Per Shri G.Santhanm, Accountant Member - This is an appeal by the assessee against the order of the Commissioner under section 263(1) of the Income-tax Act, 1961 (the Act). - (1.)
(2.) The assessee is a partner in International Fibre Sacks Co., Proddatur, holding 36 per cent share in the said firm. Clause 14 of the partnership deed dated 6-8-1979 provided as follows : "In this partnership firm party of the second part Mr. Sankaraiah is the nominee as detailed below : For 9/36th of his share he is the nominee of minor Juturu Guru Rajesh son of Krishnamurthy of Proddatur. For 9/36th of his share he is the nominee of Juturu Dinendra son of Krishnamurthy of proddatur. For 9/36th of his share, he is the nominee of minor Juturu Subhalakshmi daughter of Krishnamurthy of Proddatur. 9/36th of his share belongs to party of the second part in his individual capacity." In this appeal, we are concerned with Shri Juturu Sankaraiah, party of the second part, who is said to be a nominee of two minor sons and a minor daughter of Krishnamurthy, Proddatur, to the extent of 9/36th share in each case. The firm was granted registration. The original assessment was made in the case of the assessee on 27-6-1981 in which the share of income from the partnership firm of International Fibre Sacks Co. was taken at Rs. 14,392 being one-fourth of 36 per cent share in the firm. The assessment was completed under section 143(1) of the Act. The Commissioner exercising his jurisdiction under section 263(1) was of the view that as per the firms assessment order dated 24-8-1981, a sum of Rs. 57,560 being 36 per cent share in the profits of the firm was apportioned to the assessee. But, in the assessment of the assessee, the share was taken only at Rs. 14,392 being one-fourth of 36 per cent. He also noticed that the assessee had clearly indicated in his return of income that out of 36 per cent share in the profits of the firm amounting to Rs. 42,495, a sum of Rs. 31,872 was deducted as being the share of profit referable to Juturu Guru Rajesh, Juturu Dinendra and Juturu Subhalakshmi, minor children of Shri Krishnamurthy of Proddatur. The Commissioner noticed that the assessment record did not indicate that the ITO applied his mind to the claim of deduction of Rs. 31,872 nor did he made enquiries regarding the validity of the claim and that assessment was made under section 143(1) on the basis of the assessees return without much thought being given to it. Therefore, the Commissioner was of the new that the order of the ITO suffered from an error and prejudice. Notice under section 263 dated 7-6-1983 was served on the assessee on 10-6-1983. The assessee objected to the proposals and contended that the ITO had taken note of paragraph 14 of the partnership deed and had allowed the deductions as claimed in favour of three minor children keeping in view the proviso to section 185(1) of the Act. It was also stated in that letter that the procedure adopted by the ITO is in accordance with law and there was enough evidence to pin-point the fact that the ITO had applied his mind before taking the income of the assessee at one-fourth of 36 per cent. However, before the Commissioner, the assessees representative Shri N. L. Narasimha Rao is stated to have no objection to the proposal under section 263(1). This is recorded by the Commissioner in his order cited supra. Subsequently, on 21-6-1983, Shri Narasimha Rao wrote the Commissioner a letter withdrawing his consent, if any, that was given during the course of hearing of the case. Before us, Shri Ch. Sreerama Rao, the learned counsel for the assessee, submitted that the order of the Commissioner under section 263(1) was not justified. All the materials were placed before the ITO in the course of the assessment of the firm; the partnership deed was also before him. The ITO scrutinised the case of the firm on several sittings and had gone into the genuineness of the firm before granting continuation of registration under section 185(1). He had gone into the provisions of the partnership deed, particularly clause 14 thereof, in which it was mentioned that Shri J. Krishnamurthy in respect of three-fourth of his share in the partnership. The partners have also informed the ITO about the benami relations of Shri J. Sankaraiah with the minor children of Shri Krishnamurthy and after considering the relevant materials, the ITO granted continuation of registration of the firm treating the firm as genuine for the purposes of the Act. The assessment of the partners is only a consequential one emanating from the assessment of the firm. The return of income disclosed that the assessee had specifically drawn the attention of the ITO that out of the 36 per cent share which he derived from the firm three-fourth belonged to the minor children of Shri Krishnamurthy explaining why the assessee had deducted the amount representing three-fourth of 36 per cent share in income statement. This was also before the ITO. He had accordingly accepted the contention of the assessee that he is a benamidar of the minor children of Shri Krishnamurthy in respect of three-fourth of 36 per cent share. It is not as if he had blindly accepted the return of the assessee even though the assessment was made under section 143(1). Therefore, he submitted that the Commissioners conclusion that the ITO had not applied his mind to the facts of the case or materials on record is not supported by evidence. In view of this, the Commissioner was not empowered to invoke the provisions of section 263(1). He submitted further that the assessees representative Shri N. L. Narasimha Rao is an octogenarian and he might have given his consent for the proposal under section 263(1) in a weak moment, but later on he had withdrawn his consent. Therefore, the consent initially given by a very old person in a weak moment, and that too before the Commissioner, should not be held against the assessee.
(3.) ON merits, Shri Sreerama Rao submitted that it is the real income of the person which is to be assessed and not the notional or hypothetical income. It is true that in this context the income should be understood in accordance with income-tax law and not otherwise. The basis of the income for the assessee is from his membership in the partnership and that is witnessed by an instrument in writing duly approved by the income-tax authorities. Clause 14 of the partnership deed is very specific in that the assessee is a benamidar of Shri Krishnamurthys children and only one-fourth share of the 36 per cent in the hands of the assessee and the balance he had taxed in the respective hands of the minor children as the assessee was the benamindar of these persons. This was in keeping with the decisions of the Supreme Court in CIT v. Sivakasi Match Exporting Co. [1964] 53 ITR 204 and Murlidhar Himatsingka v. CIT [1966] 62 ITR 323. He also submitted that the real income of the person alone should be assessed but not the notional income or hypothetical income and he relied on a number of authorities for this proposition. It was his plea that once the genuineness of the firm was established, the ITO is bound to give ef fect to the provisions of the partnership deed on the basis of which the genuineness of the firm was established for purposes of registration. ONe of the clauses of the partnership deed spelt out benami relationship of the assessee with the minor children of Shri Krishnamurthy and the income of the assessee could only be computed in accordance with that particular provision in the partnership deed. The ITO had, therefore, rightly assessed only one-fourth share of 36 per cent of the profits of the firm in the hands of the assessee and, therefore, there was neither error nor prejudice caused to the revenue in such assessment. Before setting aside the order of the ITO, it is the duty of the Commissioner to establish that the order suffered from both error and prejudice. In this case, there was neither error no prejudice, and, therefore, even on merits, the Commissioners order cannot be sustained.;