The Income Tax Officer Vs. Arvind N.
Mafatlal  INSC 73 (27 February 1962)
27/02/1962 HIDAYATULLAH, M.
AIYYAR, T.L. VENKATARAMA AYYANGAR, N.
RAJAGOPALA SINHA, BHUVNESHWAR P.(CJ) SUBBARAO, K.
CITATION: 1963 AIR 493 1962 SCR Supl. (3) 455
RF 1966 SC1583 (7)
Income Tax--Partners of registered firm
holding shares of company as benamidars of the firm--Error in computing
tax--Proceeding to rectify errors--Income tax officer, if could effect
readjustment to avoid illogicalities Income- tax Act, 1922(11 of 1922), ss.
16(2), 18(5), 35.
The respondents were the four partners of a
firm M, which I was registered under the Indian Income Tax Act. Three of these
four partners held amongst them forty shares in private limited company which
was registered in the Phaltan State.
For the account year ending 30-9-1943 the
Phaltan Company disclosed a net profit, but did not declare any dividend out of
these profits but paid income-tax and super-tax thereon. After the merger of
Phaltan State in the Indian Union, the Income-tax Officer issued notice to the
Phaltan Company under s. 34 of the Act and acting tinder the provisions of
s.23A directed that the undistributed asscess- able income of the company
should be deemed to have been distributed as dividend among the shareholders.
Before the date of this order, the assessment of the firm M and the individual
assessment of its four partners had been completed. 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 contended
that the forty shares held by the three of the four partners were in fact the
property of the registered firm M. This contention was accepted by the
Income-Tax Officer who thereupon treated the dividend attributable to the total
of the forty shares as the dividend income of the firm and proceeded to the
apportion the said income among the four partners in proportion of the shares
which each of them held in the firm and added this to the income already
assessed. In doing so however, the Income-tax Officer committed an error. In
recomputing total income of each of these four assessees he included only the
net dividend "deemed to 456 be received" by each but as again this
addition he allowed a deduction of the tax paid by the company attributable to
such dividend. Subsequently this mistake was discovered and thereupon the
Income-tax Officer issued notice 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, and averred that
this was a mistake apparent on the record" which he proposed to rectify
under s.35 of the Act.
Held, that in view of the decision in M/s.
Howrah Trading Co. v Commissioner of Income-tax, it is only the registered
shareholders who are entitled to the benefit of the credit for tax paid by the
company under s.18(5.) as well as the corresponding grossing up under s. 16(2).
On that basis the only persons who were entitled to be treated as shareholders
to whom the provisions of s.16(2) and s. 18(5) of the Income-Tax Act were
attracted were the three partners in whose name the forty shares stood
Held, further, that the Income-tax Officer
and jurisdiction under s.36 to rectify errors but not to effect merely
readjustment so as to avoid the illogically in an error which is still
permitted to continue.
Held, also, that it is not possible- to
correct the initial error in the proceedings because the notice under s.35
issued to the parties which is the foundation of the jurisdiction to effect the
rectification, sought not the correction of the error but the perpetuation of
it though in an altered and a less objectionable from the point of view of
Messrs. Howrah Trading Co., Ltd. v. The
Commissioner of Income-tax, Calcatta  Supp. 2. S. C. R. 448 applied.
CIVIL APPELLATE JURISDICTION C. As. Nos. 502
to 505 of 1960.
Appeals from the judgment and orders dated
January 14, 1957 of the Bombay High Court in Special Civil Applications Nos.
1848 to 1851 of 1956.
N. D. Karkhanis and P. D. Menon for the
appellant (in all the four appeals).
S. T. Desai and I. N. Shroff fur the
457 1962. February, 27. The Judgment of the
Court was delivered by AYYANGAR, J.-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.
The respondent in these four appeals are each
of the four partners in a firm constituted under the name of Mafatlal Gagalbhai
& Sons and which was composed of Navinchandra Mafatlal, Arvind N. Mafatlal,
Yoginder N.Mafatlal and Homant Mafatlal with shares 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. Ton Shares in this private company stood in the name of
Navin Chandra, 10 in the name of Arvind and 20 in the name of Ham ant. 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 those profits but paid income-tax and super-tax thereon. After
the merger of the Phaltan State in the Indian Union and the ex. tension 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
458 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 Gaalbhai & Sons and the individual assessment of
its four partners had been completed.. 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.
31 of the Income Tax Act. In respondent to the notice the partners appeared and
it was stated in their behalf that the 40 shares hold 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 added this to the income already assessed, In doing so however,
the Income Tax Officer com- mitted an error. In recomputing the total income of
each of these four assessees he included only the net dividend. 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 lncome-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 entirely of the grounds on which the objection
was 459 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. ..he 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 B. 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.
The ground upon which the learned Judge
granted the relief to the respondents was briefly this : The order of assessment
had proceeded on the basis that the firm of Mafatlal Gagalbliai & Sons was
the shareholder 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.
In our opinion, however the appeals have to
'be dismissed on a short ground which does not involve any consideration of the
correctness of the Construction adopted by the High Court, of s. 16(2) 460 of
the Income Tax Act This Court has held in Messrs. Howrah Trading Co., Ltd. v.
The Commissioner of Income-Tax Calcutta (1) that it is only the registered
shareholder who is entitled to the benefit of the credit for tax paid by the
company under s. 18 (5) as well as the corresponding grossing up under s.
16(2). On that basis the only persons who were entitled to be treated as
shareholders to whom the provisions of ss. 16(2) and 18(5) of the Income Tax
Act were attracted were the three partners in whose names the 40 shares stood
registered, as detailed earlier. An error had therefore been committed by the
Income Tax Officer in treating the registered firm as the owner of the shares
in respect of the entire number of 40 shares. It was not this initial and
fundamental error that was sought to be rectified by the proceedings under s.
35, but the removal of an anomaly in that error which continued to be affixed
in other words the object of the proceedings under s. 35 was to carry out to
its logical conclusion the error which had been committed in the order of
assessment dated October 12, 1955 passed after invoking the provisions of s.
34. We consider the submission of learned Counsel for the respondents that the
Income Tax Officer had jurisdiction under s. 35 to rectify errors but not to
effect merely readjustments so as to avoid illogicalities in an error which is
still permitted to continue is well founded.
It has further to be mentioned that it is not
possible to correct the initial error in these proceedings because the notice
under s. 33 which is the foundation of the jurisdiction of the officer to
effect the rectification, sought in reality not the correction of the error but
the perpetuation of it though in an altered and less objectionable form from
the point of view of Revenue In this connection it would be noticed that one of
the four partners Yoginder Mafatlal had no shares standing in his name and by
(1)  Supp. 2 S.C.R. 448.
461 the order of assessment under s. 34 he
had been saddled with a liability to the extent of his 3/16th share in the firm
, though this has been partially offset by the credit given to him, obviously
wrongly, of relief under s. 18(5) of the tax deemed to have been paid by the
company on that incomes.
We therefore consider that the appeals must
fail. They are accordingly dismissed but in the circumstances of this case
there will be no order as to costs.