1. This petition under article 226 of the Constitution raises questions of some importance under the Income-tax Act. To appreciate them it is necessary to state the facts giving rise to the petition in some fullness. The petitioner-firm at all material times consisted of three partners and it carried on business, inter alia, at Bhavnagar. The assessment of the petitioner-firm for the assessment year 1949-50, the relevant account year being Samvat Year 2004, was completed by Income-tax Officer by an assessment order, dated 30th May, 1951. The petitioner-firm not having applied for registration was not registered under section 26A of the Income-tax Act, 1922 (hereinafter referred to as "the old Act"), but the Income-tax Officer being of the opinion that it was more advantageous to the revenue to proceed under section 23(5) (b), treated the petitioner-firm, though unregistered, as registered for the purpose of assessment and assessed the three partners by carrying the share of each in the income, profits and gains of the petitioner-firm in his individual assessment. Now it appears that there were certain lands taken on lease by the petitioner-firm and sublet by the petitioner-firm to a co-operative society. A part of these lands was acquired by the Government of Bombay under the Land Acquisition Act and a sum of Rs. 5,38,547 was awarded to the petitioner-firm as compensation in respect of the lands so acquired as a result of a consent decree taken in the compensation proceedings on 8th May, 1960. The petitioner-firm incurred legal expenses amounting to Rs. 2,33,991 in fighting the compensation proceedings. The Income-tax Officer was of the view that the amount of compensation received by the petitioner-firm was income assessable to tax but had escaped assessment and he therefore issued a notice under section 34(1) (a) seeking to reopen the assessment of the petitioner-firm for the assessment year 1949-50. The petitioner-firm contended that the amount of compensation after deducting the legal expenses represented gain arising from the acquisition of lands which were capital assets of the petitioner-firm and it was therefore not chargeable to tax either under the head "income from business" or under the head "capital gains". Discussions thereupon took place between the petitioner-firm and the revenue authorities and ultimately, in the course of the discussions as admitted by the respondents in the affidavit-in-reply made by C. I. Saxena on their behalf, the petitioner-firm "addressed letters dated 11th December, 1961, and 19th February, 1962, suggesting that the compensation amount of Rs. 5,38,547 should be taxed as Capital gains in the assessment year 1949-50, after deducting thereout the expenses of Rs. 2,33,991 incurred by the petitioner". This proposal of the petitioner-firm was accepted by the Directorate of Inspection and in accordance with the agreement thus arrived at, an assessment order was made by the Income-tax Officer on 22nd March, 1962. By this assessment order made under section 23(3) read with section 34(1) (a) the petitioner-firm was assessed as an unregistered firm in respect of a total income of Rs. 3,72,559 made up of Rs. 63,587 representing rents and interest income, and Rs. 3,09,072 representing capital gains arising out of receipt of compensation of Rs. 5,38,537 and the tax liability determined to be one under the assessment order was paid off and discharged by the petitioner-firm. Nothing transpired thereafter for a period of over three years until 23rd December, 1965, when a notice came to be issued by the Income-tax Officer stating that there was a mistake apparent from the record of the assessment of the petitioner-firm and that he proposed to rectify such mistake under section 154 of the Income-tax Act, 1961 (hereinafter referred to as "the new Act"). The mistake which, according to the Income-tax Officer, was apparent from the record of the assessment was, to quote the words of the notice :
"According to the
Income-tax Act, 1922, the capital gain in the case of firm would be business income in the hands of the partners as headwise allocation was not permissible under the old Act. Accordingly, capital gain of the firm would be taxable as business income in the hands of the partners. Hence the
provisions of section 23(5) (b) should have been applied as the gain to the revenue is to the extent of Rs. 1,54,000. But it appears that this aspect was not considered by the Income-tax Officer when assessment was completed."
2. The petitioner-firm by its letter, dated 31st December, 1965, pointed out to the Income-tax Officer that the view taken by him was erroneous and that there was no mistake apparent from the record of the assessment and requested him to adjourn the hearing of the notice with a view to enabling the petitioner-firm to submit a proper detailed answer. The petitioner-firm however felt that the action and he was not entitled to proceed with the hearing of the notice and the petitioner-firm therefore filed the present petition challenging the validity of the rectification proceedings initiated by the issue of the notice. On the admission of the petition an interim injunction was issued by this court restraining the Income-tax Officer who is the respondent before us from proceeding further with the impugned notice. The respondent, however, made an application for vacating the interim injunction under section 154 was expiring on 21st March, 1966, and if the interim injunction was not vacated, the impugned notice would be rendered infructuous and, on the application of the respondent, a consent order was passed on 17th March, 1966, varying the interim injunction to the limited extent that the respondents should be permitted to pass an order of rectification order were taken against the assessee till the hearing and final disposal of the petition. The respondent thereafter proceed to make an order of rectification dated 18th March, 1966, under section 154 of the new act. The respondent held that there was a mistake apparent from the record of the assessment dated 22nd March, 1962, had failed to make assessment under section 23(5) (b) by treating the petitioner-firm as registered for the purpose of assessment even though by so doing the aggregate amount of tax, including the super-tax, if any, payable by the petitioner-firm and the partners individually if separately assessed. The conclusion that there would have been a gain to the revenue if the petitioner-firm had been assessed as a registered firm by proceeding under section 23(5) (b) was based on the premises that what was capital gain in the hands of the petitioner-firm would have been business income in the hands of the partners and would have been assessed as such in the individual assessment of the partners. The respondent accordingly rectified the assessment order by assessing the petitioner-firm as a registered firm by invoking the provisions of section 23(5) (b). The result of treating the petitioner-firm under section 23(5) (b) was that no tax was payable by the petitioner-firm and a notice of refund of the amount of tax which had been paid by the petitioner-firm. The petitioner-firm, in view of the making of the order of rectification and the issue of notice of refund, amended the petition with leave of the court by introducing challenge against the validity of the order of rectification and the notice of refund and seeking a writ of certiorari against the same.
3. The petitioner-firm contended that the respondent had no jurisdiction to make an order of rectification under section 154 of the new act since the rectification admittedly related to assessment of tax made for the assessment year 1949-50, to which the old Act was applicable and proceedings for rectification of the assessment for that assessment year could only be taken under section 35(1) of the old Act in view of the provisions of section 297(2)(c) of the new Act. The argument of the petitioner-firm was that, since the order of rectification was avowedly made under section 154 of the new Act and that section did not confer jurisdiction on the respondent to rectify the assessment order for the assessment year 1949-50, the order of rectification was without jurisdiction and hence null and void. The validity of this contention was disputed on behalf of the revenue and a two-fold answer was sought to be given to it. The first answer was that, on a true construction of section 154 of the new act, the respondent had jurisdiction to rectify the order of assessment even though it related to the assessment year 1949-50 and, secondly, it was urged, that, in any event, even if section 154 of the new act was not applicable and did not confer jurisdiction on the respondent to make the order of rectification, the respondent had power under section 35(1) of the old Act to make the order of rectification and mere recital of a wrong source of power did not have the effect of invalidating the order of rectification.
4. On these rival contentions the first question which arises for consideration is as to which is the provision of law under which an order could be made for the respondent rectifying the assessment order for the assessment year 1949-50. Does section 154 of the new act apply or must we find the source of the power in section 35(1) of the old Act ? The revenue relied on the language of section 154(1) (a) and urged that there was nothing in it which limited the applicability of that provision to an order of assessment made under the new Act. The words "under this Act", contended the revenue, were significantly absent and the section on its plain terms was sufficiently wide to include a power to amend even an order of assessment made under the old Act. The revenue also pointed out that section 297(2) which, as pointed out by the Supreme Court in Kalawati Devi Harlalka v. Commissioner of Income-tax was meant to provide as far as possible for all contingencies which may arise out of the repeal of the old Act, did not make any provision in regard to proceedings for rectification and that also supported the contention that rectification of an order of assessment made under the old Act was liable to be governed by section 154 of the new act. Reference was also made by the revenue to the Income-tax (Removal of Difficulties) Order, 1962, made by the Central Government under section 293 of the new act and it was urged that, though provision was made in it in regard to appeal, reference or revision proceedings in respect of orders passed under the old Act, nothing was stated in regarad to rectification proceedings : nothing was necessary to be stated since rectification, even in respect of an assessment order passed under the old Act, was governed by section 154 of the new act. These arguments were sought to be met on behalf of the petitioner-firm by saying that since rectification affects vested rights, and section 154 empowering the Income-tax Officer to rectify an order of assessment made by him was a substantive and not a procedural provision and it could not be construed to have retrospective effect so as to empower the Income-tax Officer to rectify an order of assessment made prior to the enactment of that section. Fortunately, however, it is not necessary for us to spend any time on a consideration of these arguments, for there is a decision of the Supreme Court in S. Sankappa v. Income-tax Officer, which directly decides this point in controversy between the parties. The notices for rectification of assessment of the partners which were impugned in that case purported to be issued under section 155 of the new act and the question arose in the writ petition filed by the partners in the High Court of Mysore whether these notices were valid. Before the Supreme Court the Income-tax Officer did not seek to justify the impugned notices under section 155 of the new act but relied on section 35(5) of the old Act and contended that since the rectification admittedly related to assessment of tax for the assessment years when the old Act was applicable, the proceedings for rectification could be taken only under section 297(2)(a) of the new Act. The partners disputed the applicability of section 35(5) of the old Act and contended that "proceedings for rectification under section 35(5) of the Act of 1922 cannot be held to be proceedings for assessment within the meaning of that expresion used iln secstion 297(2)(a) of the Act of 1961, so that, under that provision of law, the Act of 1922 could not be resorted to by the Income-tax Officer in order to rectify the assessments" of the partners. The question whdich therefore arose before the Supreme Court was whether proceedings for rectificastion of the assessment of the partners could be instituted by the Income-tax Officer under secstion 35(5) of the old Act. The Supreme Court held that the word "assessment" as used in section 297(2)(a) had a comprehensive meaning and it comprehended the whole procedure for ascertaining and imposing the liability upon the taxpayer and it included proceedings fodsr rectification of assessment to tax. The Supreme Court observed :
".... when proceedings are taken for rectification of assessemnt to tax either under section 35(1) or section 35(5) of the Act of 1922, those proceedings must be held to be proceedings for assessment. In proceeding under those provisions, what the Incoem-tax Officer does is to correct errors in, or rectify orders of assessment made by him, and orders making such corrections or rectifications are, therefore, clearly part of the proceedings fosr assessment."
and concluded the discussion of this point by saying :
"Clearly, therefore, in these cases,
section 297(2)(a) of the Act of 1961 permits the Income-tax Officer to proceed in accordance with the provisions of the Act of 1922 and he has rightly proposed to take action under section 35(5) of the Act of 1922............."
5. It is therefore clear that proceedings for rectification of an order of assessment are proceedings for assessment and where an assessment order made pursuant to a return of income filed before the commencement of the new Act, proceedings for rectification would by reason of section 297(2)(a), be governed by section 35 of the old act. The revenue however sought to escape the effect of this decision by a rather ingenuous argument. Faced with this decision the revenue of course could not contend that the proceedings for rectification could not be initiated under section 35 of the old At but the argument of the revenue was that, merely because proceedings for rectification could be initiated under section 35(5) of the old Act, that did not mean that they could not be initiated under section 154 of the new act. The revenue urged that where the order of assessment sought to be rectified was made under the old Act, both section 35 of the old Act and section 154 of the new Act would be available to the Income-tax Officer for rectifying the order of assessment. This argument is plainly incorrect it fails to give due effect to the provision enacted in section 297(2)(a). what section 297(2)(a) says is that where a return of income has been filed before the commencement of the new Act by a person for any assessment year proceedings for the assessment of that year may be taken and continued as if the new Act had not been passed. The words underlined by us clearly show that the proceedings for assessment must be taken under the old Act and cannot be taken under the new Act and cannot be taken under the new Act. And if, as held by the Supreme Court the proceedings for assessment include proceedings for rectification, it must follow as a necessary corollary that proceedings for rectification must be taken under the old Act and not under the new Act. It is therefore clear that the respondent had no power to make an order of rectification under section 154 of the new act. We find that the same view has also been taken by the Andhra Pradesh High Court in Uppala Peda Venkataramanaiah v. First Additional Income-tax Officer confirmed in appeal in First Additional Income-tax Officer v. Uppala Peda Venkataramanayya.
6. But that does not necessarily lead to the conclusion that the order of rectification made by the respondent was without jurisdiction. It is now well settled that a wrong reference to the power under which an order is made does not per se vitiate the order, if there is some other power under which the order could lawfully be made. The validity of the order has to be tested by reference to the question whether the Income-tax Officer had any power at all to make the order. If the power is otherwise established, the fact that the source of the power has been incorrectly described would not make the order invalid : the order cannot fail merely because it purports to be made under a wrong provision if it can be shown to be within the power of the Income-tax Officer under some other provision of law. Now, though the order of rectification could not be made by the respondent under section 154 of the new act, it cannot be said that the respondent had not power at all to make it. The respondent had power to make an order of rectification under section 35 of the old act and the order of rectification could not therefore be regarded as an order made by the respondent without jurisdiction. It is not doubt true that the notice which preceded the order of rectification mentioned section 154 of the new Act as the provision under which the assessment order was sought to be rectified but that was no prejudice to the petitioner-firm by reason of the wrong description of the source of the power, since there is no difference in the nature and content of the power, whether it is exercised under section 35 of the old act or under section 154 of the new act, and the conditions for the exercise of the power under both the provisions are also identical. The order of rectification cannot therefore be assailed as an order made in exercise of a power which did not exist. It was an order made in exercise of the power under section 35 of the old act.
7. There is abundant authority to support this view but we may usefully refer only to one decision, and that is the decision of the Supreme Court in L. Hazari Mal v. Income-tax Officer. The Commissioner of Income-tax in that case, purporting to act under section 5(5) and 5(7A) of the Indian Income-tax Act, made an order on November 4, 1953, that the assessment of the assessee-firm would be done by the Income-tax Officer, Special Circle, Ambala, and not by the Income-tax Officer at Patiala who was the competent authority under section 64 of the Act to assess the firm. In 1955 the Income-tax Officer, Special Circle, Ambala, issued a notice under section 34 of the Patiala Income-tax Act, 2001, to reopen the firm's assessment or the accounting year 1945-46. The firm contended that the officer at Ambala had no jurisdiction as the order of the Commissioner was ultra varies, since it was not issued under the Patiala Act, which applied to the assessment year 1945-46. The firm contended that the officer at Ambala had no jurisdiction as the order of the Commissioner was ultra vires, since it was not issued under the Patiala Act which applied to the assessment year 1946-47 by virtue of the Finance Act, 1950. This contention was negatived by the Supreme Court, Hidayatullah J., as he then was, observing :
"The Patilal
Income-tax Act contained provisions almost similar to section 5(5) and 5(7A) of the Indian Income-tax Act. Sub-section (5) differed in this that the Commissioner of Income-tax was required to consult the minister-in-charge before taking action under that sub-section. The only substantial difference in the latter sub-section was that the Explanation which was added to
section 5(7A) of the Indian Income-tax Act as a result of the decision of this court in
Bidi Supply Co. v. Union of Indian did not find place in the Patiala Act. The Commissioner, when he transferred this case, referred not to the Patiala
Income-tax Act, but to the Indian
Income-tax Act, and it is contended that if the Patiala
Income-tax Act was in force for purposes of reassessment action should have been taken under that Act and not the Indian
Income-tax Act. This argument however loses point, because the exercise of a power will be referable to a jurisdiction which confer validity upon it and not to a jurisdiction under which it will be nugatory. This principle is well settled : see
Pitamber Vajirshet v. Dhondu Navlapa."
8. The exercise of the power in making the order of rectification must be held to be referable to section 35 of the old act which confers validity upon it and not to section 154 of the new act under which it would be nugatory.
9. That takes us to the next question whether the order of rectification was validly made under section 35(1) of the old Act. Now power off rectification under section 35 can be exercised only if there is a mistake apparent from the record of the assessment of the assessee. Two conditions are requisite before the Income-tax Officer can exercise the power under section 35. One is that there must be a mistake and the other is that the mistake must be apparent from the record. The contention of the petitioner-firm was that neither of these two conditions was satisfied in the present case and it therefore becomes necessary to examine whether these two conditions are satisfied. If either of them is not, the order of rectification would have to be held to be without jurisdiction.
10. The petitioner-firm urged that there was no mistake committed by the Income-tax Officer who made the assessment order date 22nd March, 1962. Now the mistake which was alleged by the respondent and on the basis of which the respondent exercised the power of rectification was the failure of the Income-tax Officer who made the assessment order to apply section 23(5) (b) in the assessment of the petitioner-firm. The respondent said that capital gain in the hands of the petitioner-firm would be business income in the hands of the partners and therefore, if the petitioner-firm had been treated as a registered firm for the purpose of assessment under section 23(5) (b), the revenue would have gained more tax and the Income-tax Officer should have therefore proceeded under section 23(5) (b) and assessed the petitioner-firm as if it were a registered-firm. The petitioner-firm disputed the very basis of this argument and contended that it was not correct to say that capital gain in the hands of the petitioner-firm would be business income in the hands of the partners. That raises the question : when a partner receives his share in capital gain of the firm does it cease to bear the character of capital gain and acquire the character of income from business so as to be assessable under section 10 ? In order to determine this question it is necessary to refer to a few provisions of the old Act.
"Total income" is defined in section 2(15) to mean total amount of income, profits and gains referred to in section 4(1) computed in the manner laid down in the Act. This definition is an important one since the charge of tax is levied by section 3 on the total income of the previous year of the assessee and it, therefore, runs through almost every section of the Act. section 4(1) defines the scope of the total income with reference to the factor of residence. Section 6 lays down the heads of income chargeable to income-tax and for each head appropriate rules are provided in section 7 to 12 for computing the amount of income. The heads are six in number and amongst them are the heads "Profits and gains of business, profession or vocation" and "Capital gains". Section 10 lays down the rules for computing the income of the assessee under the head "Profits and gains of business profession or vocation". Sub-section (1) of section 10 provides that the tax shall be payable by an assessee under the head "Profits and gains of business profession or vocation" in respect of the profits or gains of any business, profession of vocation carried on by him. Now, an assessee may be an individual or a firm and even in the case of a firm, the revenue may at its option either assess the firm or assess the individual partners of the firm. Where a firm is assessed it may be either registered or unregistered. Whether or not it is registered, the procedure for assessment is up to a point common. The taxable income of the firm is computed in its hands as that of an entity by following the procedure set out in sub-section (1) or sub-section (3) or sub-section (4) of section 23. The registration of the firm makes no difference with regard to the computation of the total income of the firm which has to be done in either case in the hands of the firm. But then comes the difference between a registered firm and an unregistered firm as regards assessment procedure. If the firm is registered, the procedure followed is that set out in section 23(5) (a). Prior to its amendment by the Finance Act, 1956, section 23(5) (a), was in the following terms :
"23. (5) Notwithstanding anything contained in the foregoing sub-section, 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 sum payable by him on the basis of such assessment shall be determined :
Provided that if such share of any partner is a loss it shall be set off against his other income of carried forward and set off in accordance with the provisions of section 24 :.........."
11. The position therefore is that in the case of a registered firm the firm itself does not pay the tax and the tax payable by the firm is therefore not determined but each partner's share of the total income of the firm computed in accordance with section 16(1) (b) is added to his other income, the tax payable by each partner on the basis of such income (including his share of the firm's total income) is determined and the demand or levy is made on the partner individually. section 16(1) (b) provides as to how each partner's share of the total income of the firm is to be computed and it says :
"16. (1) In computing the total income of an assessee - ..............
(b) when the assessee in a partner of a firm, then when there the firm has made a profit or a loss, his share (whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of the previous year increased or decreased respectively by his share in the balance of the profit or loss of the firm after the deduction of any interest salary, commission or other remuneration payable to any partner in respect of the previous year :
Provided that if his share so computed is a loss, such loss may be set off or carried forward and set off in accordance with the provisions of section 24."
12. On the other hand, if the firm is unregistered, the tax payable by the firm itself is determined as in the case of any other entity and the demand and levy are made on the firm itself. But says section 235(5)(b) :
"Notwithstanding anything contained in the foregoing sub-section 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, -..............
(b) in the case of an unregistered firm, the Income-tax Officer may instead of determining the sum payable by the firm itself proceed in the manner laid down in clause (a) as applicable to a registered firm if in the opinion the aggregate amount of the tax including super-tax if any payable by the partners under such procedure would be greater than the aggregate amount which would be payable by the firm the partner individually if the firm were assessed as an unregistered firm."
13. It will be seen that whether the firm is registered or unregistered the total income of the firm is computed in accordance with the provisions of the Act. Now, profits and gains of the firm may fall within one or more of the heads of income specified in section 6 and under each head, profits and gains would be computed in accordance with the rules relevant to such head of income and after the profits and gains under the different heads are computed they would all be aggregated to make up the total income of the firm after carry forward and set off permissible under section 24. So far there is no dispute between the parties but the question is as to what is the position where partners are individually assessed without assessment of the firm or the firm is assessed as a registered firm, for in either case the share of each partner of the income, profits and gains of the firm would be included in his total income for the purpose of assessment. Would the share of the income profits and gains received by the partner be assessable as income, profits and gains of business under section 10 irrespective of the heads of income under which the income profits and gains of the firm fall, or would it be liable to be apportioned under the various head of the firm fall, or would it be liable to be apportioned under the various heads of income according as the income, profits and gains of the firm are determined under each head of income ?
14. Now, it is no doubt true that unlike section 67(2) of the new Act, there is no provision in the old Act which provides for apportionment of the partner's share of income, profits and gains of the firm under the different heads of income according to the determination made in respect of the income, profits and gains of the firm but when the share of the partners sought to be assessed in his individual assessment it is implicit in the very scheme of the Act that it must be determined under what head of income it falls. When the total income of the partner is computed, the head of income under which each item of income falls has to be determined, for there are different rules of computation appropriate to each head of income. The Income-tax Officer computing the total income of the partner would therefore have to ask himself the question as to what is the head of income under which the share of the partner in the income, profits and gains of the firm falls. Now in order that any profits or gains should fall within the head of income, profits and gains of business, under section 10, it is necessary that they should be profits or gains of some business carried on by the assessee. The share in the income profits and gains of the firm would therefore be assessable under the head "Profits and gains of business, profession or vocation" only if it can be predicated of it that it represents profits or gains of any business carried on by the partner. We must therefore ask ourselves the question whether the share of each partner in the amount representing capital gain of the firm could be said to be profits or gains derived from any business carried on by the partner.
"Partnership" has the same meaning in the Income-tax Act as it has in the Partnership Act. Section 4 of the Partnership Act. Section 4 of the Partnership Act defines "partnership" as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all : person who have entered into partnership with one another are called individually partners and collectively a firm and the name in which the business is carried on is called the firm came. It is undoubtedly true that for the purpose of the Income-tax Act the firm is an assessable entity but the definition of "partnership" incorporated in the Income-tax Act shows that a firm is not a legal entity; it is not a juristic person distinct from its partners. A firm is merely a compendious expression to indicate the partners who are carrying on the business. When it is said that a firm is carrying on the business what is meant is that the partners constituting the firm are carrying on the business. Each partner is carrying on the business in partnership with the other partners and the business of the partnership is the business carried on by each partner. Now, if there are any profits or gains which arise to the firm from the business of the partnership, they would be assessable in the hands of the firm under section 10 and the share of each partner in such profits or gains would also be assessable in his hands under section 10, for it would represent the profits or gains derived by the partner from the business carried on by him. But where the profits or gains earned by the firm are not profits or gains of the business of the partnership but are capital gains it is difficult to see how the share of the partner in such profits or gains can be said to represent profits or gains of the partnership business so as to be assessable under section 10 in the hands of the firm, they cannot be profits or gains of the business carried on by the partner, for the business carried on by the partner for the business carried on by the partner is the same as the business of the partnership. What are not profits cannot become profits or gains of that business when an aliquot share of them is received by such partner. The firm, as pointed out above, is a compendious expression for the partners and when it is said that the firm received income, profits and gains it is the partners collectively who received the income, profits and gains it is the partners collectively who received the income, profits and gains an reach one gets his share according to the partnership agreement. The share of the partner in the income, profits and gains of the firm is only a part of the whole of the income, profits and gains and the part must bear the character of the whole. The position would be wholly different where a shareholder receives divided out of the income profits and gains made by the company. There the company stands as a separate juristic entity distinct from the shareholder and the shareholder receives the dividend in virtue of a distinct right which the possesses as a shareholder. But a partnership being merely an association of persons for carrying on business of the partnership and the firm being a compendious mode of describing the partners, where the income, profits and gains of the firm are divided amongst the partners, the share in the hands of each partner bears the same character as the income, profits and gains in the hand of the firm. It is therefore impossible to hold that the share of each partner in the capital gain of the firm representing profits or gains was derived from any business carried on by him. The respondent was therefore, in our opinion, wrong in taking the view that capital gain in the hands of the petitioner-firm would be business income in the hands of the partners. The character of capital gain would continue to attach to this amount even in the hands of the partners and if that be so, the entire basis of the argument of the respondent disappears and it must be held that the Income-tax Officer making the original assessment order did not make any mistake in not applying section 23(5) (b) in the assessment of the petitioner-firm. We may point out that it was not the case of the respondent in the order of rectification nor even in the affidavit filed by him in reply to the present petition that even if the amount of capital gain in the hands of the petitioner-firm remained capital gain in the hands of the partners, section 23(5) (b) ought to have been applied by the Income-tax Officer. We must therefore hold that there was no mistake in the assessment order and the condition precedent for the exercise of the power of rectification under section 35 of the old act was not satisfied.
The petitioner-firm also contended that, in any event, even if what was capital gain in the hands of the firm would be business income in the hands of the partners and there was therefore a mistake made by the Income-tax Officer in not assessing the petitioner-firm as a registered firm under section 23(5) (b), it was not a mistake apparent from the record and the power of rectification under section 35 of the old act was therefor not attracted. The determination of this contention depends upon what is the true scope and meaning of the expression "mistake apparent from the record". It is now well settled that a mistake apparent from the record must be one to point out which no elaborate argument is required. It must be a glaring, obvious or self-evident mistake. If it is a mistake which requires to be established by complicated process of investigation, argument or proof, it cannot be regarded as a mistake apparent from the record : vide Walchand Nagar Industries Ltd. v. V. S. Gaitone, Income-tax Officer, M. Subbaraja Mudaliar v. Commissioner of Income-tax, National Rayon Corporation v. G. R. Bahmani, Income-tax Officer, and Arvind N. Mafatlal v. T. A. Balakrishnan, Deputy Controller of Estate Duty. The Supreme Court pointed out in Satyanarayan v. Millikarjun, while dealing with the question as to what is an error of law apparent from the face of the record so as to invite certiorari jurisdiction of the High Court : "An error which has to be established by a long drawn process of reasoning on points where there may conceivable be two opinions can hardly be said to be an error apparent on the face of the record. " These observations, though made in the context of the exercise of certiorari jurisdiction, are equally applicable to the construction of the words "mistake apparent from the record" in section 35 of the old act. The Supreme Court also spoke to the same effect in a case directly arising under section 35 of the old act, namely, Maharana Mills (Private Ltd. v. Income-tax Officer, Porbandar :
"The power under section 35 is no doubt limited to rectification of mistakes which are apparent from the record. A mistake contemplated by this section is not one which is to be discovered as a result of an argument but it is open to the Income-tax Officer to examine the record including the evidence and if he discovers any mistake he is entitled to rectify the error............"
15. If therefore a mistake is of such a nature that it can be discovered only as a result of an argument or by a long drawn process of reasoning on points where there may conceivably be two opinions, it cannot be said to be a mistake apparent from the record so as to attract the corrective jurisdiction under section 35 of the old act. Now in the present case, putting the matter at the highest in favour of the revenue, the question whether capital gain in the hands of the firm would be business income in the hands of the partners was a highly debatable question and, even if there was any mistake in regard to a point where there might conceivably be two opinions. It must therefore follow that, even if any mistake was committed by the Income-tax Officer, it was not a mistake apparent from the record. This condition for the exercise of the jurisdiction under section 35 of the old act was also therefore not satisfied and the order of rectification must be held to be bad on this ground too.
16. That leaves two other contentions urged on behalf of the petitioner-firm : the petitioner-firm, in the first place, contended that section 23(5) (b) merely conferred a discretion on the Income-tax Officer to assessee an unregistered firm as if it were registered if in his opinion
"the aggregate amount of the tax including super-tax if any, payable by the partners under such procedure would be greater then the aggregate amount which would be payable by the firm and the partners individually if separately assessed."
there was no obligation on him to do so and his failure to do so could not therefore be regarded as mistake apparent from the record. The argument was that even if the condition was satisfied, namely that the revenue would gain more tax by following the procedure set out in
section 23(5) (b), the Income-tax Officer had a discretion whether or not to follow the procedure set out in
section 23(5) (b) and, if in the exercise of his discretion he chose not to follow that procedure in the assessment of the petitioner-firm it, could not be said that there was any mistake apparent from the record. This contention involves a question of construction of
section 23(5) (b) and much argument was devoted to that question before us but, in the view taken by us as regards the other two contentions of the petitioner-firm it is not necessary for us to decide it. The other contention urged on behalf of the petitioner-firm was that, even if there was a mistake, it was not apparent from the record of the assessment of the petitioner-firm for unless reference was made to the record of assessment of the partners it could not be said that by following the procedure set out in
section 23(5) (b) the aggregate amount of the tax, including super-tax if any, payable by the partners under such procedure would be greater than the aggregate amount which would be payable by the firm and the partners individually if separately assessed. It is unnecessary to decide this contention also and we do not say anything about it.
17. We therefore allow the petition and make the rule absolute by issuing a writ of certiorari quashing and setting aside the order of rectification, dated 18th March, 1966, and the notice of refund dated 19th March 1966, issued pursuant to the order of rectification. The respondent will pay the costs of the petition to the petitioner.