Commissioner of Income-Tax, Hyderabad
Vs. Sri Rajareddy Mallaram [1963] INSC 226 (20 November 1963)
20/11/1963 SHAH, J.C.
SHAH, J.C.
SARKAR, A.K.
HIDAYATULLAH, M.
CITATION: 1964 AIR 825 1964 SCR (5) 508
CITATOR INFO:
R 1964 SC1095 (5) R 1965 SC 325 (4)
ACT:
Indian Income Tax Act, 1922 (11 of 1922), ss.
23(4), 44, 63(2) -Dissolution of' Business Association-Notice of assessment on
one member-If order of assessment enforceable against members not served with
notice-Dissolution, effect of-s. 44, Scope and effect of--"Every
person", meaning of--"Tax payable". meaning of.
Practice-Question which did not arise out of
Tribunal's order and was not referred--If could be raised.
HEADNOTE:
An association of three persons carrying on
business in liquor was dissolved. No return was filed on behalf of the
association or the individual members. The Income-tax Officer issued a notice
under s. 34 of the Income-tax Act calling upon Baba Gowd, one of the members of
the association, to file a return of the income of the association but he did
not so. The Income-tax Officer then assessed the taxable income of the
association under s. 23(4) of the Act and determined the tax payable. Attempts
to recover tax from Baba Gowd were not successful. The Income-tax Officer then
issued a notice of demand to the respondent, another member of the dissolved
association.
The respondent applied under s. 27 for
cancellation of the assessment. The application was rejected by Income-tax
Officer. The Appellate Assistant Commissioner ordered cancellation of the
assessment and directed that fresh assessment be made after giving an
opportunity to the respondent to file a return and to produce evidence in
support thereof. The Income-tax Appellate Tribunal held that a valid order of
assessment had already been made and there was no occasion to issue a fresh
notice to the respondent or to make a fresh assessment.
At the instance of the respondent, the
Tribunal referred to the High Court two questions whether the order of
assessment made by the Income-tax Officer under s. 23(4) on September 30, 1953
was bad in law or not and whether the respondent was or was not liable for the
amount of tax payable as determined in that order of assessment by reason of
the terms of s. 44 of the Incometax Act. The High Court held that the order of
assessment under s. 23 (4) was bad in law and the respondent was not liable. In
appeal to this Court.
Held:The order of assessment made by the income-tax
Officer under s. 23(4) on September 30, 1953 was not bad in law and the
respondent was liable for the amount of tax payable under the order of
assessment.
Under Chapter IV of the Income-tax Act, an
association of persons can be assessed as a unit of assessment or the
individual members can be assessed separately in respect of their respective
shares of income. The Act does not contain any machinery for assessing the
income received by an association, in the hands of its members collectively.
The unit of assessment in respect of the income earned by the association is
either the association or each individual member in respect of his share in the
income. This is so when the association is existing and the same is true after
its dissolution. There can be no partial assessment of the income of an
association, limited to the share of the member who is served with notice of
assessment. The theory of assessment binding only those members who were served
with the notice of assessment, is not valid. The use of the expression
"tax payable" in s. 44 in the context in which it occurs can only
mean tax which the association but for its dissolution or discontinuance of its
business, would have been assessed to pay.
510 By virtue of s. 44, the personality of
the association is continued for the purposes of assessment. What can be assessed
is the income of the association received prior to its dissolution and the
members of the association would be jointly and severally assessed thereto in
their capacity as members of association. For the purpose of such assessment,
the procedure is that applicable for the assessment of the income of
association as if it had continued. A notice to the appropriate person under s.
63(2) would, therefore, be sufficient to enable the authority to assess to tax
the association. The plea that the respondent was not served personally with
the notice of assessment and was therefore not liable to pay the tax assessed,
cannot be sustained.
C.A. Abraham, Uppoottil, Kottayam v.
Income-tax Officer, Kottayam, [1961] 2 S.C.R. 765, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 290 of 1963.
Appeal from the judgment and order dated January 19, 1960, of the Andhra Pradesh High Court in case referred No. 7 of 1958.
K. N. Rajagopal Sastri and R.N. Sachthey, for
the appellant.
K. Bhimasankaram and K.R. Sharma, for the
respondent.
November 20, 1963. The Judgment of the
Court was delivered by SHAH, J.-Baba Gowd, P.V. Rajareddy and Rajareddy
Mallaram formed an association of persons called "Nizamabad Group Liquor
Shops"-called for the sake of brevity 'the Group'.
For the Fasli year 1358 i.e. October 1, 1948 to September 30, 1949 the Group carried on business in liquor contracts
obtained from the former State of Hyderabad. With the end of Fasli year 1358
the contracts came to an end. The business was then discontinued, and the Group
was dissolved.
The Group did not make a return of its income
pursuant to the general notice under s. 22(1)of the Indian Income-tax Act.The
Incometax Officer, Nizamabad Circle, issued a notice under s. 34 of the
Income-tax Act calling upon Baba Gowdone of the members of the Group-to file a
return of the income of the Group, but Baba Gowd failed to file the return on
the due date. The Incometax Officer then assessed the taxable income of the 511
Group under s. 23(4) at Rs. 51,000, and determined Rs. 8,826-14-0 as the tax
payable. Attempts made by the Income- tax Department to recover the tax from
Baba Gowd having proved unsuccessful, on March 13, 1954, the Income-tax Officer
issued a notice of demand addressed to Rajareddy Mallaramanother member of the
Group. The latter then applied under s. 27 of the Indian Income-tax Act for
can- cellation of the assessment. The application was rejected by the
Income-tax Officer. In appeal to the Appellate Assistant Commissioner, the
order was set aside and the Income-tax Officer was directed to cancel the order
of assessment under s. 23(4) and to make a fresh assessment after giving an
opportunity to Rajareddy Mallaram to file a return and to produce the books of
account of the dissolved Group. The Income-tax Appellate Tribunal, Hyderabad Branch modified the order of the Appellate Assistant Commissioner.
The Tribunal held that a valid order of
assessment under s. 23(4) having already been made in the case there could be
no occasion to issue a fresh notice to Rajareddy Mallaram or to make a fresh
assessment, but somewhat inconsistently with that opinion, 'the Tribunal
directed that the Appellate Assistant Commissioner do consider whether
Rajareddy Mallaram had been prevented by sufficient cause from making the
return.
At the instance of Rajareddy Mallaram the
following two questions were referred to the High Court of Andhra Pradesh by
the Tribunal.
"(1) On the facts and in the
circumstances of the case, was the order of assessment made by the Income-tax
Officer under section 23(4) on 30-9-1953 bad in law? (2) If the answer to the
above question is in the negative, was not the applicant liable for the amount
of tax payable as determined in that order of assessment by reason of the terms
of section 44 of the Income-tax Act?" The High Court answered the first
question in the affirmative and held that the second question did 512 not fall to
be determined. In arriving at its conclusion the HighCourt recorded the
following findings:
"(1)On the facts and in the
circumstances of this case, the order of assessment made by the Income-tax
officer under section 23 on 30-9- 1953 is bad in law, (a) absolutely, because
he Made the assessment of the association and not of those who were members of
the association at the time of the dissolution jointly and severally; and (b)
particularly as against any member on whom notices under sections 34 and 22(4)
were not served because of such failure to serve notices on him.
The assessment is not binding on the
petitioner, as no notice under section 22 was issued to him and as he was not
assessed severally or jointly with others referred to above.
(ii) The applicant is not liable for the
amount of tax payable as determined in the order of assessment dated 30-9-1953, as that assessment was not made in conformity with section 44 of the Income-tax
Act." The sole question which fell to be determined before the taxing
authorities was whether the order of assessment made by the Income-tax Officer,
subsequent to the dissolution of the Group, assessing its income, after serving
a notice upon one and not all the members of the Group, could be enforced
against members of the Group who were not served. The material part of s. 44 of
the Indian. Income-tax Act (insofar as it dealt with the liability of
discontinued associations) before it was amended by s. 11 of Finance Act XI of
1958 with effect from April 1, 1958, stood as follows:
"Where any business, profession or
vocation carried on by a association of persons has been discontinued, or where
an 513 association of persons is dissolved, every person who was at the time of
such discontinuance of dissolution a member of such association shall, in
respect of the income, profits and gains of the . . association, be jointly and
severally liable to assessment under Chapter IV and ,for' the amount of tax
payable and all the provisions of Chapter IV shall, so far as may be, apply to
any such assessment." The section declares the liability for assessment
under Ch. IV of the Act in case of discontinuance, of the business of or
dissolution of an association. The Group admittedly discontinued its business
at the end, of Fasli year 1358 and it was also dissolved. Every person who was
at the time of such discontinuance or dissolution a member of the Group was by
the express terms of s. 44 liable to be assessed jointly and severally in
respect of, the,, income, profits and gains of the Group and was also liable
for the amount of tax payable. This Court in examining the scheme of S. 44 as
it' stood before its amendment in 1958 in its application to a firm which had
discontinued its business observed: C.A. Abraham, Uppoottil, Kottayam Y. The
Income-tax Officer, Kottayam and another "In effect, the Legislature has
enacted by s..44 that the assessment proceedings may be commenced and continued
against a firm of which business is discontinued as if discontinuance has not
taken place. It is .enacted manifestly with a view to ensure continuity in the
application of the machinery provided for assessment and imposition of tax
liability notwithstanding discontinuance of the business of firms. By a
fiction, the firm is deemed to continue after discontinuance for the purpose of
assessment under, Chapter IV." In Abraham's case (1) the Court was
concerned with; the assessment of a firm -of which the business was
discontinued because of the' dissolution of the (1)[1961] 2 S.C.R. 765 at p.
770.
514 firm, by the death of one of the
partners. But s. 44 as it stands amended by Act, 7 of 1939 applies to
'discontinuance of the business of associations of persons as well as of firms,
and the question which directly fell to be determined in that case was whether
penalty for concealing the particulars of income or for deliberately furnishing
inaccurate particulars of income in the return could lawfully be imposed after
discontinuance of the business.
It is true that the validity of the order
assessing the firm was not expressly challenged, though at the date of the
order of assessment the firm stood dissolved, and its business was discontinued,
but the 'Court could not adjudicate upon the validity of the order imposing
penalty without deciding whether there was a valid assessment, for an order
imposing penalty postulates a valid assessment.
Counsel for the respondent contended that
even if the assessment after dissolution of the Group be regarded as valid, it
is binding upon only those persons who were served with the notice calling for
a return, and in support of this plea. relied upon the clause "every
person who-was at the time of such dissolution, a member of such association
shall in respect of the income of the association be jointly and severally
liable to assessment".
He urged that the expression "every
person" in s. 44 means all persons, and that by enacting that such persons
shall be liable to assessment "jointly and severally" it was intended
that after the association is dissolved only the members at the date of
dissolution can be assessed in, respect of the income of the association. As:
a, corollary to the argument it was submitted -that all members who are sought
to be assessed must be individually served with notice of assessment, and those
not, served will not be bound by the assessment. The argument is plainly
inconsistent with what, was observed by this Court in Abraham's case(".
If, by s., 44 the continuity of the. firm or association-,is for the purpose of
assessment ensured, (1) [1961] 2 S.C.R. 766 at P. 770.
515 no question of assessing the individual
members of the association can arise. Under Ch. IV of the Income-tax Act an
association of persons may be assessed as a: unit of assessment, or the
individual members may be assessed separately in respect of their respective
shares of the income, but the Act contains no machinery for assessing the
income received by an association, in the hands of its members collectively.
The unit of assessment in respect of the income earned by the. Association is
either the association or each individual member in respect of his share in the
income. This is so when the association is existing, and after it is dissolved
as well. There can be no partial assessment of the income of an association,
limited to the share of the member who is served with notice of assessment. For
the purpose of assessment the Income-tax Act invests an association with a
personality apart from the members constituting if, and if that personality is
for the purposes of Ch. IV, insofar as it relates to assessment, continued, the
theory of assessment binding only upon members who were served with the notice of
assessment can have no validity. This view is supported by the use of the
expression "tax payable" in s. 44 which in the context in which it
occurs can only mean tax which the association but for dissolution, or
discontinuance of its business would have been assessed to pay. Since the
primary purpose of s. 44 is to bring to tax the income of the association after
it is dissolved or its business is discontinued, assessment of an aliquot share
of that income is not contemplated by s. 44 of the Income-tax Act.
The effect of s. 44 is as we have stated,
merely to ensure continuity in the application of the machinery provided in Ch.
IV of the Act for assessment and for imposition of tax liability
notwithstanding discontinuance of the business of the association or its
dissolution. By virtue of s. 44 the personality of the association is continued
for the purpose of assessment and Ch. IV applies thereto. What can be assessed
is the income of the association received prior to its dissolution and the
members of the association would be 516 jointly and severally assessed thereto
in their capacity as members of the association. For the purpose of such
assessment, the procedure is that 'applicable for assessment of the income of
the association as if it had continued. A notice to the appropriate person
under s. 63(2) would, therefore, be sufficient to enable the authority to
assess to tax the association. The plea 'that the respondent not having been
served personally with the, notice of assessment is not liable to pay the tax,
assessed cannot therefore be sustained.
Counsel for the respondent then contended
that the original assessment made under s. 23(4) was invalid, because notice of
assessment was not served upon the Group in the manner provided by s. 63(2) of
the Indian Income-tax Act, Baba Gowd who was served with' the notice not being
the principal officer who .could be served, with notice on behalf of the Group.
But no such contention was raised before the Tribunal. It does not arise out of
the order of the Tribunal and the question referred by the Tribunal to the High
Court does not. justify consideration of that plea.
The respondent .'cannot be permitted to raise
a question which did not arise out of the order of the Tribunal, and has not
been referred. The case must be decided on the footing that notice of
assessment was properly served on Baba Gowd and that the assessment, was
properly , made by the Income-tax Officer tinder s. 23(4).
We hold that the answer to the first question
will be in the negative. If the order of assessment is held to be valid, the
application made by the respondent for setting aside the assessment on the
ground that he was not served with the notice of assessment must fail., The
second question will be answered as follows "The applicant was liable' for
the amount of tax payable under the order of assessment." The appeal is
allowed. The respondent will pay the costs of this appeal in this Court and in
the High Court.
Appeal allowed.
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