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Attorney(S)
  • M.K.Nambiyar
  • C.S.Rama Rao Sahib
Judges
  • Satyanarayana Rao
  • Rajagopalan, JJ.
Acts
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Citation Codes
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citation codes
Case Number
Attorney(S)
  • M.K.Nambiyar
  • C.S.Rama Rao Sahib
Judges
  • Satyanarayana Rao
  • Rajagopalan, JJ.
Acts
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Smart Summary

Structured Summary of the Opinion — Rajagopalan, J.

Factual and Procedural Background

The opinion arises from applications under Article 226 seeking writs of prohibition or other writs to restrain Income-tax Officers from enforcing assessments made under Section 34 of the Income-tax Act for the assessment years 1943–1944 and 1944–1945.

The material facts as set out in the opinion are:

  • Two principal persons, B. Audayya and C. Pitchayya, carried on textile trade through three distinct described firms:
    • Firm I: Audayya and Pitchayya, partnership deed dated 20-4-1936; purported dissolution 31-3-1948.
    • Firm II: C. Pitchayya and Co., partnership deed dated 30-7-1941 between C. Pitchayya and R. Subba Rao; purported dissolution 31-3-1949.
    • Firm III: Prabhat Textiles, partnership deed dated 1-12-1941, purported to include seven persons including Audayya and Pitchayya; dissolved by court decree dated 22-12-1949 with effect from 1-1-1949.
  • Each of the three firms was registered under Section 26-A of the Income-tax Act for the assessment years in question (1943–1944 and 1944–1945).
  • A Special Income-tax Officer, North Madras, after enquiry on 31-3-1945, held that each of the three firms was a separate entity and assessed them on that basis for the relevant years.
  • Subsequently, proceedings under Section 34 were initiated:
    • Notices under Section 34(1) dated 14-8-1951 were issued (for firm III addressed to managing partner C. Pitchayya and served on his agent).
    • In the course of Section 34 proceedings, notices dated 17-5-1952 were issued to each of the seven alleged partners of firm III to produce account books; none were filed, the stated reason being that the books had been filed in a civil Court.
  • The Income-tax Officer estimated escaped income on the best judgment basis and assessed the firms. The Officer concluded that certain firms (II and III) were fictitious and that the real business was carried on by Audayya and Pitchayya. Registrations were cancelled under rule 6-B and assessments were made treating B. Audayya & C. Pitchayya as an unregistered firm for the relevant years.
  • Assessment orders for 1943–1944 were dated 14-8-1952 and for 1944–1945 dated 25-2-1953. Petitions (writ petitions) were filed challenging the validity of these proceedings (W.P. Nos. 613, 629 of 1952 and W.P. Nos. 201, 202 of 1953 as referred to in the opinion).
  • Appeals against the assessment orders had been filed; there was no specific statutory appeal provision against cancellations under rule 6-B distinct from the assessment orders themselves.

Legal Issues Presented

  1. Whether the proceedings under Section 34 against each of the three firms were without jurisdiction.
  2. Whether the cancellation of registration of each of the three firms under rule 6-B was without jurisdiction because rule 6-B was ultra vires the Central Board of Revenue (i.e., beyond rule-making powers granted by the Act).
  3. Whether it was illegal to assess escaped income under Section 34 on an unregistered firm when the original assessments for the years in question had been made on the basis that the firms were registered under Section 26-A.

Arguments of the Parties

Petitioners' Arguments (as presented in the opinion)

  • Under Section 23(5) of the Act the contention was that the registered firm is not the "assessee" for purposes of liability allocation; instead Section 23(5) provides for apportionment among partners and therefore in the context of Section 34 the term "assessee" must mean the person liable to pay the tax (i.e., the partner), not the registered firm. From this, petitioners argued that proceedings under Section 34 against the registered firms were without jurisdiction.
  • Rule 6-B was argued to be ultra vires the Central Board of Revenue. The petitioners contended that Section 26-A (together with the rule-making power under Section 59) did not authorize the Board to provide for cancellation of registration by rule; specific provisions for cancellation existed in Section 23(4) (which provides for cancellation and is made appealable), and therefore rule 6-B exceeded delegated powers.
  • It was contended that rule 6-B was invalid because, unlike Section 23(4), it did not provide for notice before cancellation and therefore was ultra vires. Petitioners also argued that rule 6-B could not be applied retrospectively to cancel registrations already granted in relation to the assessment years in question; the rule could not be given retrospective operation to affect past registration and past assessments.
  • As a corollary, petitioners argued that it was illegal to assess escaped income under Section 34 on an unregistered firm where earlier assessment had proceeded on the registered-firm basis under Section 26-A.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court first observed that the existence of an appeal against the assessment orders (which had been availed of) was a factor that would ordinarily justify declining to exercise writ jurisdiction under Article 226, but since the primary relief sought was writs of prohibition the Court proceeded to consider the petitioners' main contentions.

On Point No. 1 (jurisdiction under Section 34 vis-à-vis Section 23(5)):

  • The Court rejected the petitioners' contention that a registered firm is not the "assessee." It analysed Section 23 as comprising two stages: (1) assessment of the income and (2) assessment/apportionment of the tax liability among partners under Section 23(5).
  • Reading the definition of "assessee" with the charging section (Section 3) and Section 23, the Court concluded that even in the case of a registered firm the firm remains the assessee, despite the statutory apportionment of tax among partners under Section 23(5).
  • The Court therefore found no basis for construing "assessee" in Section 34 to mean only the individual partner (the person liable to pay tax under Section 23(5)(a)) and not the registered firm. The income to be assessed under Section 34 is the income of the firm (in this instance escaped income), just as under Section 23 for ordinary assessment.

On Point No. 2 (validity of rule 6-B and cancellation of registration):

  • The Court was unable to accept the argument that rule 6-B was ultra vires. It noted that Section 26-A(2) contemplates prescribed particulars and forms for registration and that Section 59 confers rule-making powers. The petitioners' argument that those provisions did not authorize cancellation by rule was rejected.
  • The Court distinguished the specific statutory cancellation mechanism in Section 23(4) (which is appealable) from the operation of rule 6-B, observing that rule 6-B provides for cancellation where the Income-tax Officer concludes there was no real firm and that registration of such a fictitious firm was a fraud on the department. The Court found no basis that such a rule exceeded the scope of the Income-tax Act or the rule-making powers under Section 59.
  • With respect to the absence of an express notice requirement in rule 6-B, the Court accepted that in these particular cases cancellation occurred in the course of Section 34 assessment proceedings in which the partners had been given opportunity to participate. The Court therefore declined to decide finally whether rule 6-B would be ultra vires where no notice at all was given, since in these facts the partners had notice and an opportunity to participate.
  • The Court further held that cancellation of registration in relation to a particular assessment year necessarily operates retrospectively because the question whether a firm was registered for a particular accounting year must be determined with reference to past facts; assessments under Section 34 for escaped income may be completed long after the assessment year. Thus, cancellation with reference to the assessment year is necessarily retrospective and not objectionable on that ground in these circumstances.

On Point No. 3 (assessing escaped income on an unregistered firm after cancellation):

  • The Court explained that Section 34 allows the Income-tax Officer to deal only with escaped income and does not permit revisiting or undoing an assessment already validly made under Section 23. However, in making an assessment under Section 34 the Officer can exercise all powers that he has under Section 23.
  • Consequently, with reference to a given assessment year, it was open to the Income-tax Officer to cancel a previously granted registration (where justified) and to assess escaped income on the basis that the entity was an unregistered firm for that assessment year. The Court concluded that the Officer had jurisdiction to make the contested assessments on that basis.

Additional procedural and factual findings applied by the Court included that notices addressed to the managing partner were valid under Section 63, and that all alleged partners in firm III had opportunities to participate in the proceedings (they participated but did not produce account books when invited).

Holding and Implications

Holding: Petitions dismissed.

Explicit consequences as recorded in the opinion:

  • The petitions (writs) failed and were dismissed.
  • Costs were awarded at Rs. 250 each in W.P. Nos. 613 and 629 of 1950.
  • There was no order as to costs in W.P. Nos. 201 and 202 of 1953.

The opinion does not purport to announce a broader rule of precedent beyond application of the statutory provisions and rules to these facts; the decision addresses the direct effect on the parties and the validity of the assessments and cancellations in the factual matrix before the Court.

Disposition recorded in the opinion: Petitions dismissed.

Show full summary ...

    Y. Narayana Chetty And Others v. The Income-Tax Officer, Nellore, Main Circle, Nellore And Others

    Rajagopalan, J.:— These are applications under Art. 226 of the Constitution for the issue of writs of prohibition or other appropriate writs to restrain the Income-tax Officer from enforcing the orders of assessment passed under Section 34 of the Income-tax Act, with reference to the assessment years 1943–1944 and 1944–1945.

    2. The facts that led up to the institution of these applications cannot be in dispute. B. Audayya and C. Pitchayya carried on trade in textiles. There were three firms. The first firm was known as Audayya and Pitchayya. There was a registered deed of partnership dated 20-4-1936, and the partners purported to dissolve the partnership on 31-3-1948. The second firm was known as C. Pitchayya and Co., and purported to consist of C. Pitchayya and one R. Subba Rao. The deed of partnership between the two was dated 30-7-1941, and the partnership was dissolved on 31-3-1949. The third firm was known as Prabhat Textiles. That partnership purported to include seven persons including B. Audayya and C. Pitchayya. The deed of partnership was dated 1-12-1941. The partnership was dissolved by a decree of Court dated 22-12-1949, but with effect from 1-1-1949. It should be convenient to refer to the three firms as I, II and III respectively in the rest of this order. Each of these three firms was registered under Section 26-A of the Income-tax Act, for each of the assessment years now in question, 1943–1944 and 1944–1945 among other years. There was an enquiry by the Special Income-tax Officer, North Madras, and by his order dated 31-3-1945 he held that each of these three firms was a separate entity; and they were assessed to income-tax on that basis in the relevant assessment years.

    3. Proceedings were initiated under S. 34 of the Income-tax against firm No. Ill, Prabhat Textiles, with a notice dated 14-8-1951 issued under Section 34(1) of the Income-tax Act, addressed to the assessee through its managing partner C. Pitchayya and served on his agent. In the course of the assessment proceedings under S. 34, the Income-tax Officer issued a notice dated 17-5-1952 to each of the seven alleged partners to produce their account books. None was filed on the plea, that the account books had been filed in a civil Court.

    4. The Income-tax Officer estimated the escaped income to the best of his judgment and assessed it to tax. He also held that the firm No. Ill was a fictitious one, and that the real partners were only Audayya and Pitchayya. The Income-tax Officer cancelled the registration of the firm under R. 6-B of the Income-tax rules. The order of assessment for 1943–1944 was dated 14-8-1952 and that for 1944–1945 was dated 25-2-1953. Narayana Chetti, one of the alleged partners, filed W.P No. 613 of 1952 with reference to the assessment for 1943–1944 and W.P No. 201 of 1953 with reference to the assessment for 1944–1945.

    5. Similar action under Sec. 34 was taken against firms I and II with notices issued under Sec. 34(1) dated 14-8-1951 addressed to Pitchayya on behalf of the firms. The escaped income in the case of these two firms also was assessed on the best judgment basis. The Income-tax Officer held that firm No. II was a fictitious firm, and that the business of both firms I and II really constituted one business. The registration of both firms I and II was cancelled under rule 6-B, and it was as an unregistered firm that B. Audayya & C. Pitchayya were assessed under S. 34 for both 1943–1944 and 1944–1945. The order of assessment for 1943–1944 was dated 14-8-1952 and that for the assessment year 1944–1945 was dated 25-2-1953. It was the validity of these proceedings that C. Pitchayya challenged as petitioner in W.P No. 629 of 1952 and W.P No. 203 of 1953.

    6. It was admitted that appeals had been filed against each of these orders of assessment. There is no specific provision in the Act for any appeal against orders of cancellation of registration passed under rule 6-B, but then there were no separate orders under rule 6-B, apart from the orders of assessment in each of these cases, each of which order is now under appeal.

    7. Apart from every other consideration, the existence of a right of appeal, which has also been availed of in these cases, should suffice to justify this Court to decline to exercise the jurisdiction conferred on it by Art. 226 of the Constitution. In view, however, of the fact, that the primary relief asked for is the issue of writs of prohibition, we shall deal with the main contentions of the learned counsel for the petitioners.

    8. The learned counsel for the petitioners put forward three points for our consideration: (1) That the proceedings under S. 34 against each of these three firms were without jurisdiction. (2) That the cancellation of registration of each of the three firms was without jurisdiction, as rule 6-B was ‘ultra vires’ the Central Board of Revenue, which promulgated the rules under the powers conferred on it by the Act, and (3) That it was illegal to assess escaped income under S. 34 on an unregistered firm, while the original assessment for the assessment years 1943–1944 and 1944–1945, which still stood, was on the basis that the firms were registered under Section 26-A of the Income-tax Act.

    9. ‘Point No. 1': Learned counsel for the petitioners referred to Section 23(5) of the Act and contended that it was not the registered firm that was the assessee, as S. 23(5) provided for the apportionment of the tax liability between the partners of the registered firm. We are unable to accept this contention. Section 23 provides for two stages (1) the assessment of the income and (2) the assessment of the tax liability. The definition of the term “assessee” read with the charging Section, Section 3 of the Act, and read also with Section 23 of the Act should make it clear that even in the case of a registered firm, the firm does not cease to be the assessee, though under Section 23(5) of the Act, the tax on the assessed income is apportioned between the several partners of the registered firm.

    10. Nor are we able to see any real force in the contention of the learned counsel for the petitioners, that Section 23(5)(a) of the Act, which provides for the apportionment of the liability between the partners in the case of the registered firm is by way of an “exception”. As we have already pointed out, the registered firm does not cease to be the assessee, despite the apportionment of the tax liability between the partners of the registered firm. It therefore follows that there can be no real basis either for the further contention of the learned counsel for the petitioners, that in the context of Sec. 34, the expression “assessee” can only mean “the person liable to pay the tax” under Sec. 23(5)(a), i.e, the partner and not the registered firm. It is the income of the firm that has got to be assessed both under S. 23 and under S. 34, with the only difference that it is the escaped income that comes in for assessment under Sec. 34.

    11. ‘Point No. 2:’ We are unable to accept the contention of the learned counsel for the petitioners that rule 6-B is ‘ultra vires’ the Central Board of Revenue. No doubt Sec. 26-A(2) provides that the application for registration should contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed. Section 59 confers the powers of making rules. Section 26-A read with Section 59 of the Act the learned counsel for the petitioners contended, did not authorise the Central Board of Revenue to provide for the cancellation of registration. Specific provisions for cancellation of registration have no doubt been made in the Act itself under Section 23(4) of the Act, and an order for cancellation passed under that section is made-appealable.

    12. But rule 6-B provides for the cancellation of registration of the firm not as a measure of punishment, but upon a decision reached by the Income-tax Officer, that there was no real firm at all, and that obtaining a registration of such a fictitious firm was really in fraud of the Income-tax department. We are unable to see any basis for the contention, that such a rule as rule 6-B, is beyond the scope of either the Income-tax Act, or of the rule making powers conferred on the Central Board of Revenue by Sec. 59. Even read with Sec. 26-A, rule 6-B is not beyond the scope of the Income-tax Act and the specific provision only for registration made under Section 26-A of the Act.

    13. Learned counsel for the petitioners pointed out that unlike Section 23(4) of the Act, rule 6-B did not provide for notice to the assessee before the cancellation of registration, and he contended that the rule which itself provided for no notice was ‘ultra vires’. That contention, again, we are unable to accept. It must be remembered that in the case of each of these three firms, it was after an enquiry in the course of the assessment proceedings under S. 34, in which the partners were given an opportunity to participate and they did participate that the Income-tax Officer came to the conclusion, that firms II and III were really fictitious, and it was on that basis that he cancelled the registration.

    14. Whatever might be scope of rule 6-B, the cancellation of registration in these cases was in the course of assessment proceedings of which the alleged partners had full notice. It may not be necessary to go into the question, whether rule 6-B which does not provide for the issue of notice, is therefore ultra vires, in the circumstances proved in this case.

    15. The next contention of the learned counsel for the petitioners was that rule 6-B could not be made retroactive in its operation. That contention really ignores the basic feature of the case that it was with reference to the two assessment years 1943–1944 and 1944–1945 for each of which years registration had been granted under Sec. 26-A. that the Income-tax Officer purported to cancel the registration. The assessment for these years must necessarily be after the close of the accounting years, and the Act itself envisages the possibility of the assessment being completed even after the assessment year.

    16. The consideration of the question either of registration or non-registration with respect to the accounting year must necessarily be retrospective in its operation, as the Income-tax Officer had certainly jurisdiction under S. 34 to go into the question of escaped income with reference to a given assessment year long after the expiry of that assessment year. The cancellation of registration, which has reference only to that assessment year, must necessarily be “retrospective” in its operation.

    17. We have already dealt with the question whether the partners including the alleged partners in Prabhat Textiles had notice of the proceedings under S. 34. It was true that notice under S. 34(1) was addressed only to the managing partner in the case of firm No. III, but then that notice was quite a valid one under Section 63 of the Act.

    18. Besides, as we have already pointed out, with reference to the notice dated 17-5-1952, every one of the seven partners had an opportunity to participate in the assessment proceedings, and they did participate, though they tailed to avail themselves of the opportunity given by the Income-tax Officer to produce the account books.

    19. ‘Point No. 3:’ What we have said above is enough to dispose of this point also. Under Section 34 of the Act, the Income-tax Officer could deal only with the escaped income of a firm and, in doing so, he cannot go back upon the assessment already made under S. 23; but in making assessment under S. 34 all the powers conferred upon the Income-tax Officer under Sec. 23 can and should be exercised; and with reference to the given assessment year it was perfectly open to the Income-tax Officer to deal with the assessment on the basis that it was an unregistered firm, after cancelling the registration that had already been granted.

    20. The petitions fail and are dismissed with costs of Rs. 250, each in W.P Nos. 613 and 629 of 1950. There will be no order as to costs in W. Ps. Nos. 201 and 202 of 1953.

    V.R.B

    21. Petitions dismissed.

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    Comments

    Y. Narayana Chetty And Others v. The Income-Tax Officer, Nellore, Main Circle, Nellore And Others
    (Mar 5, 1954)