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  • Dipak Kumar Sen
  • Shyamal Kumar Sen, JJ.
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  • Shyamal Kumar Sen, JJ.
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Smart Summary

Structured Summary of the Opinion delivered by Dipak Kumar Sen, J.

Factual and Procedural Background

The assessee, Alfred Herbert (India) Pvt. Ltd., an Indian company and a subsidiary of Alfred Herbert Ltd., U.K. (a non-resident), was appointed sole selling agent of the non-resident by agreement dated 27 June 1955. For assessment years 1968–69, 1969–70 and 1970–71 (relevant accounting years ending 31 October of 1967, 1968 and 1969), Alfred Herbert Ltd., U.K. was assessed to income-tax in India as a non-resident; assessment orders were passed on 5 September 1968, 7 August 1969 and 12 February 1971 respectively.

On 2 March 1971 the Income-tax Officer (ITO) passed orders under section 163 of the Income-tax Act, 1961, treating the assessee (the Indian subsidiary) as agent of the non-resident company for the three assessment years. On 3 March 1971 the ITO issued notices under section 148 (for 1968–69 and 1969–70) and under section 139(2) (for 1970–71) calling upon the assessee to file returns as agent of the non-resident. The assessee filed nil returns and protested; protests were rejected and assessments were made under section 143(3) read with sections 147 and 191 (for 1968–69 and 1969–70) and under section 143(3) (for 1970–71).

The assessee appealed; the Appellate Assistant Commissioner reduced the assessed quantum but upheld business-connection findings. Both assessee and Revenue appealed to the Income-tax Appellate Tribunal (the Tribunal). The assessee sought to raise additional grounds before the Tribunal contending inter alia that once the non-resident had been assessed directly, the Income-tax Officer could not again proceed against the agent (raising jurisdictional and section 147(a)/(b) objections). The Tribunal allowed the additional grounds as questions of law, accepted the assessee's contentions and allowed the assessee's appeals on those grounds; the Revenue's appeals were dismissed. The Revenue applied under section 256(1) and section 256(2) for the Tribunal to refer questions of law to the High Court; two references (Income-tax Reference Nos. 251 of 1977 and 112 of 1983) were made and heard together by this Court.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, and on a correct interpretation of sections 160, 161, 163 and 166 of the Income-tax Act, 1961, the Tribunal was right in law in holding that the assessment made in the hands of the assessee as an agent of the non-resident company in respect of income deemed to have accrued or arisen to the latter through or from a business connection in India was bad in law in view of the fact that the non-resident had already been assessed in respect of certain other items of income?
  2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the reassessment proceedings initiated by the Income-tax Officer were illegal and without jurisdiction (this question was directed in respect of assessment year 1969–70)?

Arguments of the Parties

Revenue's Arguments

  • The Revenue submitted that the ITO could assess a non-resident company on part of its income and also reassess the agent if any income had escaped assessment in the hands of the non-resident — the non-resident and its agent may be treated as two separate assessees and both are liable to tax.
  • The Revenue relied on a number of decisions (including decisions of the Andhra Pradesh High Court) holding that the revenue at the time of reassessment can proceed either against the agent or the principal and that there was no statutory bar to reassessing the principal even though the original assessment had been made on the agent.
  • Where reassessment was sought, the Revenue submitted that what was being reassessed was another part of the non-resident's income (income which had escaped assessment), not the same income already assessed.

Assessee's Arguments

  • The assessee contended that the law requires making a choice: income assessable either directly on the person on whose behalf it is received or in the hands of the representative (agent), but income of a year could not be split and assessed in different hands — once the Revenue had elected one mode it could not proceed in the other.
  • The assessee argued that reassessment under section 147(a) was illegal because there was no default on the part of the assessee to file returns in respect of the non-resident's income — the assessee was not treated as agent during the relevant accounting years until 2 March 1971, and therefore had no obligation to file returns earlier.
  • The assessee further argued that reassessment under section 147(b) could not be invoked because no previous assessment had been made in the hands of the assessee.
  • The assessee relied on several High Court and Supreme Court decisions to support the proposition that the Revenue cannot split a single income and assess it in different hands or seek to assess the same income twice.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner Of Income-Tax, A.P v. Claggett Brachi & Co. Ltd., [1975] 100 ITR 46 (AP) Held (Andhra Pradesh High Court) that there was no bar to reassessing the principal even though the original assessment had been made on the agent; Revenue may proceed against principal despite assessment on agent. The Court noted this Andhra Pradesh decision as supporting the Revenue's contention but treated it as one of the two Andhra Pradesh decisions whose view it did not accept in preference to other High Court and Supreme Court authorities.
Barium Chemicals Ltd. v. ITO, [1975] 100 ITR 637 (AP) Andhra Pradesh High Court held direct assessment of the non-resident was not barred by representative-assessee provisions; both non-resident and its agent could be assessed (no exclusive option). The Court recorded this decision as one of the Andhra Pradesh authorities but found itself unable to adopt the construction placed upon sections 160–166 by that High Court; it did not follow the Andhra Pradesh approach.
CIT v. Trustees of Miss Gargiben Trust (No. 1), [1981] 130 ITR 479 (Bom) Addressed treatment of income taxed in beneficiary's hands and whether such income should be taken into account for trust's tax rate; reflects limits on double assessment of same income. The Court referenced this Bombay High Court decision as an example of authorities supporting the proposition that income already taxed in one hand should not be treated as available for further assessment in another hand; it influenced the Court's view against reassessment of the same income.
East India Housing and Land Development Trust Ltd. v. CIT, [1961] 42 ITR 49 (SC) Explains that income-tax is a single tax on aggregate taxable receipts from all sources; conceptual foundation for not splitting tax on one income into multiple assessments. The Court cited this Supreme Court decision for the principle that tax is on aggregate income and used it to support the conclusion that income cannot be split and taxed in different hands for the same assessment year.
Trustees of Chaturbhuj Raghavji Trust v. CIT, [1963] 50 ITR 693 (Bom) Interpreting provisions corresponding to sections 160–161: two alternative methods exist — tax either the trustee or the person on whose behalf income is receivable; once one method is adopted the other may be unavailable. The Court relied on this authority as part of the body of High Court decisions supporting the view that the Revenue cannot choose both routes so as to tax the same amount twice.
CIT v. H.E.H. Mir Osman Ali Bahadur, [1966] 59 ITR 666 (SC) Interpreted predecessor provisions (section 41 of 1922 Act) holding that Revenue has option to levy/collect tax from trustee or beneficiary; it warned against splitting the same income between two assessees. The Court regarded this Supreme Court decision as laying down clear law that splitting the same income would lead to anomalies; it was a principal authority the Court followed in rejecting reassessment here.
Panna Sanjay Trust v. CIT, [1969] 74 ITR 396 (Guj) Concluded that sections 160, 161, 164 and 166 present two alternative modes of assessment — representative or beneficiary — and that the Revenue can adopt one mode but not both for the same amount. The Court cited and followed the reasoning in this Gujarat High Court decision as consistent with its conclusion that the Revenue cannot split or double-assess the same income.
Premier Automobiles Ltd. v. S.N. Shrivastava, ITO, [1970] 76 ITR 1 (SC) Held that where an assessee is treated as agent of a non-resident during the assessment year, the agent becomes liable (for example, to pay advance tax) in that capacity. The Court referred to this authority in the context of when a person is treated as an agent during the year and the liabilities that follow; it was cited by the assessee to support the view that agency status matters for obligation to file returns.
Rajapalayam Mills Ltd. v. CIT, [1978] 115 ITR 777 Affirms that although profits of distinct businesses are computed separately, tax is chargeable on aggregate profits — principle against fragmented taxation of the same taxable base. The Court cited this decision for the general proposition that tax is on aggregate income, reinforcing the conclusion that income of a year should not be split for assessment in different hands.
Haji Abdul Hamid v. Commissioner Of Income-Tax, Lucknow, [1980] 122 ITR 1000 (All) Interpreted predecessor trustee-beneficiary provisions to hold that the ITO could either assess the trustee or make direct assessment on beneficiaries (exclusive options for same income). The Court included this authority among those High Court decisions it treated as forming a uniform view contra the Andhra Pradesh decisions; it supported the Court's conclusion against reassessment in multiple hands.
Prem Nath Diesels Grainvaying Division v. CIT, [1986] 159 ITR 575 (Del) Interpreting section 163: held it is open to the ITO to assess either the representative or the non-resident initially; once the non-resident was assessed, the representative could not be assessed after the statutory period (in that case two years had passed). The Court cited this Delhi High Court decision as consistent with the body of authorities that limit the Revenue's ability to proceed against both principal and representative for the same income; it formed part of the jurisprudential support the Court followed.
Commissioner of Income-tax v. Murlidhar Jhawar and Puma Ginning and Pressing Factory, [1966] 60 ITR 95 (SC) Expresses the doctrine that the Revenue cannot "seek to assess the one income twice". The Court quoted this Supreme Court doctrine (as applied in other High Court decisions) and treated it as authoritative support for the view that the Revenue cannot assess the same income in different hands.

Court's Reasoning and Analysis

The Court examined the statutory scheme of sections 160–166 of the Income-tax Act, 1961 (including definitions in section 2 and the definition/requirements of "agent" in section 163), and the decisions cited by both sides. The analysis proceeded along the following lines:

  1. The Court observed that, apart from two decisions of the Andhra Pradesh High Court, other High Courts and the Supreme Court have uniformly held that the Revenue cannot proceed simultaneously against a non-resident and his representative by splitting the same income between them.
  2. The Revenue's contention that a portion of the non-resident's income which had escaped assessment could nevertheless be assessed in the hands of the representative was considered but rejected: the Court held that for the assessment year 1970–71 the ITO, knowing assessment had already been made in the hands of the non-resident, issued a fresh notice under section 143(3) calling upon the assessee as representative to file a return. The Court held that this amounted to an assessment of the same income both in the hands of the representative and the principal.
  3. The Court noted section 2(8) which defines "assessment" to include "reassessment", and concluded that where an income has already been assessed in the hands of the non-resident, attempting to assess the same income in the hands of the representative amounts to reassessment of an income already assessed — i.e., the same income cannot be assessed twice.
  4. For the other two assessment years (1968–69 and 1969–70) the Court found that reassessment proceedings were initiated after the assessee had been treated as an agent (by order dated 2 March 1971), but that during the currency of the relevant accounting years the assessee had not been treated as the agent and therefore had no obligation to file returns on behalf of the non-resident. Consequently, the "default" required for assumption of jurisdiction under section 147(a) was absent; further, section 147(b) could not apply because there had been no prior assessment of the assessee. Thus reassessment was illegal and without jurisdiction.
  5. The Court expressly disagreed with the construction placed on sections 160–166 by the Andhra Pradesh High Court decisions that those provisions allow the Revenue to split the assessment between principal and agent. It stated that it agreed with the views taken by other High Courts and the Supreme Court (in particular H.E.H. Mir Osman Ali Bahadur) that splitting the same income would lead to anomalies and complications, and that the statute does not postulate that income can be split and assessed in different hands.

On this basis the Court concluded that reassessment proceedings in the hands of the representative were illegal and without jurisdiction where the same income had already been assessed in the hands of the non-resident or where the statutory preconditions for reassessment in the representative's hands (default or prior assessment) were absent.

Holding and Implications

The references are answered in the affirmative and in favour of the assessee: the reassessment proceedings and assessments in the hands of the assessee as representative were held to be illegal and without jurisdiction to the extent they sought to tax the same income already assessed in the hands of the non-resident or where statutory preconditions for reassessment were absent.

Direct consequences:

  • The Court upheld the Tribunal's conclusion that reassessment proceedings initiated by the ITO were illegal and without jurisdiction for the years in question where the same income had already been assessed in the hands of the non-resident or where no default/prior assessment existed in the assessee's hands.
  • The Court therefore answered the referred questions in favour of the assessee and found no order as to costs.

The opinion does not state that it sets a novel principle of law beyond applying and preferring the existing High Court and Supreme Court authorities summarized above; it applies those authorities to the facts and decides the references accordingly.

End of summary.

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    Commissioner Of Income-Tax v. Alfred Herbert (India) Pvt. Ltd.

    The Judgment of the Court was delivered by

    Dipak Kumar Sen, J.:— The assessee, Alfred Herbert (India) Pvt. Ltd., is a company incorporated in India and is a subsidiary of Alfred Herbert Ltd. of Coventry, a company incorporated in the United Kingdom, and so a non-resident company.

    2. An agreement was entered into by and between the assessee and the non-resident company dated June 27, 1955, whereby the assessee was appointed as the sole selling agent of the non-resident company. In assessment years 1968–69, 1969–70 and 1970–71, the relevant accounting years ending on the 31st October of the calendar years 1967–1968 and 1969, Alfred Herbert Ltd., U.K, was assessed to income-tax in India in the status of a non-resident company. The assessment orders were passed respectively on September 5, 1968, August 7, 1969 and February 12, 1971.

    3. Thereafter, on March 2, 1971, the Income-tax Officer passed orders under section 163 of the Income-tax Act, 1961, treating Alfred Herbert (India) Pvt. Ltd., the assessee, as an agent of the non-resident company for the said assessment years 1968–69, 1969–70 and 1970–71.

    4. Against the order passed by the Income-tax Officer under section 163 of the Act of 1961, the assessee filed revision applications before the Commissioner of Income-tax which, it appears, remained pending at the material time.

    5. On March 3, 1971, the Income-tax Officer issued notices under section 148 of the Income-tax Act, 1961, on the assessee in respect of assessment years 1968–69 and 1969–70 calling upon the assessee to file returns of income as the agent of the non-resident company on the ground that income chargeable to tax for these two years had escaped assessment within the meaning of section 147 of the Act. For the assessment year 1970–71, the Income-tax Officer issued notice under section 139(2) of the Act of 1961 calling upon the assessee to file a return of income also of the non-resident company.

    6. In compliance with the above notices, the assessee filed returns of income for the said assessment years showing nil income in each of the returns and also protested against the initiation of proceedings under section 148 of the Act.

    7. The Income-tax Officer rejected the protests of the assessee and made orders of assessment for the assessment years 1968–69 and 1969–70 under section 143(3) read with sections 147 and 191 of the 1961 Act and for the assessment year 1970–71 made an assessment under section 143(3) of the said Act. Income for the said three assessment years was computed respectively, at Rs. 10,75,000, Rs. 1,90,000 and Rs. 1,30,000.

    8. Being aggrieved by the assessments, the assessee preferred appeals before the Appellate Assistant Commissioner. The Commissioner upheld the conclusion of the Income-tax Officer that there was business connection between the non-resident company and the assessee. The Appellate Assistant Commissioner, however, reduced the quantum of in comeassessed by the Income-tax Officer, respectively, to Rs. 75,000, Rs. 40,000 and Rs. 30,000 for the said three assessment years.

    9. From the order of the Appellate Assistant Commissioner, both the assessee and the Revenue preferred appeals before the Income-tax Appellate Tribunal. At the hearing before the Tribunal, the assessee sought to raise an additional ground of appeal to the effect that in view of the fact that the order under section 163 of the Act had been passed on March 2, 1971, and in view of the further fact that the original assessments for the relevant years were made on the non-resident, there was no obligation on the part of the assessee to file a return of income for the said assessment years and the condition precedent for assumption of jurisdiction under section 147(a) of the Act did not exist and the notices and the assessments made pursuant thereto were illegal, void and without jurisdiction.

    10. A further additional ground sought to be raised was that the proceedings under section 147(a) read with section 163 were ab initio void inasmuch as the original assessment had been completed on the non-resident company and the Income-tax Officer, having already exercised the option of assessing the non-resident directly, was precluded from proceeding again against the agent under section 147(a) of the Act.

    11. The above additional grounds were sought to be raised in respect of the assessment j/ears 1968–69 and 1969–70.

    12. For the assessment year 1970–71, an additional ground was sought to be raised before the Tribunal to the effect that proceedings under section 143(3) read with section 163 were ab initio void as the original assessment had been completed on the non-resident company and the Income-tax Officer having already exercised the option of assessing the non-resident direct in the said original assessment was precluded from proceeding to assess the agent again under section 147(a) of the Act.

    13. The Tribunal allowed the additional grounds to be raised inasmuch as, in the opinion of the Tribunal, the said grounds were all raised as a question of law which went to the root of the matter.

    14. The Tribunal considered and construed sections 160, 161 and 166 of the Income-tax Act, 1961, and held that the Income-tax Officer had an option either to assess the non-resident company directly or to assess it through its agent in India. Once the Income-tax Officer opted for assessing the non-resident company directly, he could not assess the nonresident company through an agent in India for the same assessment year. The assessment of the non-resident company could not be split into two, one part to be assessed in the hands of the non-resident company and the other in the hands of the agent of the non-resident company in India. The Tribunal came to the said conclusion on the authority of several decisions cited on behalf of the assessee.

    15. The Tribunal also held that the assessee was not treated as an agent of the non-resident company during the currency of the accounting years involved and as such the assessee was not aware that it was to be treated as the agent of the non-resident company. Following the two decisions of the Supreme Court, the Tribunal held that the assessee could not be expected to file the returns of income voluntarily for and on behalf of the non-resident company and, therefore, had not committed any default in not filing the returns of income for and on behalf of the non-resident company in respect of the first two years. The Tribunal also held that there was no question of reassessment in the hands of the assessee under section 147(b) of the Income-tax Act, 1961, inasmuch as no assessment at all had been made in the hands of the assessee for the first two assessment years. The income, if any, had escaped in the hands of the non-resident company. The Tribunal allowed the appeals of the assessee on the additional grounds raised and not on the merits of the reassessment. The appeals of the Revenue were dismissed.

    16. On the application of the Revenue under section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following question as a question of law arising out of its order for the opinion of this court:

    “Whether, on the facts and in the circumstances of the case, and on a correct interpretation of sections 160, 161, 163 and 166 of the Income-tax Act, 1961, the Tribunal was right in law in holding that the assessment made in the hands of the assessee as an agent of the nonresident company in respect of income deemed to have accrued or arisen to the latter through or from a business connection in India was bad in law in view of the fact that the non-resident had already been assessed in respect of certain other items of income?”

    17. The above question has come up before us in Income-tax Reference No. 251 of 1977.

    18. On an application of the Revenue under section 256(2) of the Income-tax Act, 1961, this court also directed the Tribunal to refer the following question, inter alia, for the assessment year 1969–70 also as a question of law arising out of the order of the Tribunal for the opinion of this court:

    “Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the reassessment proceedings initiated by the Income-tax Officer were illegal and without jurisdiction?”

    19. The said question is before us in Income-tax Reference No. 112 of 1983. At the instance of the parties, the two references have been heard together.

    20. Learned advocate for the Revenue drew our attention to the relevant sections of the Income-tax Act, 1961, the material portions of which are noted hereafter:

    “Section 2.—In this Act, unless the context otherwise requires,—……

    (7) ‘assessee’ means a person by whom any tax or any other sum of money is payable under this Act, and includes—…

    (b) every person who is deemed to be an assessee under any provision of this Act.

    21. Section 160.—(1) For the purposes of this Act, ‘representative assessee’ means—

    (i) in respect of the income of a non-resident specified in subsection (1) of section 9, the agent of the non-resident, including a person who is treated as an agent under section 163;

    (2) Every representative assessee shall be deemed to be an assessee for the purposes of this Act.

    22. Section 161.—(1) Every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income…………;

    Section 163.—(1) For the purposes of this Act, ‘agent’, in relation to a non-resident, includes any person in India—…

    (b) who has any business connection with the non-resident;…

    (2) No person shall be treated as the agent of a non-resident unless he has had an opportunity of being heard by the Income-tax Officer as to his liability to be treated as such.

    Section 166.—Nothing in the foregoing sections in this Chapter shall prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect of such income.”

    23. Construing the said sections, learned advocate submitted that it was open to the income-tax authorities to assess the non-resident company on a part of its income and also to re-assess the agent of the non-resident company in India if any income had escaped assessment in the hands of the non-resident. For the purpose of assessment, the non-resident company and its agent may be treated as two separate assessees and both are liable to be taxed. In support of his contentions, learned advocate for the Revenue cited the following decisions:

    (a) Commissioner Of Income-Tax, A.P v. Claggett Brachi & Co. Ltd., [1975] 100 ITR 46 (AP). In this case, a non-resident sterling company had appointed an agent in India under section 43 of the Indian Income-tax Act, 1922. The agent filed returns of income on behalf of the assessee for two assessment years on which assessments were made. Subsequently, the Income-tax Officer came to the conclusion that for the said two years, the income of the assessee had escaped assessment and issued notices to the agent of the assessee under section 148 of the Income-tax Act, 1961. The agent contended that under section 149(3) of the Income-tax Act, 1961, no notice could be served on the agent of a non-resident assessee after the expiry of two years from the end of the relevant assessment year. The Income-tax Officer thereupon issued notice under section 148 of the Act for the said two years directly to the assessee. The assessee filed returns under protest contending that reassessment could not be made in the hands of the assessee as notice had already been served on the agent. The Income-tax Officer completed the reassessment on the non-resident assessee direct. The assessments were challenged in appeal. The Appellate Assistant Commissioner rejected the appeal but the Tribunal took the view that as the assessments were originally made on the agent, a direct reassessment could not be made on the assessee under section 147(b) of the Income-tax Act. On a reference, a Division Bench of the Andhra High Court held that under the Income-tax Act, 1961, there was no bar to reassess the income in the hands of the principal even though the original assessment had been made on the agent. Construing section 160 of the Act, the High Court held that an agent who was a representative of the assessee would be deemed to be an assessee for the purpose of the Act. Therefore, the assessment made on the agent was in fact the assessment made on the principal. Construing section 166, the High Court held that it was made clear from the said section that the earlier sections would not prevent direct assessment of the person on whose behalf or for whose benefit income had been received or recovered from such person of the tax payable. Reading the sections together it was held that the Revenue at the time of reassessment would have option either to proceed against the agent or against the principal.

    (b) Barium Chemicals Ltd. v. ITO, [1975] 100 ITR 637 (AP). In this case, the assessee entered into an agreement with a non-resident firm of U.K for certain work to be executed by the latter and also for supply of certain machinery, designs, drawings and technical know-how connected with the manufacture of barium salts. In respect of the said transaction, the non-resident company was sought to be assessed to income-tax in India. The Income-tax Officer issued notice to the assessee to show cause as, to why it should not be treated as an agent of the non-resident firm and passed an order holding the assessee to be such an agent. Thereafter the Income-tax Officer served a notice on the assessee under section 148 of the Income-tax Act, 1961, requiring it to file the returns for the two assessment years. Simultaneously, the Income-tax Officer served similar notices also on the non-resident calling upon it to file its returns of income for the same two assessment years. Both the assessee and the nonresident firm filed nil returns of income.

    24. During the pendency of the proceedings, two applications under article, 226 of the Constitution were filed before the Andhra Pradesh High Court challenging both the proceedings. It was contended before the High Court that under section 166 of the Income-tax Act, 1961, the Income-tax Officer had an option to initiate proceedings either against the non-resident firm or against the agent of the non-resident: Having exercised its option to proceed against the non-resident firm, the Revenue could not continue the proceedings against the agent.

    25. The Andhra Pradesh High Court construed section 166 of the Act and held, inter alia, as follows (at pp. 640 and 641):

    “Even a casual reading of section 166 would indicate that direct assessment or recovery of the tax from a non-resident firm is not barred because of the fact that, under section 160 and section 163 of the Act, the ‘representative assessee’, that is to say, the agent of the non-resident firm, is made liable for assessment and recovery of tax. There are no words in section 166 which would indicate that the law confers a discretion or option upon the Income-tax Officer to choose, either initially or subsequent to the initiation of proceedings, as to whether he wants to assess and recover the tax from the non-resident firm or its agent. What all the section says is that merely because the representative-assessee, that is to say, the agent, is, in law, made responsible for the assessment and recovery of tax, it would not bar the assessment and recovery of tax from the nonresident principal. In other words, the law holds not only the non-resi-dent principal but also the agent of such non-resident firm liable for assessment and for the recovery of tax under such assessment. No question of selecting one or the other arises either for the purpose of assessment or for the purpose of recovery of tax. Both are equally liable.

    ………Thus, the terms ‘either’ and ‘or’ are used in section 166 to indicate the dichotomy between the assessment and the recovery. They are not, certainly, used for indicating that the assessment and recovery proceedings can be taken either against a non-resident principal or against the agent of such non-resident principal. There is no justification for reading anything of that kind in section 166. The marginal note of section 166 and the language of that section can leave no one in doubt that both the non-resident principal as well as the agent of such non-resident principal are liable to be assessed to tax…. Consequently, it must follow that, even if the proceedings of assessment had been commenced as against the non-resident principal, still they can be continued as against the agent of the non-resident principal or, simultaneous, action for assessment and recovery of tax can be taken both against the non-resident principal as well as its agent. The argument, therefore, that having exercised his option to proceed against the nonresident firm, the Income-tax Officer could not continue the proceedings against the petitioner, i.e, the agent of the non-resident firm, is misconceived and we find no difficulty in rejecting it.”

    (c) CIT v. Trustees of Miss Gargiben Trust (No. 1), [1981] 130 ITR 479 (Bom). In this case, the income of a trust had been assessed in the hands of the beneficiary. Terms of the trust deed did not permit capital gains to be disbursed to the beneficiary. Such gains were directed to be added to the corpus of the trust. The Income-tax Officer while determining the tax payable by the trust on the capital gains, determined the total income of the trust which included the amount which was already brought to tax in the hands of the beneficiary and determining the tax payable on the capital gains, the Income-tax Officer took such total income and determined the average rate of tax with reference to such total income. This method was followed in the case of two other trusts in each of which the beneficiary was common. The orders of the Income-tax Officer were upheld by the Appellate Assistant Commissioner. The Tribunal, however, held that for the purpose of determining the average rate of income-tax, the income other than the capital gains would be nil. The Tribunal directed that the capital gains should be taxed on the basis that they were the income of the trust. On a reference, it was held by the Bombay High Court that the income of the trust arose only from capital gains. The other income already taxed in the hands of the beneficiary should not be taken into account and included in the income even for determining the rate at which, the income or the capital gains were liable to be taxed.

    26. On the authority of the above decisions, learned advocate for the Revenue, submitted that the Tribunal has patently erred in setting aside the assessments in the hands of the assessee.

    27. Learned advocate for the assessee contended on the other hand that law was well settled that in assessing a person either directly or through his representative, the Income-tax Officer had to make a choice as to which of the two would be assessed. Even in the case of a representative, it could not be disputed that the income was one. The only question which would arise would be in whose hands would such income be taxed. This was the law laid down by a number of High Courts as also the Supreme Court. He submitted that the two decisions of the Andhra Pradesh High Court cited and relied on on behalf of the Revenue should not be followed as the law laid down in the said decisions should not be held to be good law.

    28. Learned advocate for the assessee submitted further that, in any event, the reassessment under section 147(a) in the hands of the assessee was clearly illegal inasmuch as it could not be said that there was any default on the part of the assessee to file its return on the ground of which the reassessment proceedings could be initiated. He submitted that till the assessee was treated as an agent of the non-resident foreign company, there could be no obligation or liability on the assessee to file any return. In the instant case, the assessee was held to be an agent of the non-resident company on March 2, 1971, and on the next day, that is, March 3, 1971, notice was given to the assessee under section 148 read with section 147(a).

    29. Learned advocate for the assessee also submitted that the reassessment could not also be supported under clause (b) of section 147 as action thereunder could not be taken unless an original assessment had been made in the hands of the assessee. In the instant case, admittedly, no prior assessment had been made on the assessee for the assessment year 1969–70 and, therefore, the assessee could not be proceeded against under section 147(b).

    30. Learned advocate for the assessee drew our attention to section 2, clause (8) of the Income-tax Act, 1961, which provides that under the Income-tax Act, assessment would include reassessment. It was submitted that in the instant case, assessments admittedly having been made in the hands of the non-resident company, reassessment could not be made in respect of the same income in the hands of its agent again. It was submitted that what was meant to be assessed under the Income-tax Act was the total income of the assessee in an assessment year from whatever source such income arose and the Income-tax Act did not permit splitting of such income and assess different parts of the same in different hands. It was submitted that the original assessments in the hands of the nonresident had not been set aside and they remained on record.

    31. In support of his contentions, the learned advocate for the assessee cited the following decisions:

    (a) East India Housing and Land Development Trust Ltd. v. CIT, [1961] 42 ITR 49 (SC). This decision of the Supreme Court was cited for the following observations (at p. 51):

    “By section 6 of the Income-tax Act the following six different heads of income are made chargeable: (1) salaries, (2) interest on securities, (3) income from property, (4) profits and gains of business, profession or vocation, (5) income from other sources and (6) capital gains. This classification under distinct heads of income, profits and gains is made having regard to the sources from which income is derived. Income-tax is undoubtedly levied on the total taxable income of the taxpayer and the tax levied is a single tax on the aggregate taxable receipts from all the sources; it is not a collection of taxes separately levied on distinct heads of income.”

    (b) Trustees of Chaturbhuj Raghavji Trust v. CIT, [1963] 50 ITR 693 (Bom). In this case, the Bombay High Court construed section 41 of the Indian Income-tax Act, 1922, which corresponds to sections 160 and 161 of the later Income-tax Act of 1961 and held that section 41 provided for two alternative methods, namely, either to tax the income in the hands of the trustee or directly in the hands of the person on whose behalf the income was receivable under the trust. One of such methods having been availed of by the Income-tax Department in directly assessing the beneficiary, the other was no longer available to the Department.

    (c) CIT v. H.E.H Mir Osman Ali Bahadur, [1966] 59 ITR 666. In this case, the Supreme Court construed section 41 of the Indian Income-tax Act, 1922 and held as follow's (at p. 682):

    “Under this section the revenue has the option to levy or collect tax from the trustee or the beneficiary; the tax can be levied upon and recoverable from the trustee in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable. In short, it imposes a vicarious liability on the trustee.”

    (d) Panna Sanjay Trust v. CIT, [1969] 74 ITR 396 (Guj). In this case, a Division Bench of the Gujarat High Court construed sections 160, 161, 164 and 166 of the Income-tax Act, 1961 and held, inter alia, as follows (at pp. 401 and 402):

    “If, therefore, any portion of the income is receivable or is received by the representative-assessee specifically for the benefit of a particular beneficiary so that such income can be said to accrue to the beneficiary, the Revenue has an option either to assess the representative-assessee in his representative capacity under section 161 or to make direct assessment on the beneficiary in respect of such income by virtue of the right expressly preserved under section 166.

    But, even apart from this clause, when ‘such income’, that is, income which falls within the main part of section 164 or any part of ‘such income’ is paid by the representative-assessee to the beneficiary, the beneficiary can always be assessed directly in respect of such amount since such amount would on receipt by the beneficiary form part of his total income and would be assessable in the hands of the beneficiary. Here also, section 166 operates to make it clear that the provision enacted in section 164 for assessment of ‘such income’ in the hands of the representative assessee as an association of persons shall not prevent direct assessment of the beneficiary in respect of any part of ‘such income’ received by him. The Revenue has thus two modes of assessment available in respect of the amount actually received by the beneficiary out of ‘such income’; one is to assess it as part of ‘such income’ in the hands of the representative assessee in a representative capacity under section 164 and the other is to assess it directly in the hands of the beneficiary by including it in the total income of the beneficiary. Now, it was not disputed on behalf of the Revenue, and indeed it could not be, that these two modes of assessment are alternative to each other. The Revenue can adopt either the one or the other but not both. Either the Revenue can bring the amount actually received by the beneficiary to charge in the hands of the representative assessee in a representative capacity or bring it to charge in the hands of the beneficiary by direct assessment on him. If it is charged to tax in the hands of the beneficiary, it cannot again be brought to tax in the hands of the representative assessee. This would appear to be clear on principle both having regard to the scheme of sections 161, 164 and 166 as also on the application of the doctrine that the Revenue cannot, in the words of the Supreme Court in Commissioner of Income-tax v. Murlidhar Jhawar and Puma Ginning and Pressing Factory, [1966] 60 ITR 95, ‘seek to assess the one income twice’.”

    (e) Premier Automobiles Ltd. v. S.N Shrivastava, ITO, [1970] 76 ITR 1 (SC). In this case, it was held by the Supreme Court that where during the assessment year concerned, the assessee is treated as an agent of the non-resident principal, it would become liable to pay advance tax in the financial year concerned.

    (f) Rajapalayam Mills Ltd. v. CIT, [1978] 115 ITR 777. This decision was cited for the following observation of the Supreme Court (at p. 778—headnote):

    “It is settled law that though the profits of each distinct business carried on by an assessee have to be computed separately in accordance with the provisions of section 10, the tax is chargeable under that section not separately on the profits of each business, but on the aggregate of the profits of all the businesses carried on by the assessee.”

    (g) Haji Abdul Hamid v. Commissioner Of Income-Tax, Lucknow., [1980] 122 ITR 1000. In this case, a Division Bench of the Allahabad High Court construed section 41 of the Indian Income-tax Act, 1922, and held that under the said section, the Income-tax Officer could either assess the trustee in the same manner and to the same amount as the beneficiaries or make a direct assessment on the beneficiaries.

    (h) Prem Nath Diesels Grainvaying Division v. CIT, [1986] 159 ITR 575. In this case, a Division Bench of the Delhi High Court construing section 163 of the Income-tax Act, 1961, held that it is open to the Income-tax Officer to assess either the representative or the non-resident at the initial stage. Once the non-resident was assessed, the representative assessee could not be assessed after the statutory period. However, in the case before the Delhi High Court, two years had passed after the end of the relevant assessment year before the Revenue sought to proceed against the representative.

    32. On a careful consideration of the facts and circumstances on record, the relevant sections of the Income-tax Act, 1961, and the decisions cited before us, it appears to us that apart from the two decisions of the Andhra Pradesh High Court, the other High Courts have taken a uniform view that the Revenue cannot proceed against a non-resident as also against his representative in India simultaneously.

    33. Learned advocate for the Revenue did not seriously dispute that if an income had been assessed in the hands of the non-resident, the same income could not again be assessed in the hands of his representative. He contended that what was being sought to be reassessed was another part of the income of the non-resident which had escaped assessment in the hands of the latter and was, therefore, not the same income. He submitted that there was no bar in the statute whereby such escaped income cannot be assessed in the hands of the representative.

    34. We are unable to accept this contention made on behalf of the Revenue. In the facts before us, for the assessment year 1970–71, there is no question of reassessment. The Income-tax Officer, knowing fully well that assessment in the said assessment year has already been made in the hands of the non-resident, had issued a fresh notice under section 143(3) of the Income-tax Act, 1961, calling upon the assessee as the representative of the non-resident to file a fresh return. This amounts to an assessment of the same income both in the hands of the representative and also the principal.

    35. So far as the other two assessment years are concerned, reassessment proceedings have no doubt been initiated. We note the definition in section 2(8) of the Act stating that assessment includes reassessment. Therefore, what is sought to be assessed in the hands of the representative is an income which has already suffered assessment in the hands of the non-resident. We are unable to construe sections 160-166 of the Income-tax Act, 1961, in the manner as has been done by the Andhra Pradesh High Court. With respect, we agree with the views taken by the other High Courts. In our view, the Income-tax Act, 1961, does not postulate that the income can be split up and different parts of such income can be assessed in the hands of different persons. The Supreme Court has clearly laid down the law in H.E.H Mir Osman Ali Bahadur, [1966] 59 ITR 666, that this would lead to serious anomalies and complications. In Gargiben Trust, [1981] 130 ITR 479 (Bom), the capital gains was not payable to the beneficiary under the terms of the trust and, therefore, the same could be assessed only in the hands of the trust but it was treated as a separate income altogether and even for the purpose of ascertaining the rate at which the said income would be taxed, the amount which was assessed in the hands of the beneficiary was directed to be excluded by the Bombay High Court.

    36. We cannot find fault with the finding of the Tribunal that the reassessment proceedings had been initiated illegally and without jurisdiction in the assessment year 1969–70. During the assessment year in question, the assessee was not treated as an agent of the non-resident company. Therefore, there was no obligation on the assessee to file any return of income of the non-resident. Therefore, the basic requirement of section 147(a) of the Income-tax Act, 1961, was not present as there could not have been any default on the part of the assessee in not filing a return. Reassessment cannot also be supported under section 147(b) as the conditions precedent for assumption of jurisdiction under the provisions of this sub-section are also not present. There has been no previous assessment of the assessee and there is no question of any income escaping the previous assessment. For the above reasons, we answer the question referred in each of the references in the affirmative and in favour of the assessee.

    37. There will be no order as to costs.

    Shyamal Kumar Sen, J.:— I agree.

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    Commissioner Of Income-Tax v. Alfred Herbert (India) Pvt. Ltd.
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