Commissioner of Income-Tax, Bombay, South
Poona Vs. Murlidhar Jhawar & Purna Ginning and Pressing Factory, Dhar
 INSC 6 (7 January 1966)
07/01/1966 SHAH, J.C.
CITATION: 1966 AIR 1536 1966 SCR (3) 219
CITATOR INFO :
D 1970 SC 778 (5) RF 1979 SC1104 (8)
Income-Tax Act, 1922-s. 23(3)-partners in
unregistered partnership assessed individually-then as unregistered
partnership-whether Income-Tax Officer exercised option to assess
individually-therefore whether second assessment on unregistered partnership
M, P and G carried on business in several
commodities and in the assessment year 1954-55, the Income-Tax Officer brought
to tax a third share in Rs. 51,280., computed as profits from the business in
the hands of each of the three, persons. Thereafter, he called upon M to submit
a return of the "income of the joint venture" on the footing that the
parties thereto constituted an unregistered firm. On a return being filed,
despite the objection of the assessees, the Income-Tax Officer completed the
assessment of the three persons to the joint venture under section 23(3) of the
Income-Tax Act, 1922 in the status of an unregistered firm and computed the
income of the "joint venture" at Rs.
80,925. An appeal to the Appellate Assistant
Commissioner was dismissed.
In second appeal, the Tribunal held that the
Income-Tax Officer had the option to assess the individual parties to the joint
venture, and having exercised that option it was not open to the Income-Tax
Officer thereafter to reassess the same income collectively in the hands of the
three persons as an unregistered firm. On a reference, the High Court confirmed
In appeal to this Court it was contended on
behalf of the Revenue that the Income-Tax Officer making the first assessment
of the three persons was not informed that they constituted an unregistered
firm and he was therefore in law competent to assess the entity which was in
truth liable to be, assessed to tax; and in making the earlier order of
assessment he could not be deemed to have exercised an option which precluded
him from assessing the income of the three persons as an unregistered firm.
HELD : The three persons could be assessed
individually or they could be assessed collectively in the status of an
unregistered firm; the Income-Tax Officer could not seek to assess one income
twice-once in the hands of the partners and again in the hands of the
unregistered firm. [221 E] The plea that the Income-Tax Officer was not in possession
of information relying on which, if he desired, he could have assessed the
three persons collectively as an unregistered firm cannot be accented.
When the, Income-Tax Officer assessed the
three persons separately, he unquestionably exercised an option knowing that
they had entered into a trading transaction in which they were jointly
interested. [222 E]
CIVIL APPELLATE JURISDICTION Civil Appeal No.
327 of 1965.
220 Appeal from the judgment and order, dated
July 4, 1962 of the Bombay High Court in Income-tax Reference No. 46 of 1960.
A. V. Viswanatha Sastri, N. D. Karkhanis, R.
H. Dhebar and R. N. Sachthey, for the appellant.
Bishan Narain, B. R. L. lyengar, S. K. Mehta
and K. L. Mehta, for the respondent.
The Judgment of the Court was delivered by
Shah, J. In the account year ending November 6, 1953 Murlidhar Jhawar, Pannalal
Lahoti and Govindbai carried on business in groundnut, cotton and cotton-seed.
In the year of assessment 1954-55 the Income-tax Officer, Nanded, brought to
tax a third share in Rs. 51,280 computed as profits from the business in the
hands of each of the three parties, and thereafter he called upon Murlidhar to
submit a return of the "income of the joint venture" on the footing
that the parties thereto constituted an unregistered firm.
Murlidhar complied with the requisition and
submitted in November 1957 a return, but later applied to withdraw it by
application dated December 18, 1957. The Income-tax Officer rejected the
application for withdrawal of return and completed the assessment of the three
parties to the joint venture under S. 23(3) of the Income-tax Act, 1922 in the
status of an unregistered firm and computed the income of the joint venture at
Rs. 80,925. In appeal to the Appellate Assistant Commissioner the order passed
by the Income-tax Officer was confirmed. In second appeal, the Income-tax
Appellate Tribunal set aside the order of the Appellate Assistant Commissioner.
The Tribunal held that the Income- tax Officer had the option to assess the
individual parties to the joint venture, and he having exercised that option it
was not open to him thereafter to reassess the same income- collectively in the
hands of the three parties to the joint venture in the status of an
unregistered firm. But on a concession made by counsel for the three parties,
the Tribunal directed that the assessment be "rectified so as to restore
the status quo ante." The Tribunal submitted a statement of the case and
referred the following question to the High Court of Judicature at Bombay :
"Whether on the facts and in the
circumstances of the case the assessment of the unregistered firm was proper
and legal, the two partners of this partnership 221 having been assessed in
respect of their shares of income from this partnership business ?" The
High Court recorded an answer in the negative. With certificate granted by the
High Court, this appeal has been preferred.
Under s. 3 of the Indian Income-tax Act,
income-tax is charged in respect of the total income of the previous year of
every individual, Hindu undivided family, company and local authority, and of
every firm and other association of persons or the partners of the firm or the
members of the association individually. This Court in Commissioner of
Income-tax, U.P. v. Kanpur Coal Syndicate(1) observed at p. 228 :
"The section (s. 3) expressly treats an
association of persons and the individual members of an association as two
distinct and different assessable entities. On the terms of the section the tax
can be levied on either of the said two entities according to the provisions of
the Act." The same principle would apply to the cases of assessment of
partners individually of an unregistered firm. The partners may be assessed
individually or they may be assessed collectively in the status of an
unregistered firm : the Income-tax Officer cannot however seek to assess the
one income twice-once in the hands of the partners and again in the hands of
the unregistered firm.
Mr. Viswanatha Sastri for the Department
contends that the Income-tax Officer making the first assessment of the three
parties to the joint venture was not informed that the three parties
constituted an unregistered firm and therefore the Income-tax Officer was in
law competent to assess the entity which was in truth liable to be assessed to
tax, and in making the earlier order of assessment he cannot be deemed to have
exercised an option which precluded him from assessing the income of the three
parties as an unregistered firm. It is true as pointed out by this Court in a recent
judgment: Income-tax Officer, Award, Lucknow v. Bachulal Kapoor(2) : that in
dealing with a claim made by the Income- tax Officer to assess income into the
hands of a Hindu undivided family, after assessing it in the hands of the
members on the footing that the family was severed, the "exercise of the
option to do one or other of the two alternatives open to an officer assumes
knowledge on his part of the existence of two alternatives". But on the
materials before the Court we are unable (1) 53 I.T.R. 225 : 8 S.C.R 85.
(2)  3 S.C.R. 68.
222 to accept the plea that the Income-tax
Officer was not in possession of information relying on which, if he desired,
he could have assessed the three parties collectively as an unregistered firm.
There is no warrant for the assumption which counsel for the Department asks us
to make, that information about the true state of affairs was not with the
Income-tax Officer when the first assessment was made by him.
The transactions in various commodities were
carried on by Pannalal and Govindbai who were partners of Messrs. Purna Ginning
& Pressing Factory and by Murlidhar. The Income-tax Officer had assessed
the income of the three parties separately and added to the individual income
of each party his or her share in the profits of the joint venture. The
Income-tax Officer had information that the three parties, two of whom were
members of a registered trading firm had effected transactions in groundnut,
cotton and cotton-seed.
Apparently returns in respect of these
trading transactions were separately made and a third share was included in the
individual assessment of each of the three parties. Apart from an association
of individuals or a firm, the Income-tax Act does not recognize a collection of
individuals as an entity capable of being assessed to tax. The three parties
were not a registered firm, and they could be assessed to tax collectively as
an association of individuals or as an unregistered firm if the relation
between them was of partners. When the Income-tax Officer assessed the three
parties separately he unquestionably exercised an option knowing that they had
entered into a trading transaction in which they were jointly interested. The
departmental authorities have not chosen to place before the Court the returns
made by the three parties, and even the orders of assessment individually made
against the three parties by the Incomes Officer are not before this Court.
Only the final order of the Income-tax Officer which directs : "Add :
Joint venture income with Messrs. Puma
Ginning and Pressing Factory taken provisionally subject to rectification after
the assessment of the joint venture" is incorporated in the order of the
Appellate Assistant Commissioner.
It is common ground that the assessment made
by the Income- tax Officer was not a "provisional assessment" within
the meaning of s. 23B. It would be reasonable to hold that the income of the
three parties was assessed under s. 23(3) of the Income-tax Act, for the income
was earned in commercial transactions in different commodities. The Income-tax
Officer in assessing the income of the joint venture, could not have proceeded
223 without scrutinizing the accounts and other relevant documentary evidence
and without determining the skares of the three parties to the joint venture.
In determining the shares of the three parties, he had also to determine the
contractual relation which gave rise to the right to a share in the profit.
Again the order of the Income-tax Officer clearly indicates that he was
cognizant of the fact that the income of the joint venture was taxable
collectively, but he thought that he could in law in the first instance make an
"assessment provisionally" of the three parties separately and then
rectify the assessments later. In so holding the Income-tax Officer may have
committed an error of law, but he does not appear to have laboured under an
ignorance of facts. A survey of the contentions raised before the departmental
authorities, the Tribunal and the High Court makes that inference irresistible.
The Income-tax Officer who made the assessment under challenge did not state
that when the first assessment was made, the facts which had a bearing on the
true relationship between the three parties were not placed, and it was not even
argued before the Appellate Assistant Commissioner and the Tribunal that those
facts were not placed before the Income-tax Officer. The Tribunal held, relying
upon J. C. Thakkar v. Commissioner of Income-tax(1) and Joti Prasad Agarwal
& Others v. Income-tax Officer, B-Ward Mathura(2), that once the option is
exercised for assessing the individual partner and including his share of
profits in the firm in his assessment, it is not open to the Department to
assess the same income as income of the unregistered firm.
The appeal therefore fails and is dismissed
(1) 27 I.T.R. 658.
(2) 37 I.T.R. 107.