Commissioner of Income Tax vs S.R. Kandan Chettiar and Sons

Ratnam, J.—In these tax case references u/s 256(2) of the Income Tax Act, 1961 (hereinafter referred to as ""the Act""), the following

common question of law has been referred to this court for its opinion :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding and had valid materials to hold that the

Income Tax Officer had exercised his option of assessing the income of the assessee-association in the hands of its members individually and that

the assessments made in the hands of the assessee-association are not valid ?

There was a firm in the name and style of S. R. Kandan Chettiar and Sons, Mettupalayam, which consisted of two partners, viz., Nachimuthu

Chettiar and Shanmugham Chettiar, and this firm continued to exist up to the assessment year 1958-59. With effect from April 1, 1958, one

Subramaniam, son of Nachimuthu Chettiar, one of the partners of the firm, was taken in as a partner in the said partnership. During the accounting

year relevant to the assessment year 1960-61, Nachimuthu Chettiar died and the firm was reconstituted and a fresh deed of partnership in respect

of the newly constituted firm was also executed and the reconstituted firm consisted of Subramaniam as karta of the Hindu undivided family in the

place of his deceased father, Nachimuthu Chettiar, and also in his individual capacity, and Shanmugham Chettiar. On the strength of the partnership

deed, the Income Tax Officer granted registration to the said firm for the assessment years 1960-61 and 1961-62 and completed the assessments

as well. However, the Commissioner of Income Tax, in the proceedings taken u/s 33B of the Indian Income Tax Act, 1922, was of the view that

the reconstituted partnership was invalid in law and that, therefore the assessee was not entitled to the benefit of registration. In that view, he

cancelled the registration of the firm as well as the assessment orders, with a direction that the Income Tax Officer should make fresh assessments

according to law. The assessee preferred appeals to the Tribunal against the order of the Commissioner of Income Tax, but the view taken by the

Commissioner of Income Tax was confirmed and the appeals were dismissed. Thereupon, the Income Tax Officer proceeded to make

assessments u/s 143(3) read with section 263(1) of the Act for assessment years 1960-61 and 1961-62 determining the status of the assessee as

an unregistered firm. The assessee sought to quash the orders of assessment by resorting to writ proceedings under article 226 of the Constitution

of India and those writ petitions were dismissed with a direction that the validity of the assessment orders of the assessment orders could be

decided only the appellate authority. The assessee thereupon preferred appeals before the Appellate Assistant Commissioner and he held that the

correct status of the assessee for the assessment years in questions was an association of persons and further held that as the Income Tax Officer

had made assessments on the members of the association individually, it was not open to him to assess the same income in the hands of the

association of persons. In doing so, he relied upon a report of the Income Tax Officer to the effect that the assessments of the partners were

originally completed adopting the shares of income as received from a registered firm and that subsequent to the reopening of the assessments of

the firm, while the assessments of Subramaniam Chettiar were revised treating the shares of income as taxed, in the case of Shanmugham Chettiar,

the assessments were not revised, with the result that in the case of one partner, the shares of income had been taken as taxed, while in the case of

the other partner, Shanmugham Chettiar, the shares were treated as not taxed. In that view of the matter, the Appellate Assistant Commissioner

further held that the assessee could not be taxed on the income determined for the assessment years in question in the status of an association of

persons and allowed the appeals. Aggrieved by this, the Department preferred appeals before the Tribunal. Before the Tribunal, it was accepted

that the assessments of Subramaniam Chettiar were revised treating the shares of income as taxed and that with reference to Shanmugham

Chettiar, the assessments were not revised and the assessments had also become final and in view of this, the Tribunal concluded that the income

was assessed in the hands of at least one member, viz., Shanmugham Chettiar and, therefore, it must be concluded that the Income Tax Officer

had exercised the option of assessing the income of the assessee-assocation in the hands of its members individually and the income could not be

subjected to assessment in the hands of the assessee as an association of persons. In the result, the appeals preferred by the Department were

dismissed and that is how the question of law set out earlier has arisen.

Thus, the main question that arises for consideration is, whether under the provisions of the Act, an option was available to the Income Tax

Officer, and if so, such an option was exercised by him. Even with reference to section 3 of the Indian Income Tax Act, 1922, an association of

person and individual members of such an association have been treated as two distinct and different assessable entities and tax can be levied on

either of the said entities according to the provision of that Act. Indeed, u/s 3 of the Indian Income Tax Act, 1922, an assessment can be made on

an association of persons as a unit or alternatively on the individual members thereof in respect of their respective shares of income. In considering

whether such an option was available to the Income Tax Officer u/s 3 of the Indian Income Tax Act, 1922, the Supreme Court in Commissioner of

Income Tax, U.P.,Lucknow Vs. Kanpur Coal Syndicate, held that section 3 of the Indian Income Tax Act, 1922, impliedly gave an option to

assess the total income of either an association of persons or the members of such an association individually. To similar effect is the decision in

J.C. Thakkar Vs. Commissioner of Income Tax, Central, Bombay, , where it has been laid down that the Indian Income Tax Act, 1922, advisedly

and clearly gives an option to the Income Tax authorities either to assess the unregistered firm and then proceed to assess each individual partner

of that firm or not to assess the unregistered firm at all, but to assess each individual partner and include his share of the profits in the firm in his

assessment but that the choice must be carefully exercised and no prejudice should be caused to the assessee resulting in a deprivation of his rights

or adding to his tax burden. Again, in (1966) 60 ITR 95 (SC) , the Supreme Court pointed out that section 3 of the Indian-tax Act, 1922,

expressly treats an association of persons and the individual members of an association as two distinct and different assessable entities and that tax

can be levied on either of the said two entities and that principle would apply to a case of assessment of partners individually of an unregistered

firm, where the partners may be assessed individually or they may be assessed collectively in the status of an unregistered firm, but 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.

Considering the availability of such an option under sections 2(31) and 4 of the 1961 Act, in COMMISSIONER OF Income Tax, MADRAS-II

Vs. BLUE MOUNTAIN ENGINEERING CORPORATION., , this court ruled that in spite of the slight change in the phraseology between

section 3 of the Indian Income Tax Act, 1922, and section 4 of the 1961 Act, the Income Tax Officer continues to have an option to assess either

the unregistered firm or the individual partners there of and the assessment of a firm after a partner has been assessed on his share income from the

firm, would not be legal. Reliance, however, was placed by learned counsel for the Revenue upon the decision reported in Setha Ram Dhanvir

Singh Vs. Commissioner of Income Tax, to contend that the assessment of an unregistered firm was valid, even though its partners were assessed

individually. However, factually it was found in that case that there was no exercise of any option as such and it was on this ground that it was held

that there was no election as such. It is significant that in that decision also, the availability of an option to the Income Tax Officer had been

accepted, but it was held that there was no exercise of such an option. That decision would not, therefore, be of any assistance to the Revenue.

We, therefore, hold considering the provisions of section 3 of the Indian Income Tax Act, 1922, and sections 2(31) and 4 of the 1961 Act, that

the Income Tax Officer had an option to assess the association of persons as a unit of assessment or the members of the association as individuals

in respect of their respective shares in the profits made by the association.

We now proceed to consider the question whether there was an exercise of the option by the Income Tax Officer. It is in this connection that a

reference has to be made to the stand taken by the Revenue before the appellate Assistant Commissioner as well as the Tribunal. It is seen from

paragraph 8 of the order of the Appellate Assistant Commissioner that in his report dated February 6, 1973, the Income Tax Officer had stated

that the assessments of the partners were originally completed adopting the shares of income as received from a registered firm and that

subsequent to the reopening of the assessments of the firm, the assessments of Subramaniam Chettiar were revised treating the shares of income as

taxed, while, in the case of Shanmugham Chettiar, the assessments were not revised. The resulting position was, in the case of one partner, viz.,

Subramaniam Chettiar, the shares of income had been taken as taxed, while, with reference to the other partner, Shanmugham Chettiar, the shares

were treated as not taxed. Even before the Tribunal, as could be gathered from paragraph 4 of its order, the departmental representative accepted

that while the assessments of Subramaniam Chettiar were revised treating the share income as taxed, the assessments made in the case of

Shanmugham Chettiar were not revised and that the assessments had become final. It was also not disputed that in the case of an association of

persons, the Income Tax Officer had the option to assess the tax either on the association itself as a unit or on the members of the association as

individuals in respect of their respective shares of profit made by the association and that the assessments in the case of Shanmugham Chettiar had

become final. In spite of it, it was contended that it is still open to the Income Tax Officer to assess the income of the relevant assessment years in

the hands of the assessee-association which was not accepted by the Tribunal. The Tribunal proceeded to hold that as the income was assessed in

the hands of one member of the association of persons, viz., Shanmugham Chettiar, it must be concluded that the Income Tax Officer had

exercised the option of assessing the income of the assessee-association in the hands of its members individually and, therefore, the income for the

assessment years in question could not be assessed in the hands of the assessee as an association of persons. The revision of the assessments with

reference to one of the partners and the assessments of the share income of the other partner individually in his hands, which had admittedly

become final, is clearly indicative that, consciously, the Income Tax Officer proceeded to revise the assessments in the case of one of the partners,

but failed to do so with reference to the other partner in whose hands the share income had been assessed individually and which assessment had

also become final. That, in our view, would sufficiently indicate the exercise of an option by the Income Tax Officer on the facts and circumstances

of this case.

An attempt was made to contend that a communication had been addressed for revision of the assessment of the other partner, Shanmugham

Chettiar, as he was under the jurisdiction of another Income Tax Officer. But even that would not in any manner assist the Department, for, in

COMMISSIONER OF Income Tax, MADRAS Vs. R. DHANDAYUTHAM AND OTHERS., , it had been clearly laid down that the normal

procedure is to tax the association primarily and then to proceed to consider the income in the hands of the individual members and that even

though the Income Tax Officer who had assessed the individual was different from the Income Tax officer who assessed the association, by the

action of first Income Tax Officer the option in the department to assess either the association or its individual members must be deemed to have

been exercised and the second officer would be bound by the action of the first officer. We may also usefully refer in this connection to the

decision in Universal Commercial Company Vs. Commissioner of Income Tax, . In that case, a firm consisting of two partners constituted under a

deed of partnership dated December 9, 1964, filed an application claiming registration for the assessment year 1965-66 on December 29, 1964.

On June 30, 1965, the business of the firm was closed and one of the partners left for a different place and as the assessee did not file any return,

the Income Tax Officer issued a notice u/s 148 of the Act calling upon the assessee to file a return of income to which there was no response. On

the available materials, the Income Tax Officer assessed the assessee in the status of an association of persons and he also refused registration to

the firm on the application filed earlier. On appeal by the assessee to the Appellate Assistant Commissioner, it was held that the status was rightly

fixed as an association of persons and some meagre relief was granted to the assessee, against which an appeal was preferred before the Tribunal

and the Tribunal held that as one of the partners of the firm had been assessed on her income from the firm, there was no jurisdiction to assess the

assessee and that led to the cancellation of the assessment made on the assessee in the status of an association of persons. Referring to

COMMISSIONER OF Income Tax, MADRAS-II Vs. BLUE MOUNTAIN ENGINEERING CORPORATION., , it was pointed out that

under the provisions of the Act. The assessment made on the firm as an unregistered firm, after the assessment made earlier in the case of one of

the partners, was not legal. We are of the view that the principles enunciated in the aforesaid decision would govern these references as well.

We have carefully perused the orders of the Appellate Assistant Commissioner as well as the Tribunal and also the contents of the report of the

Income Tax Officer dated February 6, 1973, as set out in the course of the order of the Appellate assistant Commissioner and referred to earlier.

Therefore, it is clear that the Tribunal had valid materials to hold that the Income Tax Officer had exercised his option. We, therefore, answer the

question referred to us in the affirmative and against the Revenue. The assessee will be entitled to the costs of these references. Counsel''s fee Rs.

One set.