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Commissioner Of Income-Tax v. Vikram Singh S. Vallabhadas And Others
Factual and Procedural Background
This reference arises under section 66(1) of the Indian Income‑tax Act, 1922, in relation to the assessment year 1960–61 (previous year ending 31 March 1960). Four assessees, partners in the firm Shoorji Vallabhdas & Co., had formerly acted as managing agents of the Malabar Steamship Co. After the managing agency was transferred to a limited company, the firm’s income consisted largely of investments and dividends. The firm had earlier been refused registration for certain years on the ground that it had ceased to carry on business. From 1952–53 to 1958–59 the entity was assessed as an association of persons (AOP). For the year 1958–59 the department initially assessed both the AOP and the individual members, but the Tribunal held that the individual members could not be separately assessed in respect of income already assessed in the hands of the AOP; that position was accepted by the department for that year.
For the assessment year 1960–61 the Income‑tax Officer (ITO), by order dated 23 February 1961, determined the total income of the AOP under section 23(3) and concluded that “No demand” should be made because the shares of the co‑owners were definite and they were to be assessed separately. On the same day the ITO also passed separate assessment orders under section 23(3) in respect of the four partners, directing that demand notices be issued (after crediting tax deducted at source). The four assessees appealed; the Appellate Assistant Commissioner set aside the ITO's orders as inconsistent with the Tribunal's earlier view. The revenue appealed to the Tribunal, and the Tribunal (consolidated order dated 26 February 1964) held that there had been an assessment on the AOP and it was not open to the department to assess the individual members. The matter was referred to the court on the following question:
“Whether, on the facts and in the circumstances of the case, the assessees could be assessed (except for rate purposes only) on their share from the association of persons, namely, Shoorji Vallabhdas & Co.?”
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the assessees could be assessed (except for rate purposes only) on their share from the association of persons (Shoorji Vallabhdas & Co.).
- Whether the deduction of tax at source (and the ITO's failure to order repayment of such deducted tax to the AOP) operated as a levy or payment that, for the relevant portion of income, exhausted the taxing authorities' option under section 3 so as to preclude separate assessment of the individual members.
Arguments of the Parties
Assessees' Arguments (as advanced by Mr. Kaka)
- The ITO had not properly exercised the option available to him in law (i.e., to choose which unit of assessment to charge).
- Once the ITO exercised his powers under section 23(3) and assessed the association of persons he could not stop short and say he would not raise a demand; the option to assess the association or the individual must be exercised before or as part of the association assessment, and having assessed the association it was not open to him then to assess the individuals for the same income.
- The option must be exercised judicially and, ordinarily, the association of persons ought to be assessed unless it is impossible to do so or it is necessary to assess the members to prevent evasion—relying on the Supreme Court decision in M.M. Ipoh v. Commissioner of Income‑tax [1968] 67 ITR 106.
Revenue's Argument (as reported)
- It was contended (by Mr. Joshi) that it was for the association of persons to make an application for refund under section 48 of the 1922 Act consequent on the assessment order passed in its assessment; implicitly, the revenue proceeded on the footing that separate assessments of the members could be made.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| M.M. Ipoh v. Commissioner of Income‑tax [1968] 67 ITR 106 | Cited for the proposition (relied on by the assessees) that ordinarily the association should be assessed unless it is impossible or assessing members is necessary to prevent evasion. | The court observed that the Tribunal's order did not deal with this third proposition and therefore it did not arise for decision in the present reference. |
| Commissioner of Income‑tax v. Kanpur Coal Syndicate [1964] 53 ITR 225 | Established that section 3 of the 1922 Act implies an option to the tax authorities to assess one or another unit of assessment, and that this option is exercised “in making the assessment in the first instance” as part of the process of assessment. | The court relied on this leading case to hold that the option is implicit in section 3 and is part of the assessment process; it rejected the argument that the option must be exercised before the association assessment is made in a manner inconsistent with Kanpur Coal Syndicate. |
| Commissioner of Income‑tax v. Clive Insurance Co. Ltd. [1972] 85 ITR 531 (Calcutta) | Authority for the proposition that tax deducted at source amounts to payment of tax by the assessee (context: s.49D of the 1922 Act in that case). | The court cited this decision (and followed by later decisions) as authority supporting the view that deduction at source constitutes payment by the assessee. |
| Commissioner of Income‑tax v. Tata Sons P. Ltd. [1974] 97 ITR 128 (Bom) | Followed Clive Insurance in holding that tax deducted at source amounts to payment by the assessee. | Used by the court as supporting authority that deduction at source is payment and therefore relevant to whether a levy on the AOP had occurred. |
| Income Tax Officer, A‑Ward, Lucknow v. Bachu Lal Kapoor [1966] 60 ITR 74 | Characterised the choice of which unit to tax as an election (terminology used by the Supreme Court). | The court cited this case to explain the nature of the choice/option available to the income‑tax authorities under section 3. |
| Commissioner of Income‑tax v. K. Adinarayana Murthy [1967] 65 ITR 607 | Explains that the Act treats different assessable entities as separate “units of assessment”. | The court invoked this to reinforce the scheme of the Act that contemplates separate units of assessment and the limited option to tax one unit or another. |
Court's Reasoning and Analysis
The court proceeded by addressing the contentions raised and by analysing the legal effect of tax deducted at source in the particular factual matrix.
- On the assessees' first and third contentions: The court observed that the first contention (that the ITO had not exercised the option) did not arise because the Tribunal proceeded on the footing that the ITO had exercised the option. The third proposition (that ordinarily the association should be assessed) also did not arise from the Tribunal's order in the present case.
- On the second contention (timing and manner of exercising the option): The court rejected the submission that the option to assess the association or the individual had to be exercised before an assessment of the association was made under section 23(3). The court held that the option is implicit in section 3 of the 1922 Act and, following Kanpur Coal Syndicate, is “part of the process of assessment” — it need not be a distinct preliminary act. An assessment proceeding may either culminate in a charge (whereby that unit is thereafter precluded from being the subject of another assessment for the same income) or it may stop short of making a charge, in which case the authorities may later charge another unit of assessment.
- On the legal effect of deduction of tax at source: The court emphasised the statutory provision (section 18(5) of the 1922 Act) that any deduction made and paid to the Central Government in accordance with provisions relating to deduction of tax at source “shall be treated as a payment of income‑tax ... on behalf of the person from whose income the deduction was made.” The court treated this statutory wording as determinative: deduction at source amounts to payment by the assessee. The court supported this statutory interpretation by reference to the Calcutta High Court decision in Commissioner v. Clive Insurance Co. Ltd. and this court’s later decision in Commissioner v. Tata Sons P. Ltd., which recognised that where tax is deducted at source it amounts to payment of tax by the assessee.
- On the stages of taxation and how they apply here: The court described three stages in the taxing procedure: (i) assessment (the process of assessing income), (ii) making a “charge” on the assessee within the terms of section 3 (i.e., an assessment order determining the sum payable), and (iii) levy/recovery of tax (either by direct collection consequent on assessment or indirectly by deduction at source). The court held that deduction at source is not a levy unless followed by an assessment order making a charge either expressly or by necessary implication—for example, when the assessment order does not direct repayment of tax already deducted at source.
- Application to the facts: The ITO's order dated 23 February 1961 assessed the AOP's total income (Rs. 66,270) and recorded gross dividend income of Rs. 62,438 on which tax had been deducted at source and paid to the Central Government. Although the AOP assessment purported to state that the members were to be assessed separately and that no demand should issue against the AOP, the ITO did not direct repayment of the tax already deducted at source to the AOP. The court held that because tax had in fact been deducted at source and not refunded, there had been a levy (payment) pro tanto by the AOP. That levy meant the ITO had effectively levied tax on the AOP in respect of that income, which exhausted the option under section 3 and thereby precluded making a further charge on the individual members for the same dividend income.
- On section 48 (refund procedure): The court considered and rejected the revenue's argument (Mr. Joshi) that the AOP should apply for refund under section 48 of the 1922 Act, observing that section 48(1) applies only where there is an excess payment of tax and sub‑section (3) is in terms inapplicable to the present case — thus section 48 did not provide the route relied on by the revenue.
Holding and Implications
Holding: The court answered the referred question in the negative and in favour of the assessees. In other words, the assessees could not be assessed individually (except for rate purposes) on their share from the association of persons in respect of the dividend income on which tax had been deducted at source and had not been refunded to the association. The Commissioner was directed to pay the assessees' costs of the reference.
Implications: The direct consequences of the decision are:
- The department cannot assess individual members in respect of the same dividend income where tax has already been deducted at source from the association and the assessment of the association did not direct repayment of the deducted tax (because such deduction operates as payment and effects a levy pro tanto on the association, exhausting the taxing option under section 3).
- The Commissioner was ordered to pay costs to the assessees in the reference.
The opinion does not elaborate broader policy consequences or purport to create a new, novel precedent beyond applying the established principles (as discussed above) to the facts of this case.
Vimadalal, J.:— This is a reference made at the instance of the commissioner under section 66(1) of the Indian Income-tax Act, 22, which relates to the assessment year 1960–61 (accounting year ending March 31, 1960). The four assessees were partners in a firm named, Shoorji Vallabhdas & Co., which was acting as the managing agents of the Malabar Steamship Co. After the transfer of that managing agency to a limited company the said firm had income only from certain investments and dividends, and for assessment years 1952–53 and 1953–54, registration was applied for, but was refused on the ground that after giving up the managing agency, the firm had ceased to carry on business and, therefore, was not entitled to registration. From 1952–53 to 1958–59, the said entity was assessed as association of persons. For the assessment year 1958–59, the department adopted the somewhat unusual course of assessing both the association of persons as well as the individual members thereof, but on the matter being taken Up to the Tribunal, it was held that the individual members could not be assessed separately in respect of the income which was assessed in the hands of the association of persons. That position was accepted by the department as far as the assessment year was concerned. As far as assessment year 1960–61 is concerned, the Income-tax Officer, by his order dated 23rd February, 1961, proceeded to determine the total income of the association of persons but, at the end of his order, stated as follows:
“Assessed under section 23(3). No demand, as the shares of the co-owners are definite and they are assessed separately.”
2. On the same day, the same Income-tax Officer proceeded to pass an assessment order, also under section 23(3), in respect of the four assessees as members of that association of persons, and directed that, after giving credit for the tax deducted at source, demand notice was to issue. The four assessees preferred appeals to the Appellate Assistant Commissioner who set aside the orders of the Income-tax Officer on the basis of the Tribunal's order for the earlier year, viz., assessment year 1959–60, which has already been referred to above. On appeal to the Tribunal by the revenue, the Tribunal, by its consolidated order dated 26th February, 1964, held that in the present case there had clearly been an assessment on the association of persons, and it was, therefore, not open to the department to assess the individual members of that association. It is from that order of the Tribunal that the present reference has arisen and the following question has been submitted to us:
“Whether, on the facts and in the circumstances of the case, the assessees could be assessed (except for rate purposes only) on their share from the association of persons, namely, Shoorji Vailabhdas & Co.?”
3. Three contentions were advanced before us by Mr. Kaka on behalf of the assessees, and they were as follows:
1. On a proper reading of the Income-tax Officer's order, it must be held that the said officer has not exercised the option which he had in law.
2. Once the Income-tax Officer exercised his powers under section 23(3) and assessed the association of persons, he cannot stop short and say he will not raise a demand. In other words, the option to assess the association or the individual has to be exercised before the assessment of the income of the association is made under section 23(3). Mr. Kaka submitted that the assessment order having been made on the association, and the Income-tax Officer having exercised his power under section 23(3) in that behalf, the individual members of the association could not be assessed for the same assessment year.
3. In any event, the option has to be exercised judicially and, normally, it is the association of persons that must be assessed, unless it was not possible to assess the association, or it is necessary to assess the members thereof in order to prevent evasion or escapement of tax. For this proposition, reliance was sought to be placed by Mr. Kaka on the decision of the Supreme Court in the case of M.M Ipoh v. Commissioner of Income-tax, [1968] 67 ITR 106 at pages 113, 115.
4. As far as the first proposition of Mr. Kaka is concerned, the whole case proceeded before the Tribunal on the footing that the Income-tax Officer had exercised the option; the first proposition of Mr. Kaka does not, therefore, arise in the present reference. As far as the third proposition of Mr. Kaka is concerned, the same also does not arise from the ‘Tribunal's order in the present case which does not deal with it. As far as the second proposition of Mr. Kaka is concerned, there is no warrant for the submission contained therein that the option to assess the association or the individual should have been exercised before the assessment of the association was made under section 23(3). The option which the Income-tax Officer has exercised is implicit in the terms of section 3 of the Indian Income-tax Act, 1922, which is the charging section. As laid down by the Supreme Court in the case of Commissioner of Income-tax v. Kanpur. Coal Syndicate, [1964] 53 ITR 225 at page 228, it is “in making the assessment in the first instance” under section 23 that the Income-tax Officer has to exercise that option as “part of the process of assessment In that case, which is the leading case on the subject of exercise of option, the Supreme Court has laid down that section 3 of the 1922 act impliedly gives an option to the appropriate authorities to assess the total income and levy the tax on one or other of the assessable entities. There is, therefore, no substance in Mr. Kaka's submission that once the Income-tax Officer exercised his powers under section 23(3), he should not stop short and say he will not raise a demand. An assessment proceeding may culminate in a charge or it may stop short of that. In the former case, no person other than the party charged can thereafter be assessed, but in the latter case, it is open to the income-tax authorities, in exercise of that option, to charge any other party with tax which, in the present case, would mean the members of the association. Since exercise of the option is “part of the process of assessment”, the Income-tax Officer has to stop short of raising a demand if he decides not to charge the assessee but to charge any of the other units of assessment mentioned in section 3. The question that arises in the present case is whether the Income-tax Officer has, by his assessment order dated the 23rd of February 1961, in respect of the association of persons, not merely assessed its total income, but made a charge within the terms of section 3 of the Act, or levied tax on it, in which case he would be precluded from making a charge on any of the other units of assessment in respect of the same income and it would no longer be open to him to assess the individual members of the association. As a matter of plain language, the concluding words of the Income-tax Officer's order in the assessment of the association of persons would indicate that, as he proposed to charge the members of the association separately, he was not making a charge on the association of persons, and that it was for that reason, that he directed that no demand notice should issue against the association. The issuing of a demand notice was much stressed in the course of the arguments before us, but, in my opinion, the same is merely a procedural step in the various stages through which assessment proceedings have to pass, and has, by itself, no relevance for the purpose of determining the question that arises in this reference.
5. In the present case, however, it is an admitted position that almost the whole of the income of the association of persons was from dividends on which tax has already been deducted at source. Though the Income-tax Officer has, by his order, made in the assessment of the association of per sons directed that no demand should be made against that association, as the share of the members thereof were to be assessed separately, curiously enough, he has not passed any order for refund of the tax which was deducted at source by the companies concerned and, in the usual way, collected by the revenue through the machinery of such deduction at source. In that connection, reference must be made to section 18(5) of the Indian Income-tax Act, 1922, which lays down that any deduction made and paid to the account of the Central Government in accordance with the provisions relating to deduction of tax at souce “shall be treated as a payment of income-tax or super tax on behalf of the person from whose income the deduction was made It may be mentioned that the provision in section 18(5) corresponds to section 199 of the present Income-tax Act, 1961. The question that arises, therefore, is whether by reason of the failure of the Income-tax Officer whilst passing the assessment order in the assessment of the association of persons to direct repayment of the tax already collected by the department from the association by the procedure of deduction thereof at source by the companies concerned, the Income-tax Officer has, in fact, “charged” the association of persons within the terms of section 3 of the Income-tax Act, or levied tax on that association, with the result that it would no longer be open to him to charge the members of that association individually, in exercise of the option which he had under the said section. It was the contention of Mr. Joshi that it was for the association of persons to make an application for refund under section 48 of the Indian Income-tax Act, 1922, consequent on the assessment order passed by the Income-tax Officer in the assessment of that association. A plain reading of section 48, however, leaves no room for doubt that it has no application to a case like the present one, in so far as sub-section (1) thereof would come into play only where there is an excess payment of tax, and sub-section (3) thereof is, in terms, inapplicable to the present case.
6. The most important question that arises in that connection is, what is the effect of a deduction of tax at source. A plain reading of section 18(5) of the Indian Income-tax Act, 1922, in my opinion, leaves no room for doubt whatsoever that the effect of such deduction is that it amounts to payment of tax by the assessee concerned. No authority is, in my opinion, needed to clarify that position which emerges from the very terms of section 18(5). If, however, authority be needed, reference may be made, in that connection, to the judgment of the Calcutta High Court in the case of Commissioner of Income-tax v. Clive Insurance Co Ltd., [1972] 85 ITR 531, which was followed by this court in its decision in the case of Commissioner of Income-tax v. Tata Sons P. Ltd., [1974] 97 ITR 128 (Bom). Though the question that was before the respective courts in the said two cases arose in the context of section 49D of the Indian Income-tax Act, 1922, these cases are, in my opinion, authorities for the proposition that when tax is deducted at source, it amounts to payment of tax by the assessee concerned. In this connection, it may be pointed out that the procedure for taxing an assessee may be said to pass through three stages. The first stage is what may be called “assessment”, a term which is used in different sections of the Act in slightly different senses, but which, in its widest sense, can only mean what the Supreme Court has, in Kanpur Coal Syndicate's case, [1964] 53 ITR 225, cited above, characterised as the “process of assessment”, at page 228. The second stage in the machinery of taxation is the stage of making a “charge” on the assessee within the terms of section 3 which, in my opinion, would mean making an assessment order assessing the total income of the assessee and determining the amount of tax payable by him in accordance with section 23(1) or (3) of the 1922 Act. It follows from the decision of the Supreme Court in Kanpur Coal Syndicate's case, [1964] 53 ITR 225, that once an assessee is “charged” in that sense, the option which the appropriate income-tax authorities have under section 3 of the Indian Income-tax Act, 1922, must be held to have been exercised, and it would thereafter not be open to those authorities to tax any one of the other units of assessment mentioned in that section. The stage of the making of a charge is followed by the third stage, viz., the stage of the levy of tax or, What is the same thing, the recovery thereof. Levy of tax can be effected by the process of direct Collection consequent on an assessment order; or it can be effected indirectly by deduction at source in certain specified cases, followed by an assessment order. Deduction of tax at source is not a levy of tax unless and until it is followed by an assessment order making a charge of tax, either expressly, or by necessary implication as when it does not direct repayment to the assessee of tax already deducted at source. The levy of tax in either of these ways viz., by direct collection or by deduction at source, is one stage further than the making of the charge, and if the making of the charge exhausts the option which the taxing authorities have under section 3 of the Act, a fortiori, the levy of tax would necessarily exhaust that option.
7. Viewing the matter in that light, the position in the present case is that it must be held that there has been a levy of part of the tax on the association of persons. The Income-tax Officer's order dated 23rd February, 1961, passed in the assessment of the association of persons assessed its total income at the figure of Rs. 66,270, out of which the gross dividend income from shares standing in the name of the association is Rs. 62,438 on which tax has admittedly been ‘deducted at source and paid over to the Central Government. Though the assessment order does not determine the tax payable by the association of persons and purports to state that the members of the association were to be “directly taxed to tax in their assessments”, it fails’ to direct repayment of the tax already deducted at source on the dividend income of the association. There has, therefore, been a payment of tax pro tanto by the association. Neither the fact that the Income-tax Officer has stated in the concluding part of his order that no demand notice is to issue, nor the reason given by him for not issuing that demand notice, can change that position for the simple reason that, as already stated above, the issuing or the not issuing of a demand notice is a mere matter of procedure, though, of course, it has certain legal consequences. I hold that the Income-tax Officer having levied tax as aforesaid on the association of persons, it was no longer open to that officer to charge the members of that association in respect of the same dividend income, as he purported to do. I take the view that if an Income-tax Officer is to exercise the option which he has under section 3 in a case in which tax has already been deducted at source, it is incumbent upon him to make an order for refund of the tax so collected. I would, therefore, answer the question referred to us in favour of the assessees.
S.K Desai, J.:— I agree, but would like to add a few words. A very short point is involved in this reference. The 1st Income-tax Officer, A-4 Ward, passed five orders on 23rd February, 1961, and in four of these orders, he purported to include in the individual assessment of the four persons comprising the association of persons, his (or her) respective share from the said association of persons. However, on that date, the factual position was that the association of persons had already paid income-tax on its gross dividend income of Rs. 62,438 (the figure being taken from the assessment order passed by the said Income-tax Officer on the said association of persons). As pointed out in the judgment of my brother, Vimadalal J., as long as such tax had been paid, and it is clear that it was paid, since it had not been ordered to be returned or refunded, it was not open to the Income-tax Officer to seek to tax the four individuals' share from the association of persons. The legal position appears to be that the Income-tax Officer has a choice he may tax either the association of persons or the individuals comprising it. It is this choice that is referred to as option by the Supreme Court in the case of Commissioner of Income-tax v. Kanpur Coal Syndicate, [1964] 53 ITR 225. It is the same choice which is designated as an election again by the Supreme Court in Income Tax Officer, A-Ward, Lucknow v. Bachu Lal Kapoor., [1966] 60 ITR 74, 79. If one of the two entities has already been taxed, it will not be Open to the income-tax authorities to seek to tax the other entities so long as the tax has been collected from the first entity and is not returned to it by making an appropriate order for such return. In this view of the matter, the deduction of the Income-tax Tribunal that it was not open to the department to assess the individual member will have to be sustained, though for reasons different than the one given by it.
8. By the court: The question referred to us is answered in the negative and in favour of the assessees. The Commissioner must pay the assessees' costs of the reference. It will be convenient at this stage to refer to the relevant sections of the Indian Income-tax Act, 1922. The charging section 3 enacts that “income-tax is to be charged in accordance with and subject to the provisions of the relevant 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 As laid down by the Supreme Court in the case of Commissioner of Income-tax v. K. Adinarayana Murthy, [1967] 65 ITR 607, 611, the scheme of the Act treats these as separate “units of assessment” As already stated above, it is section 3 that has been construed by the Supreme Court in Kanpur Coal Syndicate's case, [1964] 53 ITR 225 as implying an option on the part of the income-tax authorities to assess any one of these assessable entities or units of assessment, and not to levy tax for the same income on more than one of the entities or units of assessment mentioned in section 3. Section 23(3) provides that, after hearing the parties, the Income-tax Officer is to pass an order in writing assessing the total income of the assessee and determining the sum payable by him on the basis of such assessment; and section 29 provides that when tax is due in consequence of such an order, a notice of demand in the prescribed form specifying the sum payable by the assessee is to issue.
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