The Income Tax Officer, Madras Vs. S.
K. Habibullah, Madras [1962] INSC 22 (24 January 1962)
24/01/1962 SHAH, J.C.
SHAH, J.C.
DAS, S.K.
HIDAYATULLAH, M.
CITATION: 1962 AIR 918 1962 SCR Supl. (2) 716
CITATOR INFO:
D 1963 SC1436 (7,9,11,14,20,31,32,42,44,46) E
1968 SC 623 (5,8,9,11,13,15,17,19,20,21,22 RF 1986 SC 268 (4,8)
ACT:
Income Tax-Assessment of firm completed prior
to April 1,1952-Power to rectify partner's assessment-Individual and firm
distinct entities- Mistake discovered in firms' assessment-Partners if can be
made liable-Income Tax Act, 1922(11 of 1922), s. 35 cls 1, 5
HEADNOTE:
M was a partner in two firms registered under
the Indian Income Tax Act. He submitted returns for assessment of Income Tax
for the years 1946-47 and 47-48 with regard to both the firms showing losses.
The assessment of one of the firm for the year 1946-47 and 47-48 was completed
on 31.10.50 and of the other for the year 1947 48 on 30.6.51 whereby the losses
calculated were less than claimed by M before the Income Tax Officer. On
receipt of intimation of the orders passed in the assessments of the two firms
the Income Tax officer issued on May 4, 1953, notice to M to show cause why the
assessment for the year 1946.47 and 47-48 should not be rectified under s. 35
of the Act. M replied that he had no objection if the assessment was completed
according to law. On 27.3.54 the Income-tax Officer revised the assessment in
respect of the two years after taking into account the share of the losses as
computed in the assessment of the two firms. M died on 17.4.54 and his son H
applied to the Commissioner of Income Tax for revision of the orders. The
Commissioner held that s. 35 was properly invoked for rectification of the
assessment. The High Court of Madras on a petition moved by ordered that a writ
of certiorari to issue quashing the order. The Commissioner of Income-tax came
up in appeal.
^ Held, that s. 35 (1) of the Income Tax Act
empowers the Income Tax Authorities to rectify mistakes apparent from the
record of certain orders passed by them. But if the law does not authorise the
Income Tax Officer to rectify the assessment, assent could not validate what
was unauthorised.
Held, further, that for the purpose of
assessment an individual and a firm are distinct entities; and even if an
individual is a partner of a firm, a mistake discovered because of something
contained in the assessment of the firm is not a mistake apparent from the
record of assessment of the individual partner.
717 Held, also, that the Legislature has
given to cl. (5) of s. 35 which was incorporated with effect from April 1, 1952, a partial retrospective operation. The provision enacted by cl. (5) is not
procedural in character, it affects vested rights of the assessee. Therefore in
the absence of compelling reasons the court would not be justified in giving a
greater retrospectively to the provision than is warranted by the plain words
used by the Legislature. Clause (5) of s. 35 does not purport to amend cl. (1)
of the same section.
It confers additional power of rectification
upon the Income Tax Authorities; and that power cannot be exercised in respect
of assessment of firm which have been completed before the date on which the
power was invested.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 557 and 558 of 1960.
Appeals from the judgment and order dated April 10, 1957, of the Madras High Court in W.P. No. 952 of 1955.
K. N. Rajagopal Sastri and D. Gupta, for the
appellants.
R. Thiagarajan, for the respondent.
1962. January 24. The Judgment of the Court
was delivered by SHAH, J.-One S. K. Mohideen-hereinafter referred to as the
assessee-was a partner in two firms-Messrs. Dinshaw and Co. and Messrs.
Palanippa Chettiar and Co. The firms were
registered under the Indian Income Tax Act. The assessee submitted returns of
his income and incorporated therein the estimated share of his losses in the
two firms at Rs. 20,000/- and Rs. 10,000/- for the assessment year 1946-47 and
at Rs. nil and Rs. 12,436/- for the assessment year 1947-48. The Income-tax
Officer, V. Circle, Madras completed the assessment for the two years on
February 20, 1950 after adopting the estimates furnished by the assessee, but
he made a note that the losses accepted were subject to revision on
ascertainment of correct particulars. The assessment of Messrs. Dinshaw &
Co, for the years 1946-47 and 1947-48 was completed on 718 October 31, 1950 by
the Income-tax officer II Circle, Madrass and the proportionate share of the
assessee for the losses was computed for the two years at Rs. 15,839/- and Rs.
1,046/- respectively. Assessment of Messrs. Palaniappa Chettiar & Co. for
1947-48 was completed by the Income-tax Officer, Special Circle on June 30,
1951 and the share of the assessee in the loss suffered by that firm was
computed at Rs. 2,009/-.
On receipt of intimation of the orders passed
in the assessment of the two firms, the Income-tax officer, V Circle, Madras
issued on May 4, 1953 notices to show cause why the assessments of the asessee,
for the years 1946-47 and 1947-48 should not be rectified under s. 35 of the
Income-tax Act. On March 24, 1954, the assessee wrote to the Income-tax Officer
stating: "This is to inform you that I have no objection in completing the
assessments of the previous years in accordance with law". On March 27,
1954, the Income-tax officer revised the assessment of the assessee in respect
of the two years after taking into account the share of the losses as computed
in the assessments of the two firms.
The assessee died on April 17, 1954 and his
son S. K. Habibullah-hereinafter referred to as the respondent-applied to the
Commissioner of Income-tax, Madras praying for revision of the orders. The
Commissioner held that s. 35 was properly invoked for rectification of the
assessments and rejected the applications. But the High Court of Judicature at
Madras in petitions under Art. 226 of the Constitution filed by the respondent
ordered that writs of certiorari do issue quashing the orders of the Income-tax
Officer, V Circle. The Commissioner of Income-tax, Madras appeals to this Court
with certificate of fitness granted by the High Court.
The plea of the Commissioner that the
assessee having assented to the rectification, it was not 719 open to the
respondent to challenge the authority of the Income-tax officer, has no force.
By his letter dated March 24, 1954 the assessee merely informed the Income-tax
officer that he had no objection to rectification according to law. But if the
law did not authorise the Income-tax Officer to rectify the assessment, assent could
not validate what was unauthorised.
Section 35(1) empowers the income-tax
authorities to rectify mistakes apparent from the record of certain orders
passed by them. The clause (omiting parts not material) provides that the
Income-tax officer may at any time within four years from the date of any
assessment order passed by him, on his own motion rectify any mistake apparent
from the record of the assessment. The power of rectification may be exercised
subject to two conditions: (1) that there is a mistake apparent from the record
of the assessment, and (2) that the order of rectification is made within four
years from the date of the assessment sought to be rectified. The mistake which
may be rectified need not be in the order itself: it may be in any part of the
record or proceeding of assessment of the assessee. But for the purpose of
assessment an individual and a firm are distinct entities and even if an
individual is a partner of the firm, a mistake discovered because of something
contained in the assessment of the firm is not a mistake apparent from the
record of assessment of the individual partner. In Kanumar lapaudi
Lakshminarayana Chetty v. First Additional Income-tax Officer, Nellore(1) in
dealing with the question whether the record of the assessment of the firm may
be regarded as the record of the assessment of the individual partner, Subba
Rao, C.J. speaking for the Court observed, and, in our Judgment, correctly:
"But it is said that section 35 of the
Act even without the amendment would have 720 enabled the Income Tax
authorities to reopen the assessment on the ground that there was a Mistake
apparent from the record. But from the record of final assessment, it is
impossible to say that there was a mistake apparent from the record, for the assessing
authority accepted a certain figure as representing the share of the assessees
in the firm and made a final assessment. The mistake is not in the record but
by a subsequent assessment of the firm it was discovered that the earlier
assessment, was wrong to the extent of the assessees' share in the firm. It is
not a mistake apparent from the record but a mistake discovered from the
disposal of another case".
Section 35(1) of the Income-Tax Act could not
therefore be resorted to by the Income-tax authorities for rectification of the
assessments of the assessee, for there was no error apparent from the record of
those assessments.
The Income tax Officer, however, sought to
rely upon s. 35(5) which was incorporated by s. 19 of the Indian Income-tax (Amendment)
Act, 1953 (25 of 1953) with effect from April 1, 1952. The clause which was
incorporated is in the following terms "(5) Where in respect of any
completed assessment of a partner in a firm it is found on the assessment or
reassessment of the firm or any reduction or enhancement made in the income of
the firm under section 31, Section 66, Section 66A, Section 33B, Section 66 or
Section 66A that the share of the partner in the profit or loss of the firm has
not been included, in the assessment of the partner or, if included, is not
correct, the inclusion of the share in the assessment or the correction
thereof, as the case may be, shall be deemed to be a rectification of a mistake
apparent from the record within the 721 meaning of this Section, and the
provisions of sub-section (1) shall apply thereto accordingly, the period of
four years referred to in that sub-section being computed from the date of the
final order passed in the case of the firm." Clause (5) was one of a group
of clauses, added by Act 25 of 1953, dealing with rectification of assessments.
Clause (5) dealt with inclusion of income or correction of the income of a
partner in a firm consequent upon assessment or reassessment of the firm of
which he was a partner. Clause (6) dealt with re-computation of total income of
an assessee in consequence of modifications made in the Excess Profits Tax or
the Business Profits Tax payable by an assessee subsequent to an assessment
made under the Indian Income-tax Act. Clause (7) dealt with rectification
consequent upon modification of orders under 8. 23A of the Income- tax Act
cl.(8), which was enacted (in the form in which it now exists) by the Indian
Finance Act, 1956, dealt with the rectification consequent upon proceedings in
reassessment under 8. 34 (1) (a) or
8. 31 (1A). The Legislature by a fiction in
all these classes of cases regarded the inclusion, correction, computation or
re-computation as rectification of a mistake apparent from the record and
prescribed special termini reckoning for the period of four years within which
the rectification must be made, Under. cl. (5) with which alone we are directly
concerned in these appeals, the inclusion of the share in the assessment of the
partners or the correction thereof is deemed to be a mistake apparent from the
record within the meaning of the section, and sub-s. (1) applied thereto
accordingly-the period of four years being computed from the date of the final
order passed in the case of the firm. The discrepancy disclosed as a result of
assessment, or reassessment of a firm between the share of a partner included
in the individual assessment of that partner and his share disclosed in the 722
assessment of the firm was not an error apparent from the record within the
meaning of s. 35(1) and the Legislature enacted a fiction making the inclusion
of the share in the assessment or correction thereof such a mistake. If the
inclusion of the share or the correction of the assessment were an error
apparent from the record and falling under cl. (1) of 8. 35, the enactment of
1. (5) was plainly unnecessary. When the Legislature has deliberately enacted a
fiction of the nature set out in cl. (5), we are unable to agree with the
contention raised by counsel for the Revenue that the enactment of the fiction
was ex-abundanti cautela. Rectification of the nature contemplated by cl. (5)
could not have been effected under cl. (1), and to remove the lacuna the
legislature declared that what was not a mistake should for the purpose of
rectification of assessment be regarded as a mistake apparent from the record
and provided a terminus for the computation of the period of four years.
The assessments of the two firms were
completed a long time before April 1, 1952 It is also common ground that the
individual assessments of the assessee were not provisional but final
assessments under 8. 23 (3) of the Income-tax Act.
The question which falls to be considered is
whether relying upon cl. (5) of s. 35 an Income tax Officer may rectify the
assessment of a person who is a partner of a firm when the assessment of the
firm is completed before the 1st of April, 1952. The Legislature has given to
cl. (5) a partial retrospective operation. The provision enacted by cl. (5) is
not procedural in character:
it affects vested rights of the assessee.
Therefore in the absence of compelling
reasons the court would not be justified in giving a greater retrospectivity to
the provision than is warranted by the plain words used by the Legislature. As
observed by 723 the Judicial Committee of the Privy Council in Income-tax
Commissioner v. Khemchand Ramdas :
" x x x x when once a final assessment
is arrived at, it cannot, in s their Lordships 'opinion, be reopened except in
the circumstances detailed in sections 34 and 35 of the Act x x x and within
the time limited by those section." The orders of assessment are, subject
to the provisions relating to appeals, revisions, reassessment and
rectification, final: it is not open to the Income-tax Officer to reopen the
assessment because he thinks fit to do so. The provisions relating to
assessments and rectification or reopening thereof are exhaustive, and may not
be extended by analogies. The right to rectify an assessment may therefore be
exercised in strict compliance with conditions prescribed by the statute in
that behalf. Before April 1, 1952, rectification of assessment of an individual
on the disclosure of errors consequent upon assessment of the firm of which he
is a partner was not for reasons already stated permissible under cl. (1) of s.
35 This power was conferred for the first time by cl. (5) as from April 1,
1952, and by the express words of the clause arose from the assessment of the
firm. If by the law prevailing at the time when the assessment of the firm was
made, no such result as is contemplated by the new clause (5) arose, to give a
larger retrospective operation than is directed, is to ascribe to the
Legislature an intention different from the one expressed, and to make a larger
inroad upon the finality of that assessment than is permitted by the
Legislature. Section 35(5) does not purport to amend cl. (1); that clause is
left untouched by the amending statute. Its application, by fiction, is
extended to other clauses of cases by declaring what in truth are not mistakes,
as mistakes. clause (5), therefore confers an 724 additional power of
rectification upon the Income- tax authorities and in the absence of compelling
reasons we will not be justified in upholding the exercise of the power to
assessments of firms which have been completed before the date on which the
power was invested.
Some assistance may be derived from the
phraseology used by the legislature in cl. (6) which was enacted simultaneously
with. cl. (5).
That clause provides, omitting parts which
are not material:
"Where the excess profits tax or the
business profits tax payable by an assessee has been modified x x x x or where
any excess profits tax or business profit tax has been assessed after the
completion of the corresponding assessment for income-tax (whether before or
after the commencement of the Indian Income-tax (Amendment) Act, 1953), and in
consequence thereof it is necessary to recompute the total income of the
assessee chargeable to income-tax, such recomputation shall be deemed to be a
rectification of a mistake apparent from the record within the meaning of this
section, x x x".
Manifestly, by the express provisions
contained in cl. (6) the fiction applies whether the assessment is completed
before or after the commencement of the Indian Income-tax (Amendment) Act,
1953. Even though cl. (6) is also made retrospectively operative as from April
1, 1952, the legislature has authorised the revenue authorities after April 1,
1952 to pass an order recomputing the total income of the assessee whether or
not the assessment was completed before the commencement of the Indian Income
tax (Amendment) Act, 1953. It is true that by the Explanation to that clause,
for the purposes of this sub-section, where the assessee is 725 a firm, the
provisions of sub-s. (5) shall also apply as they apply to the rectification of
the assessment of the partners of the firm, but thereby an intention to give a
larger retrospective operation to cl. (5), in so far as it deals with
rectification of assessments of partners consequential upon the completion of
the assessment of the firm in which they are partners, is not indicated. When
the legislature under cl. (6) of s. 35 expressly authorised rectification in
the circumstances mentioned therein even if the assessment has been completed
before the Indian Income-tax (Amendment) Act, 1953, and it made no such
provision in cl. (5), it would be reasonable to infer that the Legislature did
not intend to grant to the revenue authorities a power to rectify assessments
falling within cl. (5) where the firm's assessment was completed before April
1, 1952.
In our view, it was rightly held in Kandan
Lal v. Income-tax Officer following Kanumaralapudi Lakshminarayana Chetty v.
First Additional Income- Tax Officer, Nellore that cl. (5), of s. 35 of the Indian
Income-tax Act, which was enacted by the Income Tax, (Amendment) Act, 1953, was
not declaratory of pre-existing law, and as it clearly affected vested right
which had accrued to the assessee, must be deemed to have come into force from
April 1, 1952. It had no greater retrospective effect than was expressly
granted to it. The power to rectify assessment of a partner consequent upon the
assessment of the firm of which he is a partner by including or correcting his
share of profit or loss can therefore be exercised only in Case of assessment
of the firm made on or after April 1, 1952. The Income-tax officer has no
jurisdiction under cl. (5 ) of s. 35 of the Act to rectify the assessment of a
partner of a firm consequent upon the assessment or 726 reassessment of the
firm disclosing an error made before April 1, 1952.
The appeals therefore fail and are dismissed
with costs. On hearing fee.
Appeals dismissed.
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