Citation Codes

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Case Number

I.T Ref. No. 5 of 1963.

Attorney(S)

Hardyal Hardy, Senior Advocate, with Dalip K. Kapur, Advocate,
A. (R. Whig, Senior Advocate, for the Applicant.

Judges

S. K. Kapur
R. S. Narula, JJ.

Acts

Section 68 (1) of the Indian Income-tax Act, 1922:-- (1)
Section 33 (5) of the Indian Income-tax Act, 1922.
Section 23 (3) of the Income-tax Act.

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Smart Summary

Judgment Summary — Reference under Section 68(1) (Income-tax Act, 1922)

Factual and Procedural Background

The assessment year in question was 1948-49. The assessee, Gopi Lal, was a partner in the firm Messrs. Behari Lal Ghasi Ram, Delhi. The firm appealed to the Income-tax Appellate Tribunal (appeal No. 321 of 1956-57) on the issue whether a sum of Rs. 24,500 should be taxed in the hands of the firm. At the Tribunal hearing Gopi Lal expressly stated that the Rs. 24,500 should be included in his income and treated as his exclusive share. The Tribunal directed that the amount be included in Gopi Lal's hands alone and that the partners' shares and their personal assessments be modified accordingly.

Pursuant to that Tribunal direction, the Income-tax Officer re-allocated the firm's profits among the partners, including the assessee. The assessee objected to this re-allocation and appealed to the Appellate Assistant Commissioner (AAC). The AAC rejected the appeal as not competent. The assessee then appealed to the Income-tax Appellate Tribunal, which held that no appeal was competent against the re-allocation before the AAC and consequently that no appeal lay to the Tribunal. Following that outcome, the Tribunal referred two questions to the High Court under Section 68(1).

Legal Issues Presented

Whether, in the particular facts of the case, an appeal lay to the Appellate Assistant Commissioner?
If the answer to the first question is in the affirmative, whether a further appeal lay to the Appellate Tribunal in the circumstances of the case?

Arguments of the Parties

Assessee's Arguments (Mr. Whig)

The re-allocation made by the Income-tax Officer is an order made under Section 23 of the Income-tax Act, and thus an objection to that re-allocation is an objection to the amount of income assessed under Section 23 and so falls within the scope of Section 30 (right of appeal to the AAC).
In any event, the situation amounts to an assessee denying his liability to be assessed under the Act (either wholly or partially), and the phrase "denying his liability to be assessed under this Act" in Section 30 is wide enough to include such a partial denial.
Under the second proviso to Section 30, every partner who is individually assessable on his share of the firm's total income is entitled to appeal against an order of apportionment between partners; therefore the partner (assessee) may appeal.

Revenue's Arguments (Mr. Hardy)

Mr. Hardy contended that the re-allocation in this case is made pursuant to Section 33(5) of the Act and that the order re-allocating income is relatable to the exercise of power under Section 33(5), not under Section 23(3); accordingly, the appeal under Section 30 would not be competent.
He sought to distinguish the decision in Kooka Sidhwa and Co. (Calcutta) on the ground that there the Income-tax Officer had given effect to Tribunal directions made under Section 33(4) and the appeal to the Tribunal had been taken by the firm itself. He relied also on the decision in Commissioner of Income-tax v. Arunachalam Chettiar, which the Court found of no assistance on the facts.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Kooka Sidhwa and Co., Calcutta v. Commissioner of Income-tax, AIR 1964 Cal 254	The order passed by the Income-tax Officer revising the assessment under direction of the Appellate Tribunal partakes the character of a fresh assessment under Section 23(3), from which an appeal lies to the Appellate Assistant Commissioner.	The Court treated this decision as directly relevant and persuasive against Revenue's contention, rejecting the attempt to distinguish it; it supports the conclusion that amendments made by the Income-tax Officer pursuant to Tribunal directions are orders under Section 23.
Commr. of Income-tax, U.P. v. Kanpur Coal Syndicate, (1964) 53 ITR 225 = AIR 1965 SC 325	Section 30 permits an appeal by an assessee objecting to the amount of income assessed under Section 23 or denying his liability to be assessed under the Act; "denial of liability" is broad enough to include partial denials or denials of liability in particular circumstances.	The Court relied on this Supreme Court authority to hold that a partner's challenge to an over-assessment resulting from re-allocation amounts to a denial of liability within Section 30, validating the right to appeal to the AAC.
Commissioner of Income-tax v. Arunachalam Chettiar, (1953) 23 ITR 180 = AIR 1953 SC 118	The Supreme Court held that a particular order of the Tribunal was not one passed under Section 33(4) and consequently that a reference under Section 66(1) or (2) could not be entertained (specific to its facts).	The Court considered this authority but found it inapposite to the present facts and explicitly stated it was of no assistance to the Revenue's argument.
Messrs. Mela Ram and Sons v. Commissioner of Income-tax, Punjab, 1956 SCR 166 = AIR 1956 SC 367	An order of the Appellate Assistant Commissioner dismissing an appeal as barred by limitation is an order passed under Section 31 (provision relating to hearing and disposal of appeals), and an appeal lies to the Appellate Tribunal under Section 33 against such an order.	The Court used analogous reasoning from this precedent to conclude that an AAC order rejecting an appeal as incompetent is likewise an order under Section 31 and that a further appeal to the Appellate Tribunal is competent.

Court's Reasoning and Analysis

The Court proceeded by examining the statutory sources for the Income-tax Officer's power to make assessments and for the availability of appeals. It noted that the Officer's powers derive from Section 28 and that, in making assessments, the Officer must ordinarily look to Section 23 unless another express provision applies.

The Court asked whether Section 33(5) itself provides a source for making an order of assessment. After considering the Calcutta High Court decision in Kooka Sidhwa and Co., the Court concluded that Section 33(5) does not, by itself, provide the Income-tax Officer with an independent source for making an assessment. Instead, a direction by the Tribunal under Section 33(5) merely authorises the Income-tax Officer to amend any assessment made on a partner as a consequence of the change in the assessment of the firm. In effect, when the Officer carries out that direction and amends the assessment, he does so by making an order under Section 23.

On that basis the Court accepted the assessee's position that an objection to the re-allocation is, in substance, an objection to the amount of income assessed under Section 23 and therefore falls within Section 30 as a matter appealable to the Appellate Assistant Commissioner. The Court also relied on the Supreme Court's exposition in Kanpur Coal Syndicate to hold that a partner's challenge to an over-assessment arising from re-allocation is a "denial of liability" within the meaning of Section 30 — the phrase is broad enough to include partial denials of liability.

The Court further observed that the second proviso to Section 30 expressly entitles partners who are individually assessable on their shares to appeal against apportionment between partners; since the assessee's grievance was against apportionment, this proviso applied.

Addressing the second question, the Court analysed the character of the order made by the Appellate Assistant Commissioner rejecting the appeal as incompetent. It held that such an order is an order under Section 31 (the provision governing hearing and disposal of appeals). By analogy to Mela Ram and Sons, where the Supreme Court held that an order dismissing an appeal as time-barred was under Section 31 and appealable to the Appellate Tribunal, the Court concluded that an AAC order rejecting an appeal as incompetent is also within Section 31 and so an appeal to the Appellate Tribunal is competent.

The Court reinforced its conclusions by noting statutory policy: rights of appeal are remedial and should be given a liberal construction, and appeals are valuable rights which should not be denied unless clearly excluded by unmistakable statutory indication.

Holding and Implications

Holding: Both questions were answered in favour of the assessee.

Immediate consequence for the parties:

The re-allocation made by the Income-tax Officer pursuant to the Tribunal's directions is an amendable order made under Section 23 for purposes of appeal under Section 30.
The partner (assessee) was entitled to appeal to the Appellate Assistant Commissioner against the re-allocation.
The Appellate Assistant Commissioner's order rejecting the appeal as incompetent was an order made under Section 31, and therefore an appeal lay to the Income-tax Appellate Tribunal; accordingly the Tribunal erred in holding that no appeal was competent.
The assessee was awarded the costs of the reference.

Broader implications:
The Court's decision applies the principle that amendments made by an Income-tax Officer pursuant to Tribunal directions will, in substance, result in orders under Section 23 and thus attract the appeal provisions in Section 30; it also reiterates that orders of the AAC concerning competence or dismissal of appeals fall within Section 31 and are appealable to the Appellate Tribunal. The opinion does not claim to establish a novel legal doctrine beyond applying and reconciling existing authorities on these points.

Judicial disposition: Judgment authored by R.S. Narula, J. (noted in the text) and another judge recorded agreement ("I agree."). Costs awarded to the assessee.

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Gopi Lal v. C. I. T.

1. By order, dated 25th January 1968, the Income-tax Appellate Tribunal referred the following two questions to this Court under Section 68 (1) of the Indian Income-tax Act, 1922:--

(1) Whether in the particular facts of the case, an appeal lay to the Appellate Assistant Commissioner ? and (2) If the answer to the first question is in the affirmative, whether a further appeal lay to the Appellate Tribunal in the circumstances of the case ?

The relevant assessment year is 1948-49. Gopi Lal (hereafter referred to as the assessee) was a partner of a firm known as Messrs. Behari Lal Ghasi Ram, Delhi. The said firm went to the Income-tax Appellate Tribunal in appeal, being appeal No. 321 of 1956-57, and the question therein was whether a sum of Rs. 24,500/- should be taxed in the hands of the firm of Gopi Lal.

Gopi Lal, who was present at the time of hearing of the appeal before the Income-tax Appellate Tribunal, expressly stated that the said sum of Rs. 24,500/- be included in his income and treated as his exclusive share. Inter alia in pursuance of the said statement by Gopi Lal the Tribunal directed that

"Gopi Lal's share of the profits in the firm be modified so as to include this sum of Rs. 24,500/- in his hands alone. The share income of the other partners will also be accordingly modified and as a result of this, necessary modification will be made in the personal assessments of the partners"

. Consequent upon the order of the Tribunal, the Income-tax Officer re-allocated the profits of the firm in the hands of its partners including the assessee.

The assessee objected to the said re-allocation and appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner rejected the appeal on the ground that the same was not competent. Aggrieved by the order of the Appellate Assistant Commissioner, the assessee filed an appeal before the Income-tax Appellate Tribunal, which decided that no appeal was competent against the order of re-allocation before the Appellate Assistant Commissioner and consequently the appeal did not lie to the Tribunal as well. In these circumstances, the aforesaid two questions have been referred to us.

2. It appears that the direction to exclude Rs. 24,500/- from the income of the firm was made under Section 33 (4) while the direction to reallocate the profits in the hands of the partners under Section 33 (5) of the Indian Income-tax Act, 1922. Mr. Whig, the learned counsel for the assessee, has frankly pointed out that he has no grievance against exclusion of Rs. 24,500/- from the income of the firm and its inclusion in the assessee's hands as his inclusive income. His grievance, however, is against the re-allocation made in the hand of the partners including the assessee in pursuance of the directions of the Income-tax Appellate Tribunal. The order of the Income-tax Officer making the re-allocation has not been included in the record and Mr. Hardy could not find out any express order to that effect even in the original record.

Whether or not an appeal under Section 30 would be competent depends on the terms of the said provision as an appeal is always a creation of the statute. It is not disputed that it is a case where the partners of the firm are individually assessable on their shares in the total income of the firm. Mr. Whig, says that:--

(1) the order of re-allocation is an order made under Section 23 of the said Act and the assessee's objection is consequently an objection to the amount of income assessed under Section 23 within the meaning of Section 30;

(2) in any case, it is a case of an assessee denying his liability to be assessed under this act which term is wide enough to include denying the liability totally or partially; and (3) every partner is, under the second proviso to Section 30, entitled to appeal against the order of apportionment between the partners.

3. The powers of the Income-tax Officer to make assessment are derived from Section 28. Whenever the Income-tax Officer has to make assessment he has to look to Section 23 unless there is any other express provision entitling him to do so. The question, therefore, is; does Section 33 (5) provide a source for making an order of assessment ? A more or less similar question arose before the Calcutta High Court in Kooka Sidhwa and Co., Calcutta v. Commr. of Income-tax AIR 1964 Cal 254. There the Tribunal had given the following directions:--

"The result is that the three Income-tax appeals are allowed in part. We direct the Income-tax Officer to revise the assessments and authorise him to amend the assessments made on the partners if necessary. The excess-proflts-tax appeals are dismissed."

In compliance with the above direction the Income-tax Officer revised the assessments of income-tax and made certain major amendments in his original order. The assessee, a partnership firm, at the instance of which the Tribunal had given the above direction, being dissatisfied with the amendments made by the Income-tax Officer, preferred appeals to the Appellate Assistant Commissioner who entertained the same and decided them on merits. The assessee then preferred second appeals to the Tribunal for the second time in which a preliminary objection was taken that the same were not maintainable on the ground that the orders passed by the Income-tax Officer in pursuance of the directions of the Tribunal were not orders under Section 23 (3) of the Income-tax Act. The Calcutta High Court held that--

"The order passed by the Income-tax Officer revising the assessment, made originally under Section 23 of the Act, under the direction of the Appellate Tribunal, would partake the character of a fresh assessment order and would be no less an order as made under Section 23 (3) of the Act within the ordinary acceptation of the term from which an appeal would He to the Appellate Assistant Commissioner."

Mr. Hardy sought to distinguish this case on the ground that there the Income-tax Officer had given effect to that part of the direction which was made under Section 33 (4) and the appeal was taken for the second time before the Tribunal by the firm itself. According to Mr. Hardy, the direction in this case is one made under Section 33 (5) and the order re-allocating the income is relatable to the exercise of power under that provision and not under Section 23 (3). Looking at the language of Section 30 there appear to be three answers to the contentions of the Revenue. Section 33 (5) does not, in my opinion, provide a source to the Income-tax Officer for making an order of assessment. The Tribunal while giving direction under Section 33 (5) merely authorises the Income-tax Officer to amend any assessment made on any partner of the firm as a consequence of any change made in the assessment of a firm.

In carrying out that direction and amending the order of assessment in accordance therewith the Income-tax Officer merely makes an order under Section 23 and consequently when a partner flies an appeal he, in effect, objects to the amount of income assessed under Section 23. Again, if a partner is not satisfied with the re-allocation and says that the same is not in accordance with the direction of the Tribunal he, in effect, denies his liability to be assessed under the Act to the extent to which he claims to have been wrongly assessed. Partial denial of liability to be assessed is, I think, comprised in the expression "denying his liability to be assessed under this Act"

In Commr. of Income-tax, U. P. v. Kanpur Coal Syndicate, (1964) 53 ITR 225=(AIR 1965 SC 325), their Lordships of the Supreme Court observed--

"Under Section 30 an assessee objecting to the amount of income assessed under Section 23 or the amount of tax determined under the said section or denying his liability to be assessed under The Act can prefer an appeal against the order of the Income-tax Officer to the Appellate Assistant Commissioner. It is said that an order made by the Income-tax Officer rejecting the plea of an association of persons that the members thereof shall be assessed individually does not fall under one or other of the three heads mentioned above. What is the substance of me objection of the assessee? The assessee denies his liability to be assessed under the Act in the circumstances of the case and pleads that the members of the association shall be assessed only individually. The expression 'denial of liability' is comprehensive enough to take in not only the total denial of liability but also the ability to tax under particular circumstances.

In either case the denial is a denial of liability to be assessed under the provisions of the Act. In one case the assessee says that he is not liable to be assessed to tax under the Act, and in the other case the assessee denies his liability to tax under the provisions of the Act if the option given to the appropriate Officer under the provisions of the Act is judicially exercised."

If over-assessment is made in the hands of a partner as a result of re-allocation the challenge to such an over-assessment by a partner would, in my opinion, be a denial of liability. Lastly, under the second proviso to Section 30 the partners of a firm, who are individually assessable on their shares in the total income of the firm, may appeal against any order of an Income-tax Officer apportioning the income of the firm between the several partners. As I have pointed out already, the grievance of the assessee is against the apportionment and, therefore, his appeal would fall in terms under the said second proviso, It should be remembered that statutes pertaining to right of appeal have to be given a liberal construction since they are remedial. A right of appeal will not be restricted or denied unless such a construction is unavoidable. Our Courts recognise the rule that an appeal of a cause is a valuable right to a litigant and in the absence of unmistakable indications to the contrary, statutes regulating appeals are given liberal construction. It is also recognised that an appeal is a remedy that is favoured in law and an important right, which should never be denied, unless its forfeiture or abandonment, is conclusively shown and in case of doubt, an appeal should always be allowed rather than denied.

Mr. Hardy also placed reliance on Commr. of Income-tax v. Arunachalam Chettiar, (1953) 23 ITR 180 = (AIR 1953 SC 118). That case is of no assistance to Mr. Hardy. There no appeal was taken to the Tribunal against the order of the Appellate Assistant Commissioner but the assessee had only made a miscellaneous application to the Tribunal. The Supreme Court took the view that the order of the Tribunal was not one passed under Section 33 (4) and consequently no reference under section 66 (1) or 66 (2) could be entertained. In these circumstances the answer to the first question must be in the affirmative and in favour of the assessee.

4. So far as the second question is concerned, the order made by the Appellate Assistant Commissioner rejecting the appeal as incompetent was an order made under Section 31. In Messrs. Mela Ram and Sons v. Commr. of Income-tax, Punjab, 1956 SCR 166 = (AIR 1956 SC 367), the Appellate Assistant Commissioner declined to condone the delay for filing the appeal and dismissed the same as time-barred. The appellant preferred an appeal against the order of dismissal to the Tribunal under Section 33 of the said Act. Their Lordships of the Supreme Court held that Section 31 was the only provision relating to hearing and disposal of the appeal and if an order dismissing the appeal as barred by limitation be one passed in appeal it must fall within Section 31. On the same process of reasoning it appears to me that the order of the Appellate Assistant Commissioner dismissing the appeal as incompetent would be an order passed under Section 31. As a matter of fact, the order is itself described as one under Section 31. That being so, the appeal before the Appellate Tribunal must be held to be competent. The answer to the second question must, therefore, be also in the affirmative and in favour of the assessee.

5. In the result, both these questions are answered in favour of the assessee. The assessee will have the costs of this reference.

R.S. Narula, J.

6. I agree.

Gopi Lal v. C. I. T.

Judgment Summary — Reference under Section 68(1) (Income-tax Act, 1922)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments (Mr. Whig)

Revenue's Arguments (Mr. Hardy)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Gopi Lal v. C. I. T.

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