COMMISSIONER OF INCOME TAX Vs. SHAH S C

JUDGEMENT

(1.) THE assessees in IT Ref. No. 98 of 1971 and IT Ref. No. 194 of 1975 are partners in the firm of M/s K. C. Shah and Company. Apart from these two assessees the partnership firm of M/s K. C. Shah and Company also has a third partner. For the asst. year 1962 63 the assessees in both these references could not file their income tax returns under S. 139(1) of the IT Act, 1961, since the accounts of the partnership firm of M/s K. C. Shah and Company were not finalised. The partnership firm of M/s K. C. Shah and Company also could not file its income tax return for this assessment year since the firm was engaged in some urgent military contracts at the border. The ITO thereupon served on the firm as well as on the assessees notices under S. 139(2) of the IT Act, 1961. Pursuant to these notices the firm as well as the assessees filed their returns. The firm showed an income of Rs. 60,000, while the assessees in both the references showed their income at Rs. 25,079 each. Thereafter, notices under S. 142 were issued against the firm and the assessees failed to comply with these notices, whereupon the ITO completed the assessment against them under S. 144 on or about 30th December, 1963. On the basis of his assessment of the firm's income for the relevant assessment year, the ITO apportioned to the assessees their share of profit in the firm under S. 158 of the IT Act. The share of each of the partners so assessed by the ITO was Rs. 70,000.

(2.) THE firm of M/s K. C. Shah and Company filed an appeal against the ex parte assessment made against it before the AAC. By his order dated 9th November, 1964, the AAC set aside the assessment of the firm made under S. 144 of the IT Act and directed the ITO to make a fresh assessment. It seems that thereafter the Revenue preferred an appeal before the Tribunal, but the same was dismissed on 17th May, 1966. The assessees did not prefer any appeals against the ex parte assessments made against them on the basis of their share in the profits of the firm as determined by the assessment made against the firm and its partners.

(3.) BY his order dated 24th December, 1964, the ITO rejected the application of the assessees for rectification. The assessees went in appeal to the AAC from this order. By his order dated 18th October, 1966, the AAC allowed the appeals of the assessees and directed the ITO to modify the assessments of the assessees under the provisions of ss. 154 and 155 of the IT Act. The revenue went in appeal from the order of the AAC on the ground, apparently, that the directions which were given by the AAC to modify the assessments of the assessees were not specific. In view of this grievance made by the Revenue, the Tribunal clarified that the ITO should accept the figure of income as shown by the assessees in their returns, subject to it being modified at a later date, after the completion of the assessment of the firm. This order was passed by the Tribunal on 13th March, 1967. Thereafter on 17th July, 1967, the ITO rectified the assessments of the assessees and made an order for refund of the excess amounts. The ITO, however, did not award any interest to the assessees, on the amounts ordered to be refunded, under the provisions of S. 240 of the IT Act. The assessees thereupon preferred appeals to the AAC in respect of not awarding to them interest on the amounts refunded. By his order dated 29th July, 1968, the AAC rejected the appeals of the assessees and held that their claim for interest was not tenable, since the refund was given within six months of the Tribunal's order dated 13th March, 1967. The assessees went on appeal from this order to the Tribunal. The Tribunal by its order dated 26th May, 1970, allowed the appeals of the assessees and held that the assessees were entitled to interest on the amounts refunded. According to the Tribunal, the assessees became entitled to a refund immediately on the order of the AAC dated 9th November, 1964, setting aside the ex parte assessment of the firm. The Tribunal held that the ITO ought to have immediately rectified the assessments of the assessees and given them refunds within a period of six months from the date of the order setting aside the ex parte assessment against the firm. The Tribunal thereupon awarded interest to the assessees for the period of delay after the expiry of six months from 10th November, 1964. Before the Tribunal the Revenue had urged that no appeal lay to the AAC from the order of the ITO refusing interest. The revenue also urged that no appeal lay to the Tribunal from the order of the AAC refusing to award interest. Both these contentions were negatived by the Tribunal. Thereafter, under the provisions of S. 256(1) of the IT Act, 1961, a reference has been made to us.