Decided on September 22,1966

M.M. THIMMAIAH Respondents


Hegde, J. - (1.)THE assessee is a partner in three firms :
(i) M. M. Madalappa & Bros., Bangalore,

(ii) T. M. Muniswamiappa & Sons, Bangalore,

(iii) M. M. Madalappa and A. C. Balasubramania Mudaliar & Co.

(2.)THE assessment for the three years 1958-59, 1959-60, and 1960-61 were completed by the Income-tax Officer on January 19, 1959, November 30, 1959, and November 29, 1961, under section 23(3) accepting the assessee's share income from the above firms as returned by the assessee. It was noted in the assessment orders that the share incomes were being accepted subject to rectification later. In the assessment year 1958-59, the assessee's share in M. M. Madalappa & Bros. was a loss and was not taken into account in the original assessment. In 1959-60, neither income nor loss was taken into account. In the assessment year 1960-61, a loss of Rs. 4,941 from this firm was deducted. Against the share income from the other two firms, in the assessment for 1958-59, it was noted "tax earned". In the other two years, no mention has been made as to the nature of the share income from the two firms. Subsequently, the assessments of the three firms came to be completed. It was found that there were higher profits in the two firms, and that the assessee's share of profit required to be revised. THE Income-tax Officer issued notices to the assessee for all the years, which notices were shown to have been issued as "Notices under section 154/155". In the body of the notice, the notice being similar in terms for all the years, it was pointed out that :
"... there is a mistake apparent from the record within the meaning of section 154 of the Indian Income-tax Act, 1961. THE rectification of the mistake, as per details given below, will have the effect of enhancing the assessment."

At the foot of the notice, such rectification was shown to be intended to be made in respect of the share of profit from the three firms by taking the correct share as determined in the case of the firms. In due course, after hearing the assessee, the higher share of profit as determined in the case of the firms was included in the assessment. In passing the order in respect thereof, the Income-tax Officer mentioned section 154 of the Income-tax Act, 1961, as the section under which the said order was passed. Apart from taking the share of profit in the firms as determined in the firms' cases as above, the Income-tax Officer treated such share of profit in the firms as unearned income whereas the same had been treated in the original assessments as earned income. The assessee had been no objection to the enhanced share income being adopted, but objected to the Income-tax Officer, treating these as unearned income.

The Income-tax Officer passed orders sunder section 154 of the Income-tax Act, 1961, in all the three years son August 28, 1963, levying a special surcharge on the share incomes.

(3.)THE assessee filed appeals to the Appellate Assistant Commissioner, objecting to the treatment of the share of profit from the firms as unearned income. THE Appellate Assistant Commissioner, however, upheld the orders of the Income-tax Officer, observing as under :
"THE section does not restrict the scope to the alteration of the quantum only. THE nature of character of the income can also be corrected, if there is a mistake in the original assessment..... In case the character or nature of the share income is different from what was adopted previously, the Income-tax Officer can not only substitute the correct figure of income but can also consider the character or nature of the income in the orders of rectification. THE legislature had advisedly used the word 'correction'. Correction means to set right, amend or substitute right for wrong."

In that view, he confirmed the orders of the Income-tax Officer. A copy of the order of the Appellate Assistant Commissioner is annexure "A" and forms part of the case.

Click here to view full judgement.
Copyright © Regent Computronics Pvt.Ltd.