Ayyangar, J. - (1.) These four appeals are pursuant to certificates granted by the High Court of Bombay under Art 133(1)(c) of the Constitution and raise identical questions for consideration.
(2.) The respondents in these four appeals are each of the four partners in a firm constituted under the name of Mafatlal Gagalbhai and Sons and which was composed of Navinchandra Mafatlal, Arvind N. Mafatlal, Yoginder N. Mafatlal and Hemant Mafatlal with share of 5/16, 3/16, 3/16 and 5/16 respectively in that firm (It has to be mentioned that Navinchandra died subsequent to the decision of the High Court and his legal representatives have been brought on record in Civil Appeal No. 502 of 1959 but this circumstance being irrelevant we are ignoring it for the purposes of these appeals). The firm was registered under the Indian Income-tax Act. There was a private limited company named Mafatlal Apte and Kantilal Limited registered under the Phaltan State Companies Act. Ten shares in this private company stood in the name of Navin Chandra, 10 in the name of Arvind and 20 in the name of Hemant. For the account year of the company ending September 30, 1945, the company disclosed a net profit of Rs. 1,09,165. The company, however, did not declare any dividend out of these profits but paid income-tax and super tax thereon. After the merger of the Phaltan State in the Indian Union and the extension of the provisions of the Indian Income-tax Act thereto, the Income-tax Officer who had jurisdiction over the assessment of the company, issued notice to it under S.34 of the Indian Income-tax Act and acting under the provisions of S.23A thereof directed that the undistributed assessable income of the company which amounted to Rs.68,228 should be deemed to have been distributed as dividend among the shareholders as on the date of the General Body Meeting of the company(i.e. on March 11,1946). Before the date of this order the assessment of the firm of Mafatlal Gagabai and Sons and the individual assessment of its four partners had been computed. In order to bring to tax the undistributed dividend "deemed to be declared under S. 23A among the shareholders of the company notices were issued to the four partners under S.34 of the income-tax Act. In response to the notice the partners appeared and it was stated in their behalf that the 40 shares held by three of the partners in the company were in fact the property of the Registered firm and were held by them benami for the firm This contention was accepted by the Income-tax Officer who thereupon treated the dividend attributable to the 40 shares as the dividend-income of the firm and proceeded to apportion the said income among the four partners in the proportion of the shares which each of them held in the firm and add this to the income already assessed. In doing so however, the Income-tax Officer committed an error. In recomputing the total income of each of these four assessees he included only the net dividend "deemed to be received by each but as against this addition he allowed a deduction of the tax paid by the company attributable to such dividend. There was no appeal against these assessment orders which became final. Subsequently this mistake was discovered and thereupon the Income-tax Officer issued notices to the four partners on April 13, 1954. pointing out the error in including in the income the net dividend without being grossed up, while at the same time allowing credit for the tax deemed to have been paid thereon. He averred that this was a mistake apparent from the records and stated that he intended to rectify the same under S.35 of the Income-tax Act. The four assessees objected to the rectification, but almost the entirety of the grounds on which the objection was based related to the legality of the original assessment and the assessees desired that if any rectification was to be made it must be in relation to those items and not in regard to that for which notice had been served. The Income-tax Officer by his order dated October 12,1955, rectified the assessment by grossing up the newly added dividend-income by the addition of the tax deemed to have been paid by the company thereon and retained the original relief granted under S. 18(5) of the Act. After unsuccessfully appealing to the higher authorities for relief against this rectification the assessees filed writ petitions invoking the jurisdiction of the High Court under Arts. 226 and 227 of the Constitution for prohibiting the authorities from taking proceedings for the enforcement of the orders dated October 12, 1955. The learned Judges allowed the petitions. The Income-tax Officer thereafter moved the High Court for certificates of fitness under Art. 133(1)(c) and these having been granted the appeals are now before us.
(3.) The ground upon which the learned Judges granted the relief to the respondents was briefly this. The order of assessment had proceeded on the basis that the firm of Mafatlal Gagalbhai and Sons was the share-holder who had been in receipt of the dividend- income and the individual partners of the firm had been made liable for their share of the profits derived from this registered firm. In such circumstances the learned Judges held that what was distributed to the individual partners could not be deemed to be dividend-income within S.16(2) of the Income-tax Act. It is to test the correctness of this construction of S.16(2) that these appeals have been preferred.;