Decided on July 04,1962


Cited Judgements :-



Y.S.TAMBE, J. - (1.)AT the instance of the CIT, the Tribunal has referred to us the following question under Sub -S. (1) of S. 66 of the Indian IT Act :
"Whether on the facts and in the circumstances of the case the assessment of the unregistered firm was proper and legal, the two partners of this partnership having been assessed in the respect of their shares of income from this partnership business ?"

(2.)THE facts giving rise to this reference in brief are : One Murlidhar Jhawar carried on business in the partnership and sale of groundnuts in association with the two partners of the firm called Purna Ginning and Pressing Factory. The business was conducted in accordance with the arrangements between the partners. The conduct of the business was in the hands of Murlidhar. This business venture lasted for a few months in the accounting year ending with 6th Nov., 1953. We are here thus concerned with the asst. year 1954 -55. In the assessment proceedings of partners the profit of the venture as disclosed amounted to Rs. 51,280. The respective shares in the said income from this venture were assessed and brought to tax in the hands of Murlidhar and the two partners of Purana Ginning and Pressing Factory and the three assessments of these persons were completed on 9th March, 1957. At the end of the assessment order, the ITO made the following note :
"Joint venture income with M/s Purana Ginning and Pressing Factory taken provisionally subject to rectification after the assessment of the joint venture."
It appears that, at the instance of the ITO, Murlidhar Voluntarily submitted in November, 1957, a return of the income of joint venture, but soon on 18th Dec., 1957, he withdrew the return. The ITO, however, proceeded and completed the assessment of the firm under 23(3) of the Act in the status of an unregistered firm. He computed the income of the joint venture at Rs. 82,925 and brought it to tax in the hands of the firm. Inter alia, an objection was raised to this assessment by the partners on the ground that the income of the joint venture having been already taxed in their hands, it was not open to the ITO to tax it again in the hands of the firm, but the same was overruled by the ITO. The appeal filed by the firm against the assessment also failed. The firm filed a further appeal before the Tribunal. Before the Tribunal, the firm reiterated its aforesaid contention and further contended that the Department was in error in holding that the assessment of the income of the joint venture in the hands of its partners was not final provisional. The Tribunal accepted the contention of the appellant. It held that the Department, having assessed the individual partners and having included their respective shares of profit in the joint venture in their individual assessments, could not again assess the unregistered firm. In support of its conclusion, the Tribunal placed reliance on a decision of this Court in J. C. Thakkar vs. CIT (1955) 27 ITR 658 (Bom), and the decision of the Allahabad High Court in Joti Prasad Agarwal vs. ITO, (1959) 37 ITR 107 (All). On an application made by the CIT, the aforesaid question has been referred to us.
Mr. Joshi, learned counsel for the Department, raised two contentions before us -firstly, that there is nothing in the provisions of the IT Act that prohibits the IT authorities from assessing the income of an unregistered firm in its hands even after having assessed the respective shares of profit of the different partners in their hands, and, secondly, that at any rate, on the facts of this case, the assessment of the partners was only a provisional assessment, the Department reserving to itself a right to assess the income in the hands of the firm.

(3.)ON the first aspect of the question, Mr. Joshi's argument is that the firm is a separated and distinct unit of assessment as contradistinguished from its partners. Each unit is liable to pay tax. Sub -s. (5) of S. 23 gives the Department a right to tax the firm and that right is not taken away by any of the provisions of the Act. It is only when the firm assessed in accordance with the provisions of S. 23(5), and the profits of the firm are taxed in the hands of the partners, then the Department would be prohibited from charging the same in the hands of the firm. In the instant case, no assessment under S. 23(5) was made on the firm and, therefore, the assessment for the individual partners does not come in the way of the Department from charging to tax the income of the firm in the hands of the firm. Mr. Joshi also says that the provisions of Sub -S. (5) of S. 35 recognize the right of Department to assess a firm even after the completion of the assessment of its partners. He places reliance on the decision in Meka Venkatappaiah vs. Addl. ITO (1957) 32 ITR274 (Ap), and the following observations in Talipatigala Estate vs. CIT (1950) 18 ITR 320 (Mad) :
"But it cannot be said that the assessment of an individual partner in a particular year is a bar to the assessment of the firm for that year. "
We have no hesitation in accepting the argument of Mr. Joshi that an unregistered firm and its partners are two distinct assessable entities for the purposes of the purposes of the IT Act. But we find Considerable difficulty in accepting the contention of Mr. Joshi that the Department has a right to assess the income of an unregistered firm in the hands of the firm, when the same had been assessed and brought to tax in the hands of its partners. Sec. 3 is the charging section, and omitting its unnecessary parts, it reads : "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 firm and other association of persons or the partners of the firm or the members of the association individually." It would be noticed that, under this section, income -tax in respect of the income of the firm is chargeable in the hands of either of the firm or of the partners of the firm and not in the hands of both. The section, in our view, gives an option to the Department to choose. It may choose to tax the income in the hands of the firm or it may choose to tax it in the hands of its partners in accordance with their respective shares. But it is implicit in the section that, once the choice is made to tax either the firm or the partners, it is no more open to the Departments to go behind it and claim to assess the other. Mr. Joshi however contends that the provisions of S. 3 are subject to the provisions of the Act. Sub -s. (5) of S. 23 empowers the Department to tax the firm. That right is in no manner taken away by s.3. We are unable to accept this argument. In our opinion, the provision of Sub -S. (5) of S. 23 does not confer a right on the Department to bring to tax the income of the firm both in the hands of the partners as well as the firm. On the other hand, in our view, the provisions of Sub -S. (5) of the s. 23 come into play when the Department proceeds to assess the income of the firm in the hands of the firm and that section deals with the procedure that has to be followed when the assessee is a firm. The material part of Sub -S. (5) of S. 23, as it then stood, reads : "(5) Notwithstanding anything contained in the foregoing sub - sections, when the assessee is a firm and the total income of the firm has been assessed under Sub -S. (I), Sub -S. (3) or Sub -S. (4), as the case may be, - (a) in the case of a registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined; (b) in the case of an unregistered firm, the ITO may instead of determining the sum payable by the firm itself proceed in the manner laid down in the cl. (a) as applicable to a registered firm if, in his opinion, the aggregate amount of the tax including super -tax, if any, payable by the partner under such procedure would be greater than the aggregate amount which would be payable by the firm and the partners individually if the firm were assessed as an unregistered firm."

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