LAIK, J. - (1.) THIS consolidated reference under the provisions of s. 66(1) of the Indian IT Act, 1922, at the instance of the assessee, is impressed with the rapid flow of events up to the year of final accession to the Indian Dominion by the rulers of the States, when the peoples of India were no longer concerned with principalities and powers of the ruling chiefs and when they have upon themselves the whole armour of the Constitution and walk in their enlightened ways, wearing the breast-plate of its protecting provisions and flashing the flaming sword of its inspirations. In one magnificent sweep, all vestiges of arbitrary and despotic power of the ruling chiefs of the States were blotted out. Raigarh is one of such States which is involved in the reference. The original assessment was completed on the assessees by the ITO of the said Raigarh State. The facts and law discussed hereafter invest this reference with a little more than a mere passing and historical interest.
(2.) ON the basis of the same facts and law in the two applications giving rise to this reference, two questions are referred : "(1) Whether, on the facts and in the circumstances of the case, the assessment of the assessee- HUF for the asst. yr. 1949- 50 could be re-opened under s. 34 of the Indian IT Act ? (2) Whether, on the facts and in the circumstances of the case, the income from the business started by the junior members of the assessee-HUF could be included in the total income of the assessee ?" The facts briefly are : The assessee is Sri Hirachand Vastaram, an HUF, carrying on business at Kharsia, then in the State, popularly called Native State of Raigarh. The assessee had income in the business and was resident and ordinarily resident in the said Indian State. The assessment year in question is 1949-50 and the relevant accounting year ended on Diwali, 1948. Bhogilal was the Karta of the said family who had six sons. Sumatilal Mehta was the eldest and Rasiklal Mehta was the second son and these two sons were majors and the rest were minors. On 31st May, 1949, the assessment was completed for the said assessment year, ex parte, by the Raigarh State ITO. A sum of Rs. 1,907 was computed as total loss which was determined as the loss in the Raigarh State business only. Any income, outside the taxable territory, so to speak, was not included in the said assessment order. It was made without considering whether the assessee had any foreign income or not. The main reason for it was that the Raigarh State ITO had no occasion to consider as to whether the family had any other business in the then British India. Thereafter, on the information that Sumatilal, the eldest son, was doing business in the name of Mehta Pictures at Calcutta and Rasiklal, the other son, was doing business in the name of Dreamland Pictures Corporation at Bangalore in the State of Mysore, the ITO started an enquiry in or about January, 1953, as to whether the said two film businesses of the two sons had any connection with the family. On 17th March, 1954, a notice under s. 34(1)(b) of the Indian IT Act, 1922, was issued and the said notice along with a notice under s. 22(2) was served on the HUF on 22nd March, 1954. In pursuance of the said notices the assessee filed a return in or about April, 1954, which was revised in the month of June of the same year; but in this return, the assessee showed a loss to the extent of Rs. 40,000 and odd. It may be stated that the said loss was not shown in the original return on which the assessment order was passed on 31st May, 1949. The loss of Rs. 40,000 and odd was shown as speculation loss incurred through one Shri C. V. Shah of Bombay. In this return, neither the incomes of the said two film businesses were included nor the names of Sumatilal and Rasiklal were shown as members of the HUF. It was claimed in the return that from the end of the Samvat year 2003, both the said two major sons separated and the said two businesses were not of the HUF. It was asserted that they were separate businesses of the said two major sons and it was mentioned that the assessment was already made against Mehta Pictures at Calcutta, showing Sumatilal Mehta as proprietor thereof.
(3.) THE ITO however rejected the story of separation or partition and held that the incomes from the said two businesses accrued to the undivided family and, therefore, included the same in the total income of the assessee. It might be mentioned that only income from Mehta Pictures was estimated at a sum of Rs. 1,77,000 but no income was assessed on Dreamland Pictures at Bangalore. The said figure of Rs. 1,77,000 was taken on the basis of the figure as computed for making assessment on Mehta Pictures. As no evidence was produced, the assessment was completed by the ITO under the provisions of s. 23(4) on the basis of best judgment assessment and the revised assessment order was passed on 21st March, 1955. An application under s. 27 of the IT Act was filed on behalf of the assessee before the ITO for re-opening the case which was rejected. Against the said revised assessment order dt. 21st March, 1955, as well as the order rejecting the application under s. 27, two appeals were taken by the assessee to the AAC, who dismissed both of them after affirming the findings of the ITO. Thereafter, two appeals were filed by the assessee to the Tribunal. The assessee lost there also except that the quantum of assessment was reduced by the Tribunal. Two applications under s. 66(1) followed which necessitated this consolidated reference. It appears that Bhogilal died during the pendency of the hearing of the reference in this Court and on his death all the sons including the said two major sons have appeared before us representing the family as an assessee. In the said application under s. 66(1), the assessee made out the case : (1) that in March, 1945, Sumatilal commenced the business of Mehta Pictures and the initial capital came from the HUF but the same was taken as a loan or accommodation and the interest was paid on the said amount. (2);