H.N. Seth, J. - (1.) ON 3rd of December, 1968, the Income-tax Officer, Kanpur, issued two notices under Section 148 of the Income-tax Act, 1961, to the petitioner, Deo Sharma, stating that he had reasons to believe that the petitioner's income chargeable to tax for the assessment years 1948-49 and 1949-50 had escaped assessment within the meaning of Section 147 of the Act, and requiring the petitioner to file returns for the two years.
(2.) BY Writ Petition No. 341 of 1959 the petitioner has challenged the notice issued for the assessment year 1948-49, whereas in Writ Petition No. 1425 of 1969 he has questioned the validity of the notice issued in respect of assessment year 1949-50. As both these petitions are based on identical facts, it will be convenient to deal with them together. The facts leading to the two notices which are not in controversy are as follows : With effect from January 1, 1946, a partnership firm, M/s. Sharma and Co., became the sole selling agent of M/s. Cawnpore Cotton Mills Ltd. The firm, Sharma and Co., consisted of two partners, namely, Sri Sheo Nath Sharma and Smt. Chandan Devi, wife of the petitioner. This firm was dissolved on 3lst December, 1947, and with effect from 1st January, 1948, the petitioner, Sri Deo Sharma, took over as the sole selling agent of Cawnpore Cotton Mills Ltd. Subsequently, Sheo Nath Sharma also joined him as a partner. This newly constituted firm was also known as Sharma and Co. The agreement further provided that this new firm was to operate retrospectively with effect from January 1, 1948. In respect of the assessment year 1947-48, the old Sharma and Co. made an application for registration under Section 26A of the Indian Income-tax Act, 1922. The Income-tax Officer rejected this application on the finding that the partners disclosed by the deed were not the real partners, the real partners of the firm being the petitioner, Deo Sharma (instead of Smt. Chandan Devi), and Sri Sheo Nath Sharma. Though the old firm, Sharma and Co., was not registered, the Income-tax Officer proceeded to assess this firm as a registered firm as provided in Section 23(5) of the Act. He determined the share income of the petitioner at Rs. 38,533 and included this amount in his individual assessment.
(3.) THE petitioner claimed that as he was not a partner in the firm, Sharma and Co., the Income-tax Officer could not include any portion of the income of Sharma and Co. in his income. He also claimed that any assessment made against him in respect of the assessment of Sharma and Co. without notice to him was invalid. THE pleas raised by the petitioner did not find favour with the income-tax authorities. THE matter was referred to the High Court, which on May 20, 1960, held that even if the petitioner's wife was a partner in the firm as his benami, and the petitioner was the real owner of her share of profits, he did not become a partner in the firm for the purposes of the Partnership Act. In proceedings under Section 23(5), allocation of the income of a firm had to be made between the partners and then the income of each partner had to be taken into account in the assessment of that partner. THE proceedings under Section 23(5) should have stopped at that stage of allocation. THE further order passed in those very same proceedings that the income allocated to the share of the petitioner's wife would be added in the petitioner's income was beyond the jurisdiction exercisable in those proceedings and the order being without jurisdiction could not attract the provisions of the proviso to Section 30(1) and be binding on the petitioner and bar him from contending that the income was not to be taxed in his hands. THE fact that the partner happened to be the petitioner's wife, by itself, could not take away his right to be heard. THE decision of the High Court has since been reported in Pt. Deo Sharma v. Commissions of Income-tax, 1961 41 ITR 235. THEreafter, the matter went back to the Income-tax Officer through the Tribunal and is still pending. In the meantime assessment had been made against the old Sharma and Co. for the assessment years 1948-49 and 1949-50 in the years 1953 and 1957, respectively (relevant accounting periods being May 3, 19,46, to June 20, 1947, and June 21, 1947, to December 31, 1947). The assessee contended that as the firm, Sharma and Co., had dissolved on 31st December, 1947, it ceased to exist as a unit and no assessment could be made on it.;