SETHURAMAN J. -
(1.) THIS reference has been made at the instance of the Commissioner of Income-tax, Madras. The assessee is a firm carrying on business as contractors consisting of three partners, Sachidanandam, Nataraja Gounder and Mosa Gounder. On December 12, 1968, the Income-tax Officer made an assessment for the assessment year 1968-69, in the case of Sachidanandam under section 144 of the Act. In the said order the Income-tax Officer observed as follows :
"On the basis of materials available, I estimate the assessee's share income from the firm of Messrs. Blue Mountain Engineering Corporation at Rs. 7, 500. " *
(2.) THE same Income-tax Officer had served a notice under section 139(2) on 18th July, 1968, on the assessee-firm. It did not file a return of income in pursuance of the said notice and the Income-tax Officer completed the assessment on January 4, 1969, estimating the income at Rs. 25, 000 and showing the status as "unregistered firm". THE assessee filed an appeal before the Appellate Assistant Commissioner, who dismissed it. THEre was a further appeal to the Tribunal and in the course of the said appeal it was contended that the assessment made in the case of the assessee-firm could not be sustained as earlier an assessment had been made in the case of one of the partners. THE Tribunal, which considered a similar question in an earlier order of its, was of the opinion that the assessment on the unregistered firm could not be sustained. It is this order of the Tribunal dated 22nd August, 1970, that has given rise to the present reference in which the following question has been referred :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessment made in the case of the assessee-firm which has not been granted registration at a stage at which an assessment had been made earlier in respect of income referable to the same source in the hands of one of the partners of the firm was without legal sanction ""
The learned counsel for the Commissioner contended that whatever might have been the position under the Income Tax Act, 1922, under the Act of 1961, there was no question of any option being exercised by the Income-tax Officer between making an assessment on the partner and on the firm, and that the Income-tax Officer could assess the income in the hands of the right person even though another person might have been assessed on part of the same income. In the submission of the learned counsel for the department, the Act of 1961 contained different sets of provisions, which were not identically worded, so that the decisions rendered under the Act of 1922 could not be applied to the cases arising under the Act of 1961. The learned counsel for the assessee brought to our notice a decision of the Patna High Court in Commissioner of Income-tax v. Pure Nichitpur Colliery Company, in which an identical question arising under the Act of 1961 had been decided, following the earlier decision rendered under the Act of 1922.
The further submission was that when the Income-tax Officer sought to make an assessment on the partners of a firm, he was trying to assess the income of the firm in the hands of the partners and that this would amount to the exercise of an option which precluded him from subsequently taxing the firm as such. In support of the rival submissions, we had the benefit of hearing M/s. J. Jayaraman and A. N. Rangaswami, the learned standing counsel for the department, and also M/s. K. Srinivasan and S. Swaminathan, the learned counsel for the assessee.
The facts given above go to show that, apart from the fact that the Income-tax Officer was aware of the partner, Sachidanandam, having a share in the income of the assessee-firm, he knew also that the income of the firm was liable to be assessed in its hands as is clear from his own conduct in serving a notice earlier on the firm. There is nothing on record to show that the other two partners of the said firm had been assessed to tax. The legality of the assessment on the firm when the partner was earlier assessed on the part of this income is thus in issue.The Income Tax Act, 1922, provided in section 3 as follows :
"Where any Central Act enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or the members of the association individually."
The question as to whether the Income-tax Officer had an option to assess the firm or the partners individually or to assess the association or its members individually has been the subject of discussion in cases decided by the Supreme Court cited before us. There are also some High Court decisions which have dealt with this aspect more or less directly. Before referring to the High Court decisions, we shall briefly refer to the Supreme Court decisions which form the foundation for the view taken by the High Court on this point.
(3.) THE earliest of the Supreme Court decision is in relation to an association of persons in Commissioner of Income-tax v. Kanpur Coal Syndicate. THE Syndicate consisted of persons combined together for the purpose of purchasing coal for supply to customers. For the assessment year 1948-49, the Income-tax Officer levied tax upon the total income in the hands of the association. THE association claimed that in the circumstances of the case it should not be assessed to tax as an association of persons, but that the proportion of the income in the hands of each of the members of the association could alone be assessed to tax instead. THE Income-tax Officer did not accept this claim nor did not Appellate Assistant Commissioner do so. On further appeal to the Appellate Tribunal it held that though the Income-tax Officer had the power to assess the income of the association of persons as such, or, in the alternative, on the individual members thereof in respect of their proportionate share in the income, it had no power under the Act to direct the Income-tax Officer to exercise his power in one way or the other. On a reference, the Allahabad High Court held that the Appellate Tribunal had power to set aside the Income-tax Officer's assessment against the association and to give consequential and ancillary directions to the said officer to assess the individuals. When the matter came on appeal, at the instance of the Commissioner, the Supreme Court agreed with the said decision of the Allahabad High Court. Learned counsel for the revenue contended before the Supreme Court that under the Indian Income-tax Act of 1922, the Income-tax Officer had no option nut to assess the total income of the association of members, though the individual's share in the income might be added to his individual income for the purposes of ascertaining his total income. It was further argued that even if the Income-tax Officer had the option to assess to income-tax the association of persons on its total income or the individual members thereof in respect of their proportionate share of the income, if he had exercised the option in one way or the other, neither the Appellate Assistant Commissioner in appeal nor the Income-tax Appellate Tribunal in further appeal had power to direct the Income-tax Officer to exercise his discretion in a different way. THE contention went to the full length of stating that no appeal lay against the assessment on the association on the ground that the Income-tax Officer should have assessed the individual members of the said association. It is this contention that was repelled by the Supreme Court. THE Supreme Court held as follows (page 228) :
"...... section 3 impliedly gives an option to an appropriate authority to assess the total income of either the association of persons or the members of such association individually." *
It was further held that the scope of the appellate power was coterminous with that of the Income-tax Officer and that the comprehensive phraseology used in the Act in relation to the appellate powers did not countenance the attempt of the revenue to restrict the powers of the Appellate Assistant Commissioner or of the Appellate Tribunal and that both of them had power to direct the assessing authority to assess the members individually instead of the association of persons as a unit.
It may be seen from the above that the existence of an option to assess either the members or the association was first mooted by the counsel for the department in the case before the Supreme Court cited above. What was decided in that case has been set out by the Supreme Court in a later case reported as M. M. Ipoh v. Commissioner of Income-tax as follows :
"In Commissioner of Income-tax v. Kanpur Coal Syndicate it was held by this court that the Appellate Tribunal has ample power under section 33(4) to set aside an assessment made on an association of persons and to direct the Income-tax Officer to assess the members individually or to direct amendment of the assessment already made on the members."