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Vedantham Raghaviah v. Third Additional Income-Tax Officer, City Circle V, Madras.

Madras High Court

Mar 7, 1963

Judgment

Subsequent
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Factual and Procedural Background

This summary is drawn solely from the provided opinion of Jagadisan, J.

The petitioner is a professional cine-dance director who was a partner in the firm Vinodha Pictures. The partnership was constituted by deed dated 20 January 1950 and underwent changes in membership during the periods described in the opinion:

Partnership with four partners: 20 January 1950 to 27 June 1952.
After Subburam retired, a partnership of three partners: 28 June 1952 to 28 July 1953.
After Raghavacharya left, two partners (the petitioner and D.L. Narayanan): 29 July 1953 to 12 November 1954.

Applications for registration under section 26A of the Income-tax Act were filed on behalf of the firm for assessment years 1953-54, 1954-55 and 1955-56; those applications were signed by the partners (including the petitioner) and registration was granted. The firm was assessed as a registered firm and the opinion records the firm assessments (including dates and totals for the stated account/assessment years).

There were parallel assessment proceedings:

Proceedings and appeals in respect of the firm's assessment (including appeals to the Appellate Assistant Commissioner and the Appellate Tribunal). The Tribunal on 9 March 1959 allowed certain appeals and directed fresh assessment for 1954-55 and 1955-56. The Income-tax Officer complied and completed fresh assessments on 11 March 1960; those assessments became final as no further appeals were filed.
Separate assessments against the petitioner as an individual for corresponding years. After the firm's assessments were finally determined, the Income-tax Officer proceeded under section 35 of the Income-tax Act to rectify the petitioner's individual assessment to include the petitioner's share of the firm's income (or loss) and issued rectification orders culminating in the impugned order dated 23 March 1960 which computed the petitioner's total income for assessment year 1955-56 and resulted in a tax liability of Rs. 49,965.08.

The petitioner challenged the rectification order of 23 March 1960 by filing a writ petition seeking certiorari (or other appropriate writ) to quash the order.

Legal Issues Presented

Whether the Income-tax Officer had jurisdiction to pass a rectification under section 35 (and specifically section 35(5)) of the Income-tax Act to correct the petitioner's individual assessment after the firm's assessment had been completed.
Whether a rectification order under section 35 that benefits (reduces liability for) the assessee can be lawfully passed without giving the assessee notice and an opportunity to be heard.
Whether a subsequent rectification (of the individual's assessment) can be invalidated on the basis that an earlier rectification was, according to the petitioner, rendered void by the Appellate Tribunal's decision in proceedings concerning the firm.
Whether the petitioner could repudiate his status as a partner (including by reliance on a release deed) so as to avoid inclusion of share income from the firm in his individual assessment.

Arguments of the Parties

Petitioner's Arguments

The Income-tax Officer lacked jurisdiction to pass the rectification order under section 35.
The rectification order dated 23 March 1960 was passed without notice to the petitioner and was therefore bad.
Factually, the petitioner contended that there was no reduction of assessment but an effective enhancement because an earlier rectification (in his favour) had been voided by the Tribunal's decision in connection with the firm's assessment; hence the latest rectification worsened his position.
The petitioner further contended that he was never a partner of Vinodha Pictures (relying on a release deed dated 4 November 1954) and therefore his alleged share of firm income could not be included in his individual assessment.

Respondent / Revenue's Position (as reflected in the opinion)

The department conceded that no notice was issued by the officer before the impugned order was passed, but maintained that the rectification ultimately conferred a benefit (reduced tax liability) on the petitioner and therefore the lack of prior notice did not invalidate the order.
The department relied on the statutory provision in section 35(5) deeming omission or incorrect inclusion of a partner's share to be a mistake apparent on the record and therefore rectifiable under section 35.
The department treated the petitioner's declaration (signature on the registration application) and the firm's final assessment as establishing his status as a partner for the purposes of taxation; the revenue resisted the contention that a later release deed could be relied upon to avoid tax liability in respect of the period concerned.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
E.M. Muthappa Chettiar v. Commissioner Of Income-Tax, Madras, [1961] 41 I.T.R. 1	The opinion refers to this Supreme Court decision as settling the position that the petitioner cannot avoid tax on his share income from a firm merely because the partnership has been dissolved or by relying on a subsequent release deed.	The court invoked this decision to reject the petitioner's contention that he was not properly taxable as a partner or that dissolution/release could relieve him of tax liability on his share of the firm's income.

Court's Reasoning and Analysis

The court examined the petitioner's contentions in light of the statutory text and the facts recorded in the file. The analysis proceeded in several discrete steps, described below in the order the court addressed them:

Jurisdiction under section 35(5)
The court rejected the submission that the Income-tax Officer lacked jurisdiction. It relied on the express text of section 35(5) (quoted in the opinion), which deems the failure to include, or the incorrect inclusion of, a partner's share in the individual assessment to be a mistake apparent on the record and therefore rectifiable under section 35. The court noted that section 35(1) permits rectification only of mistakes that are manifest or apparent, but that the legislature addressed any ambiguity by enacting section 35(5) (effective from 1 April 1952 by the Income-tax (Amendment) Act, 1953) which creates a statutory fiction making these errors "apparent" and so rectifiable. Having regard to that provision, the court concluded that the officer had jurisdiction to act under section 35.
Lack of prior notice to the petitioner
The court accepted that the department conceded no notice had been issued prior to the impugned order. It then turned to the proviso to section 35(1), which provides that no rectification that has the effect of enhancing an assessment or reducing a refund shall be made unless notice of intention to do so has been given and the assessee allowed a reasonable opportunity of being heard. The court read the proviso as implicitly permitting rectification without notice where the rectification does not prejudice the assessee (for example, where the rectification confers a benefit by reducing assessment). Because the rectification reduced the petitioner's tax liability (from Rs. 77,838.07 down to Rs. 49,965.08), the court held that the absence of prior notice did not amount to a breach of natural justice or invalidate the proceedings.
Effect of prior rectification and Tribunal proceedings
The petitioner argued that an earlier rectification (passed after notice) was effectively nullified by the Appellate Tribunal's decision relating to the firm, and that the fresh rectification therefore had the effect of enhancing his assessment. The court disagreed. It reasoned that the earlier rectification was a valid order passed in the presence of the petitioner and that proceedings relating to the firm's assessment before the Tribunal were independent and did not legally "wipe out" the prior rectification of the petitioner's personal assessment. The court explained that once a rectification has been validly made, the resulting assessment is the operative assessment; if the petitioner wished to challenge that rectification he should have sought revision to the Commissioner or other remedy at the time. Because he did not, the earlier rectification became final and the later rectification operated upon that final assessment. On the facts, the court found no enhancement of assessment or reduction of refund with respect to the petitioner.
Petitioner's denial of partnership status
The court rejected the petitioner's contention that he was never a partner. It observed that the firm's assessment proceeded on the basis that the petitioner was a partner and that the petitioner had himself signed the firm's application for registration under section 26A. The court found it too late for the petitioner to repudiate that position (for the relevant period) by relying on a release deed. The court noted that the firm assessment had become final and that, had the petitioner been aggrieved by the firm's assessment or by being treated as a partner, his remedy was to appeal the firm's assessment— which he failed to do. The court referred to the Supreme Court decision E.M. Muthappa Chettiar (supra) as settling the related legal position.
Conclusion on writ remedy
Given the above, the court concluded there was no error of law or jurisdiction apparent on the face of the record that would justify interference under Article 226 of the Constitution. The court also noted that the petitioner had an alternative statutory remedy (a revision to the Commissioner under section 23A of the Act) but did not find it necessary to decide on the adequacy or effectiveness of that remedy in the circumstances.

Holding and Implications

Holding: The writ petition is dismissed and the rule nisi is discharged. (The opinion records: "This writ petition fails and is dismissed with costs. The rule nisi is discharged. Counsel's fee Rs. 150. Petition dismissed.")

Implications:

The rectification order dated 23 March 1960 (under section 35) that computed the petitioner's total income for assessment year 1955-56 and resulted in a tax liability of Rs. 49,965.08 was upheld and remains effective against the petitioner.
The court affirmed that section 35(5) supplies jurisdiction for rectification where a partner's share was not included or was incorrectly included in an individual assessment by deeming such omission or error to be a mistake apparent on the record.
The court held that absence of prior notice does not invalidate a rectification where the rectification confers a benefit on the assessee (i.e., neither enhances assessment nor reduces refund), and consequently the failure to give notice in such circumstances does not amount to a breach of natural justice as a matter of law in the present facts.
The decision had direct effect on these parties only. The opinion did not purport to lay down a novel principle of law beyond application of the statutory provisions and the cited Supreme Court authority; no new precedent beyond the court's application of existing statutory text and precedent was announced.

Show all summary ...

Jagadisan, J.:— The Third Additional Income-tax Officer, attached to City Circle V, Madras, passed an order on March 23, 1960, purporting to be one under section 35 of the Indian Income-tax Act and levied a tax of Rs. 49,965.08 on the petitioner for the assessment year 1955-56-The petitioner challenges the validity of the said order and prays for the issue of a writ of certiorari or other appropriate writ for quashing the same.

2. The facts leading up to this writ petition are briefly as follows: The petitioner (assessee) is a professional cinedance director. He was also a partner of a firm called Vinodha Pictures, carrying on business of production of motion pictures. The firm of partnership was constituted by a deed dated January 20, 1950. At the inception there were four partners including the petitioner. This partnership functioned between January 20, 1950, and June 27, 1952. One of the partners, Subburam, retired from the firm and a fresh partnership was constituted between the other three partners which subsisted between June 28, 1952, and July 28, 1953. Then another partner, Raghavacharya, went out of the partnership and the two remaining partners, the petitioner and one D.L Narayanan, carried on the business between July 29, 1953, and November 12, 1954. In respect of the assessment years 1953-54,1954-55 and 1955-56, applications were made on behalf of the firm under section 26A of the Income-tax Act for registration. These applications were signed by the partners of whom the petitioner was one. Registration was granted for all the years. The firm was assessed as a registered firm and the particulars of assessment are as detailed below:

Assessment year Aceount year Date of assessment order Total income determined Rs. 1953-54 27-6-1952 30-3-1957 1,54,184 1954-55 28-6-1953 30-3-1957 36,000 1955-56 30-6-1954 30-3-1957 2,50,000

3. The assessment for the years 1954-55 and 1955-56 were made under section 23(4) of the Act. Applications under section 27 of the Act were filed to set aside the assessments under section 23(4) of the Act. Appeals were preferred to the Appellate Assistant Commissioner against the assessments for 1953-54 under section 23(3) of the Act and also against the assessments for the years 1954-55 and 1955-56 under section 23(4) of the Act. The Income-tax Officer having dismissed the applications under section 27 of the Act, appeals were preferred to the Appellate Assistant Commissioner against these orders as well. The appellate authority, after hearing the appeals, computed a loss for 1953-54 at Rs. 25,849 and the income for 1954-55 as nil. He, however, confirmed the Income-tax Officer's computation of income for 1955-56 at Rs. 2,50,000. Further appeals to the Appellate Tribunal were preferred on behalf of the firm. The Tribunal, by its order dated March 9, 1959, allowed the appeals against the orders dismissing the kralications under section 27 and directed the Income-tax Officer to make a fresh assessment in accordance with law in respect of the years 1954-55 and 1955-56. The Income-tax Officer carried out the directions of the Tribunal and completed the assessment of the firm in regard to these two years on March 11, 1960, under section 23(3) of the Act. He determined a loss of Rs. 75,511 for the assessment year 1954-55 and computed a profit of Rs. 2,66,787 for the assessment year 1955-56. He also determined the petitioner's share income from the firm. No appeals were preferred against these assessments and they have, therefore, become final.

4. There were also proceedings against the petitioner under the Act for assessment of his income as an individual. The details of the assessment are set out below:

Assessment year Account year Date of assessment Income returned Total income computed 1953-54 3-3-1953 26-1-1955; loss Rs. Rs. under profession 5,723 profit 1,499 Share of loss from registered firm 9,216 Declared “N.A” Total loss… 14,939 1954-55 21-3-1954 29-1-1955: profession loss 2,570 nil 1955-56 31-3-1955 31-12-1956: profession income 1,008 2,508

5. The petitioner admitted that he was a partner of Vinodha Pictures for purposes of assessment relating to the accounting year 1952-53 or the assessment year 1953-54. He disclosed in his return his share income from the firm as a loss of Rs. 9,216 for the assessment year 1953-54. The petitioner disclosed in his return that he was a partner of Vinodha Pictures and requested the Income-tax Officer to include his share income from the firm after the determination of his share of profit or loss resulting from the assessment of the firm. For the assessment year 1955-56 the petitioner submitted in his return that he had executed a release deed on November 4, 1954, to the other partner and stated that he ceased to be a partner from the very inception of the firm and that he was entitled only to a sum of Rs. 40,000 for the services rendered by him and expressed his willingness to bring that amount for taxation as and when the amounts were received. It is thus seen that there were two parallel proceedings, one in respect of the petitioner's individual income and the other in respect of the income of the firm of which, at all relevant dates, the petitioner was a partner.

6. After the assessment of the firm for the assessment year 1955-56 necessarily the petitioner's individual assessment, which was completed prior ??? the assessment of the firm, has to be modified. Action was therefore taken by the Income-tax Officer under section 35(5) of the Act and the petitioner was duly served with notice of the contemplated proceedings under that section. By order dated January 29, 1958, the total income of the petitioner, viz., his individual earning as a film director and his share income as a partner of Vinodha Pictures, was computed at Rs. 1,27,508. This resulted in a tax demand of Rs. 77,838-07. Subsequently, on July 30, 1958, the Income-tax Officer again passed an order under section 35 computing the petitioner's income at Rs. 1,22,537, after allowing the carried forward loss of Rs. 4,983 for the assessment year 1953-54. The tax due was therefore reduced from Rs. 77,838-07 to Rs. 72,896-64.

7. The stand taken by the petitioner in resisting these proceedings under section 35 of the Act was that the assessment of the firm was pending before the Appellate Assistant Commissioner and also before the Tribunal and that until the firm's assessment reaches a stage of finality no action under section 35 should be taken against him. The petitioner did not file any revision to the Commissioner of Income-tax from the orders of the Income-tax Officer under section 35 of the Act as apparently at that stage he was willing to abide by the result of the pending appeal in connection with the firm's assessment. He merely prayed for time to pay the tax and permission to pay the total amount in instalments of Rs. 2,000.

8. The termination of the appeal proceedings arising out of the assessment of the firm necessitated a fresh order under section 35 in regard to the petitioner's assessment. On March 23, 1960, the Income-tax Officer computed the petitioner's share income as per the firm's assessment at Rs. 1,33,393. and, after absorbing the carried forward loss of Rs. 25,170 for the assessment year 1954-55, computed the total income at Rs. 1,10,723. By reason of this rectification order the tax liability on the petitioner was reduced from Rs. 77,838-07 to Rs. 49,965-08. It is this order of rectification which is now called in question before us.

9. Mr. K. Srinivasan, learned counsel for the petitioner, contends that the Income-tax Officer had no jurisdiction to pass any order of rectification under section 35 of the Act. This submission is obviously untenable in view of section 35(5) which reads as follows:

“Where in respect of any completed assessment of a partner in a firm it is found on the assessment or reassessment of the, firm or on any reduction or enhancement made in the income of the firm under section 31, section 33, section 33A, section 33B, section 66 or section 66A that the share of the partner in the profit or loss of the firm has not been included in the assessment of the partner or if included, is not correct, the inclusion of the share in the assessment or the correction thereof, as the se may be, shall be deemed to be a rectification of a mistake apparent from the record within the meaning of this section, and the provisions of sub-section (i) shall apply thereto accordingly”

10. Section 35(1) provides for rectification of mistakes. It is not every kind of mistake that can however be rectified under this provision. The mistake must be one which is manifest or apparent from the record. In order to obviate any contention on behalf of an assessee that the non-inclusion of his share income from a firm would not be an apparent mistake on the face of his individual assessment, the legislature thought fit to introduce section 35(5). This provision came into effect on and from 1st April, 1952, as a result of the Income-tax (Amendment) Act, 1953. Failure to include in the assessment of an individual his share income as a partner of a firm, or the inclusion of an incorrect figure as his share income of the firm is deemed to be a mistake apparent on the face of the record within the meaning of section 35. This is no doubt a statutory fiction, but, nevertheless, it enables the authorities to act under section 35 so as to compute the correct income of an individual who earns income both in his own right as well as a partner of his business firm. Learned counsel for the petitioner is certainly not well-founded in submitting that the action of the Income-tax Officer in the instant case is lacking in jurisdiction.

11. The substantial ground, if not the only ground, urged on behalf of the petitioner is that the order dated March 23, 1960, is bad as it was passed without notice to the petitioner. It is conceded on behalf of the department that no notice was issued by the concerned officer before the impugned order was passed asking the petitioner to show cause why an order under section 35 should not be passed. But, it must, however, be remembered that the result of the rectification proceeding, which is now challenged before us, was to place the petitioner in a better position than he occupied prior to the order. We may refer to the proviso to section 35(1) which reads:

“Provided that no such rectification shall be made, having the effect of enhancing an assessment or reducing a refund unless the Commissioner, the Appellate Assistant Commissioner or the Income-tax Officer, as the case may be, has given notice to the assessee of his intention so to do and has allowed him a reasonable opportunity of being heard;….”

12. It is implicit from this proviso that an order for rectification can be passed behind the back of the assessee if that would not, in any way, cause prejudice to him either by way of enhancement of assessment or by way of reduction of the refund due. In other words, where a rectification order secures a benefit or advantage to the assessee he cannot complain of that order by reason only of the fact that there was no notice to him of the initiation of the proceedings. Nor can it be said that the failure to issue notice in such a case, where a benefit is conferred on the assessee, would amount to violation of the principles of natural justice. In our opinion, this contention of the learned counsel for the assessee, viz., that the proceedings are bad because of want of notice, is also devoid of substance.

13. Mr. Srinivasan, however, contends that factually there has been no reduction of assessment but only an enhancement of assessment. He contends that the prior order of rectification should be treated to be non est and void in law as the foundation for the said-order was knocked out by reason of the decision of the Income-tax Appellate Tribunal. Thus, according to the learned counsel, if the prior orders were treated as null and void and totally ignored, the result of the latest rectification proceedings was to throw a greater burden on him than what it was previously.

14. We must observe that we are wholly unable to follow or appreciate this contention. Right or wrong, there was an order under section 35 and that was an order which was passed in the presence of the petitioner and after due notice to him. It cannot be said that the order fell to the ground by reason of certain other proceedings before the Income-tax Appellate Tribunal relating to the assessment of the firm. These proceedings were independent proceedings, and, whatever effect they may have upon the individual assessment of the petitioner, they cannot have the legal effect of wiping out orders passed by the competent Income-tax Officer in relation to the petitioner's personal or individual assessment. The proper remedy which the petitioner should have adopted was to have preferred a revision petition to the Commissioner, or taken other steps to have the previous order of rectification corrected or modified. He did not choose to do so and the result was that that order became final. It is impossible to accept the contention that the orders became ineffective or wiped out by reason of the order of the Appellate Tribunal in a proceeding relating to the firm of which no doubt the petitioner was a partner. After the prior order of rectification the position was that there was an assessment against the petitioner individually in a particular figure. Once an order of rectification is passed the assessment itself is modified and what remains is not the order of rectification, but only the assessment as rectified. It should, therefore, be presumed that there was an assessment against the petitioner in respect of the year 1955-56 after the rectification order under section 35 and it was that assessment which was again the subject-matter of a fresh rectification proceeding at the instance of the Income-tax Officer. There can be no doubt that on the facts and circumstances of this case there has been no enhancement of assessment or reduction of refund amount so far asthe petitioner was concerned.

15. The petitioner contends that he was never a partner of Vinodha Pictures, and that, therefore, there can be no question of including his alleged share income as a partner of that firm. Obviously this contention is wholly untenable. The assessment of the firm has proceeded on the footing that the petitioner was a partner of that firm. Indeed, the petitioner himself cannot repudiate that fact, he having subscribed his signature to the application for registration under section 26A of the Act. It is too late in the day for the petitioner to contend that he was never a partner or that he should be deemed never to have been a partner as a result of the release deed executed by him. The assessment on the firm has become complete and final, and, if the petitioner was aggrieved because of the fact that he was deemed to be a partner of that firm, his remedy was to have filed an appeal against the order of assessment on the firm. This again he failed to do. It is true that the partnership has now been dissolved, but, that would not avail the petitioner in avoiding tax on his share income from the firm. This position has now been settled by a decision of the Supreme Court in E.M Muthappa Chettiar v. Commissioner Of Income-Tax, Madras. [1961] 41 I.T.R 1.

16. We have reached the conclusion that there is no error of law or jurisdiction apparent on the face of the record to justify the issue of a writ under article 226 of the Constitution. The petitioner had certainly another remedy to the Commissioner of Income-tax under section 23A of the Act against the order of rectification passed by the Income-tax Officer. But, in the view which we have taken, it is unnecessary to consider how far this remedy by way of revision would have been quite adequate and effective, and, whether the present writ should be entertained though he had an alternative remedy under the Act.

17. This writ petition fails and is dismissed with costs. The rule nisi is discharged. Counsel's fee Rs. 150.

18. Petition dismissed.