the firm. The Court therefore rejected the revenue's argument that, by reference to varying meanings of 'assess' and 'assessee' (as discussed in the Privy Council's decision in Badridas Daga), the reassessments could be treated as targeted at the individual partner. The Court distinguished the Privy Council's statement as not assisting the revenue because in the present factual matrix the statutory language is clear and unambiguous: the firm is the assessee for the non-resident partner's share.
The Court then addressed the Tribunal's principal ground for quashing the reassessments: the notices issued on 2 March 1961. The condition precedent to valid reassessment under section 34 is that the entity to be reassessed be given notice as provided by that section. The notices in question were addressed and served in the name “Shri Bhagwandas Naraindas, non-resident, as represented by the firm, M/s. Naraindas Dwarkadas...”. The Court held that the tenor of those notices established that they were notices on the individual partner Bhagwandas served through his alleged representative (the firm). They were not notices on the firm itself, nor did they give the firm any intimation that reassessment proceedings were proposed against the firm. A firm may be represented by partners, but a firm does not represent a partner; therefore service "on Bhagwandas as represented by the firm" is not service on the firm.
Consequently, because the reassessments were directed against the firm (as required by the AAC's order and by the second proviso of section 23(5)(a)) but the statutorily required notice was not served on the firm, the proceedings were held to be invalid ab initio. The Court considered this single defect sufficient to dispose of the reference and did not consider it necessary to decide the other grounds relied upon by the Tribunal (for example, the contention about the Commissioner’s permission under section 34(1)(a)). The Court also noted it was not persuaded by the revenue's submissions and therefore did not call upon the assessee's counsel to reply.
Holding and Implications
Answer to the referred question: In the negative — the reassessment proceedings against the firm were not valid.
Direct consequences and immediate implications:
- The Court held that the reassessment proceedings taken against the firm M/s. Naraindas Dwarkadas were void ab initio because the notices under section 34 were not properly served on the firm (the entity to be reassessed) and instead were served on the individual partner through the firm.
- As a result, the reassessment orders passed against the firm are liable to be set aside (the Tribunal had set them aside and the Court affirmed that conclusion by disposing of the referred question in the negative).
- The revenue was ordered to pay the costs of the assessee (as recorded in the opinion).
The opinion does not announce any broader novel precedent beyond its application and interpretation of section 23(5)(a) (including its second proviso) and its reliance upon the established authority cited; the decision's practical effect is the invalidation of the reassessment proceedings in the particular facts before the Court.
Kantawala, C.J:— This reference is made at the instance of the revenue under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as “the Act”). The question of law referred for our determination is whether, on the facts and in the circumstances of the case, could it be said that the Income-tax Officer had validly reopened the assessments of the firm, M/s. Naraindas Dwarkadas, for the assessment years 1951-52 and 1952-53.
2. As the question shows, the reference relates to the assessment years 1951-52 and 1952-53, for which the relevant previous years are Samvat years 2006 and 2007. The partnership-firm of Messrs. Naraindas Dwarkadas consists of three partners, one of the partners being Bhagwandas Naraindas. The sources of income of Bhagwandas Naraindas during the relevant years were two: (1) his individual share income from the firm of Messrs. Naraindas Dwarkadas, and (2) dividends. For the assessment years 1951-52 and 1952-53, Bhagwandas filed returns of his personal income declaring his status as that of resident and ordinarily resident and he was accordingly assessed by the Income-tax Officer at the ordinary rates applicable to a resident and ordinarily resident.
3. After the initial orders of assessment were made the Income-tax Officer came to know that Bhagwandas had left for the United Kingdom for higher medical studies on August 31, 1949, and was out of India till December 2, 1958. In the opinion of the Income-tax Officer, Bhagwandas should have been assessed in the status of a non-resident and at the maximum rate because he had not filed the requisite declaration prescribed by section 17(1) of the Act. Since the original assessments were not made on that footing the Income-tax Officer reopened the assessments of Bhagwandas under section 34. Pursuant to the notices issued under section 34, Bhagwandas filed two returns showing his status as that of a non-resident. In the course of these reassessment proceedings Bhagwandas also filed a declaration as required by section 17(1). Such declaration was filed on January 20, 1960. Since the declaration was filed much after the prescribed time, Bhagwandas made a request for condonation of delay by the Income-tax Officer in filing of the declaration. The Income-tax Officer declined to condone the delay and accept the declaration and he completed the assessments by bringing to tax the individual income of Bhagwandas at the maximum rate applicable to a non-resident. Aggrieved by the order of the Income-tax Officer Bhagwandas went in appeal against these orders of revised assessments. In the course of the hearing of these appeals it was contended by Bhagwandas that inasmuch as he was a non-resident his share of profit from the firm should have been assessed on the firm under the second proviso to section 23(5)(a) and not on him directly and that accordingly the reassessment orders made upon him were bad in law. This contention of Bhagwandas was accepted by the Appellate Assistant Commissioner while disposing of the appeals and by his order dated March 20, 1961, he cancelled the revised assessments passed against Bhagwandas personally pursuant to notices under section 24. Simultaneously, by this order the Appellate Assistant Commissioner directed the Income-tax Officer that the income of the nonresident partner, Bhagwandas, should be assessed on the firm in which he was a partner and at the rate applicable to a non-resident.
4. Pursuant to the above order and direction of the Appellate Assistant Commissioner, the Income-tax Officer wanted to initiate steps to assess the share income of Bhagwandas in the hands of the firm of Messrs. Naraindas Dwarkadas. The Income-tax Officer, therefore, issued notices for both the years under section 34 on March 2, 1961, and these notices were issued in the following name: “Shri Bhagwandas Naraindas, non-resident, as represented by the firm, M/s. Naraindas Dwarkadas, Picket Road, Bombay”. Before the Income-tax Officer initiation of such reassessment proceedings was challenged on more than one ground. All the grounds were rejected by the Income-tax Officer and the Income-tax Officer added the share income of Bhagwandas in the assessment of the firm of M/s. Naraindas Dwarkadas and subjected it to tax at the maximum rate. These orders of reassessment were challenged in appeal before the Appellate Assistant Commissioner. Aggrieved by the order of the Appellate Assistant Commissioner further appeals were filed before the Tribunal. It was, inter alia, contended before the Tribunal on behalf of the assessee that under the order and direction of the Appellate Assistant Commissioner dated March 20, 1961, the Income-tax Officer was directed to assess the firm in respect of the share of Bhagwandas who was a non-resident in accordance with the second proviso to section 23(5)(a). It was urged on behalf of the assessee that the assessments made by the Income-tax Officer as confirmed by the Appellate Assistant Commissioner were invalid on a number of grounds. It was, inter alia, urged that as action was taken in the present case to initiate reassessment proceedings in view of the provisions of section 34(1)(a), the Income-tax Officer ought to have obtained the permission of the Commissioner of Income-tax for taking action under the said section but such permission was not obtained by him for any of the two years. Even an alternative contention was urged that if initial initiation of reassessment proceedings against Bhagwandas was commenced after obtaining such permission such permission enured to the benefit of the assessee pursuant to the order and direction given on March 20, 1961. It was also contended that for commencement of reassessment proceedings under section 34, serving of a notice upon the entity sought to be reassessed is a condition precedent; that in the present case in view of the order passed by the Appellate Assistant Commissioner the entity to be reassessed was the firm of M/s. Naraindas Dwarkadas; that the notice given in the present case is not served upon the firm but upon the individual, Bhagwandas Dwarkadas; and so the entire initiation of proceedings is without jurisdiction. All these contentions found favour with the Tribunal and the Tribunal set aside the orders of reassessment passed against the firm.
5. Mr. Hajarnavis, on behalf of the revenue, urged that the word “assessee” is used in section 23(5)(a)(ii) in the sense of a person whose income is computed; that in the case of a registered firm the assessment of the firm and the assessment of partners are a single operation; that for the reassessment for the years 1951-52 and 1952-53, it was Bhagwandas who was assessed and so the notice given under section 34 by the Income-tax Officer was a valid notice. He also urged that initiation of these proceedings against Bhagwandas was not time-barred in view of the provisions of section 34(3); as such initiation was made pursuant to a direction given under the order of the Appellate Assistant Commissioner passed under section 34 of the Act. Alternatively, he submitted that even if the assessee whose income is reassessed is a firm it is a valid reassessment order because a proper notice has been given. As we are not impressed with any of the contentions urged on behalf of the revenue we have not considered it necessary to call upon the counsel for the assessee to reply.
6. Section 3 of the Act is a charging section and it, inter alia, provides that where any Central Act enacts that income-tax shall be charged for any year at any rate or rates tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of the Act in respect of the total income of the previous year of every firm or the partners of the firm. In view of the decision of the Supreme Court in Commissioner of Income-tax v. Kanpur Coal Syndicate [1964] 53 ITR 224 SC., it is well-settled that the option to assess given by section 3 of the Act either the firm or the partners threof has to be exercised by the Income-tax Officer in the first instance. Where the Income-tax Officer assessed the firm instead of the partners thereof individually the same income cannot be reassessed in the hands of the partners. This was a case of association of persons but the principle therein laid down has been applied also to the case of a firm and its partners.
7. The first question that we have to decide in the present reference is who is the assessee against whom reassessment proceedings are initiated by the Income-tax Officer pursuant to the order and direction of the Appellate Assistant Commissioner dated March 20, 1961. The argument of Mr. Hajarnavis on behalf of the revenue is that if regard be had to the provisions of section 23(5) of the Act it is quite clear that the reassessment proceedings pursuant to the directions are commenced against the individual partner, Bhagwandas, and the entire approach of the Tribunal was erroneous in having proceeded on the footing that the assessment was against the firm of M/s. Naraindas Dwarkadas. His submission was that if reassessment proceedings pursuant to the order of the Appellate Assistant Commissioner are initiated against Bhagwandas the contentions which found favour with the Tribunal for setting aside the order of reassessment does not hold water. We have, therefore, to consider who is the assessee against whom reassessment proceedings are initiated pursuant to the directions given by the Appellate Assistant Commissioner by his order dated March 20, 1961. Before we deal with the facts it will be necessary to refer to the relevant provisions of section 23 which deal with assessment. For the present purpose we are concerned with sub-section (5) thereof and it is as under:
“23. (5) Notwithstanding anything contained in the foregoing subsections, when the assessee is a firm and the total income of the firm has been assessed under sub-section (1), sub-section (3) or sub-section (4), as the case may be,—
(a) in the case of a registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the snm payable by him on the basis of such assessment shall be determined:…..
Provided further that when any of such partners is a person not resident in the taxable territories, his share of the income, profits and gains of the firm shall be assessed on the firm at the rates which would be applicable if it were assessed on him personally, and the sum so determined as payable shall be paid by the firm:…”
8. The contention of Mr. Hajarnavis on behalf of the revenue is that the words “assessed”, “assessment” and “assessee” have not the same meaning but sometimes they have different meanings and for this purpose reliance was placed by him upon the observations of their Lordships of the Privy Council in Badridas Daga v. Commissioner Of Income Tax. Reliance was placed upon the passage at page 211, which is as under:
“It will be convenient to begin with section 23 which deals with assessment. Some confusion arises from the fact that in the Act the words ‘assessment’ and ‘assessee’ are used in different places with different meanings. Section 2(2) defines ‘assessee’ as ‘a person by whom income-tax is payable’, but the context in section 23 makes it clear that down at least to the middle of sub-section (5)(a) ‘assess’ and ‘assessment’ refer primarily to the computation of the amount of income and ‘assessee’ means primarily a person the amount of whose income is being computed. The section requires the Income-tax Officer to do two things: first to compute or ‘assess’ a person's total income and then to determine the sum payable as tax…In the normal case the person whose income is being computed is the person who pays the tax and for that case these sub-sections also provide for the Income-tax Officer taking the second step and determining the sum payable as tax. But the case of a firm is specially dealt with by sub-section (5). This sub-section only comes into operation after the total income of the firm has been computed or ‘assessed’ under one of the earlier sub-sections.
It draws a distinction between registered and unregistered firms. In the case of a registered firm, the firm itself does not pay income-tax and, therefore, the sub-section directs that the sum payable by the firm shall not be determined, but that each partner's share of the firm's income shall be included in the assessment or computation of the total income of that partner. Thereupon, the sum payable by that partner as tax is to be determined on the basis of that assessment which includes his share of the firm's income.”
9. As observed by their Lordships of the Privy Council, undoubtedly the word “assess”, “assessment” and “assessee” may sometimes have more than one meaning, but we are concerned in the present case with a case of a non-resident partner of a registered firm and so far as he is concerned, if regard be had to the relevant provisions of sub-section (5) of section 23 there is no scope for ambiguity or different meanings being attached to any of these words qua him. The opening part of subsection (5) starts with a non-obstante clause and the ordinary connotation of a non-obstante clause is that notwithstanding anything said earlier the provisions of what is stated in the sub-section will prevail. The operative part of sub-section (5) in clear terms lays down “when the assessee is a firm and the total income of the firm has been assessed under subsection (1), sub-section (3) or sub-section (4), as the case may be”. The language of the operative part of this sub-section, therefore, leaves no scope for doubt that the assessee is a firm and what is being assessed is also the total income of the firm. So far as a registered firm is concerned, ordinarily except in the cases covered by the proviso the sum payable by the firm itself has not to be determined but the total income of each partner of the firm including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined. When these provisions are operative or attracted it is possible to argue that in such a case the words “assess”, “assessment” or “assessee” may have one meaning or different meanings, but in the present case we are concerned with a case covered by the second proviso which deals with the assessment of a nonresident partner of a registered firm. This proviso lays down that in the case of a non-resident partner of a firm in the taxable territories, his share of the income, profits and gains of the firm shall be assessed on the firm at the rates which would be applicable if it were assessed on him personally and the sum so determined as payable shall be paid by the firm. Thus, if regard be had to the provisions of the operative part of sub-section (5) of section 23 read with the second proviso above referred to, it is quite apparent that the assessee is the firm. The total income that has to be assessed is of the firm; the entity of which the assessment is to be made is the firm; and the entity liable to pay tax is the firm. Thus, there is no scope for ambiguity or different meanings being attached to any of these expressions. The effect of the proviso is merely this: As ordinarily in the case of a registered firm, the share of a partner in the income, profits and gains of the firm are to be assessed in his individual return, that provision is not applicable or attracted when such a partner is a non-resident partner in the taxable territories. In the case of such a non-resident partner, the share of such a partner in the income, profits or gains of the firm has to be assessed on the firm itself and the rate at which the computation is to be made is on the footing that assessment is made on such non-resident partner personally. Thus, even though in some cases different meanings may be applicable to the words “assess”, “assessment” or “assessee”, so far as the present case is concerned, if regard be had to the substantive provisions of section 23(5)(a) read with the second proviso to clause (a) it is quite apparent that it is the firm which is the assessee, it is the firm whose income is being assessed, it is the liability of the firm to pay tax though in the determination of the quantum regard is to be had to the share of the partner and the rates applicable to him. Thus, the observations of the Privy Council in the above case are not of any assistance to Mr. Hajarnavis. By the order dated March 20, 1961, what the Appellate Assistant Commissioner held was that the reassessment orders passed upon the individual, Bhagwandas, as partner were invalid. They were, therefore, set aside by him and he gave an express direction that the income of the nonresident partner, Bhagwandas, should have been assessed on the firm in which he was a partner and at the rates applicable to non-residents. This direction was given in consonance with the provisions of the second proviso to clause (a) of section 23(5) and he clearly directed that the entity that may be assessed is not the non-resident, Bhagwandas, but the firm of Naraindas Dwarkadas. Thus, the first contention that has been urged by Mr. Hajarnavis on behalf of the revenue must fail.
10. Question then arises whether the reassessment orders passed for the two years against the firm of Naraindas Dwarkadas are valid in law. More than one reason has been assigned by the Tribunal for coming to the conclusion that the orders in reassessment proceedings against the firm of Naraindas Dwarkadas are invalid in law. But, for our purpose, the matter is capable of being disposed of if regard be had to only one of the contentions which found favour with the Tribunal. It is a condition precedent to initiate reassessment proceedings under section 34 that the entity to be reassessed must be given a notice as provided in the provisions of section 34. In the present case such notice for both the years was given on March 2, 1961, in the following name: “Shri Bhagwandas Naraindas, nonresident as represented by the firm, M/s. Naraindas Dwarkadas, Picket Road, Bombay”. The argument of Mr. Hajarnavis is that this is not a notice upon Bhagwandas as a partner but it is a notice upon the firm of Naraindas Dwarkadas. Per se, such a contention cannot be accepted. The very tenor of the notice clearly shows that the party or the entity on whom such notice is served is Bhagwandas Naraindas and it is served through his representative, namely, the firm of M/s. Naraindas Dwarkadas. This is clearly a notice on the individual partner, Bhagwandas, through the alleged representative according to the income-tax department of that partner. It is not a notice on the firm itself nor is the firm given any intimation that reassessment proceedings are proposed to be initiated against the firm. It is well-known that a firm being a collective body consisting of partners may be represented by all or any one of the partners of the firm, but a firm does not represent a partner. Thus, in our opinion, the Tribunal was right in taking the view that the notices which have been served for both the assessment years on March 2, 1961, are on the individual non-resident, Bhawandas Naraindas, and not upon the firm of M/s. Naraindas Dwarkadas. This finding itself, in our opinion, is sufficient to answer the question referred to us and we do not consider it necessary to go into the other grounds which the Tribunal was persuaded to go into. As in the present case proceedings for reassessment are adopted against the firm of Messrs. Naraindas Dwarkadas without a proper notice as contemplated by section 34, the entire proceedings are ab initio void and orders in reassessment proceedings passed as a result of such notices are also liable to be set aside.
11. In the result, our answer to the question referred to us is in the negative. The revenue shall pay the costs of the assessee.
12. Question answered in the negative.
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