M.R. Jayaram vs Commissioner of Income Tax, Madras

Balasubrahmanyan, J.—The assessee in this Income Tax reference was originally a partner of a registered firm called ""Sri Venkateswara

Bus Union"". He had a 1/4th share in the firm. He retired from the partnership with effect from March 30, 1960. For the accounting year ended

March 31, 1960, relevant to the assessment year 1960-61, the firm was subjected to assessment to Income Tax. The assessment on the firm was

made on October 10, 1960, on a total income of Rs. 49,040. Following the assessment of the firm, the assessment on the assessee as an individual

partner of the firm was also completed for the same assessment year 1960-61. In that assessment, the assessee''s share income was included as

part of his total income. The amount included was Rs. 12,263.

Subsequent to the completion of this assessment, both on the firm and on the assessee as individual partner thereof, the Income Tax authorities

conducted a raid in the premises of the partnership firm and seized several documents therefrom. According to the Department, these documents

indicated suppression of income by the partnership firm for the year ended March 31, 1960. Following the search and seizure as aforesaid, the

ITO reopened the assessment of firm for the assessment year 1960-61 under s. 147 of the I.T. Act, 1961. A notice for reopening the assessment

was issued under s. 148 of the Act on the remaining partners of the firm as well as on the assessee as retired partner thereof. In response to the

notice under s. 148, the assessee represented that since he had ceased to be a partner and not in possession of any of the account books, papers

or other materials of the partnership firm, he was not in a position to submit any return as called for the assessment year 1960-61 pursuant to the

reopening of the proceedings under s. 147. He, accordingly, referred the ITO to seek for necessary materials from the other partners of the firm.

As for the remaining partners, they participated in the reassessment proceedings. Ultimately the reassessment was made on the firm fixing the total

income for the year ended March 31, 1960, as Rs. 85,049 as against Rs. 49,049 as originally assessed. As a necessary corollary of the

supplemental assessment on the firm for the assessment year 1960-61, the allocation of the share incomes, as between the partners of the firm for

the year ended March, 31, 1960 had also to be revised and enhanced. The ITO, accordingly, took proceedings under s. 155(1) of the Act. In the

individual assessment of the assessee, the officer substituted in the place of the share income of Rs. 12,262 as originally assessed, the sum of Rs.

21,363 which was the correct share income on the basis of the firm''s reassessment. The assessee objected to the revision of his individual

assessment on two grounds. One was that he was not liable for the reassessment of his individual share income for the assessment year 1960-61

since it was made subsequent to his retirement. The other ground of objection was that the remaining partners of the firm who participated in the

reassessment had compromised with the Income Tax Department for getting the assessment made on a total of Rs. 85,049 and such a

compromise. These objections were overruled by the ITO who proceed to complete the individual assessment of the assessee in terms of s.

155(1) of the Act. On appeal, the assessment of the assessee was confirmed both by the AAC and the Appellate Tribunal.

In this reference made at the instance of the assessee by the Tribunal, the following questions of law have been referred for our opinion :

Whether the Tribunal was right in holding that u/s 187(1) the share income as allocated to the assessee in the reassessment order of the firm

was rightly assessed in the hands of the assessee ?

Whether, the Tribunal was right in holding that u/s 247 the assessee was precluded from objecting to the inclusion of the share income from the

firm on the ground that no appeal has been filed against the reassessment made on the partnership firm ?

It seems to us that, strictly speaking, neither of these two questions arise for consideration. The revision of the assessment for the assessment

year 1960-61 in consequence of the reassessment made on the firm was made in pursuance of the provisions of s. 155(1)(a) of the Act. That

provision reads as under :

Where in respect of any completed assessment of a partner in a firm it is found -

(a) on the assessment or reassessment of the firm,....

that the share of the partner in the income of the firm has not been included in the assessment of the partner, or, if included, is not correct, the

Income Tax Officer may amend the order of assessment of the partner with a view to the inclusion of the share in the assessment or the correction

thereof, as the case may be; and the provisions of section 154 shall, so far as may be, apply thereto.....

This provision enables the ITO to amend or revise a determination of the share income of a partner consequent upon a reassessment of the firm

in cases where the original determination of the share income follows the original assessment of the firm. This power conferred on the ITO has to

be exercised in the same manner as the power of rectification which is exercisable by the ITO under s. 154. Section 154 provides that where as a

result of rectification there is an enhancement of the assessment, such rectification can only be made after prior notice to the assessee concerned

who would be affected by such rectification. In this case, it is not denied that the assessee was given notice of the revision of his share income

consequent upon the reassessment of the firm. It cannot also be denied that the redetermination of the assessee''s share income is in perfect

accourd with the allocation of the share income as made in the reassessment of the firm.

This provision in s. 155(1) has not been considered either by the AAC or by the Tribunal in seeking to meet the objection put forward by the

assessee in this case. The discussion before the Tribunal went on the language of s. 187(1) and (2). Arguments were addressed before us too by

the assessee''s learned counsel, Mr. T. V. Balakrishnan. We, however, feel that there is no difficulty whatever in the construction and application of

s. 187 of the Act to a case of the present kind. Section 187 is a machinery provision intended to enables the ITO to take into account the change

in the constitution of the firm as between the end of the previous year and the date of making the assessment. This provision, in short, provides for

as assessment to be made on the firm as reconstitued ""at the time of making the assessment"". But the provision takes care to lay down in its

proviso that although the assessment on a reconstituted firm has to made on the firm as reconstituted on the date of the assessment, the assessment

itself, as involving a liability to tax, has got to be adjusted in accordance with the respective shares of the partners who were partners in the relevant

previous year with reference to which the income is sought to be assessed.

Mr. Balakrishnan''s construction of the provision of the provision in s. 187 was the there is no mention made in the section of a reassessment

proceeding on a form under s. 147 of the Act. Learned counsel submitted that in some other sections of the Act, special provision has been made

for proceedings unders s. 147. He cited, or example, s. 159 wherein a special provision is made for assessment on legal representatives. Sub-s (2)

of s. 159 makes provision not only for assessment in the regular course but also ""reassessment or recomputation u/s 147"". Similar words,

according to Mr. Balakrishnan, are found lacking in s. 187.

We do not think that the absence of any reference to s. 147 disentitles or disables the ITO from applying s. 187 even to reassessment

proceedings. After all, s. 147 is not what may be called an assessment provision. It is only an enabling provision, which gives the ITO additional

power to make an assessment on escaped income -income which was not brought to his notice in the original assessment. There is, therefore, no

need to refer specially to the provisions of s. 147 wherever it is intended to cover not merely the original assessment proceedings but also the

reassessment proceedings.

The fact that the Legislature has made special reference to s. 147 in the context of s. 159 does not mean that we will have to read the provisions

of s. 187 in a different manner for lack of reference to s. 147 in that provision. The Tribunal in its order had held that s. 187 is large enough in its

scope to take in not only an original assessment under s. 143 but also reassessment proceedings against a firm under s. 147 of the Act and the

same consequences will flow following the reassessment of the firm as they flow following an original assessment on it. We feel that this is the

correct view of s. 147 of the at for reasons which we have discussed above. This disposes of the first question of law which has been referred to

us. Our answer, shortly stated, is favour of the Revenue and against the assessee.

The second question of law raises a point about the applicability of s. 247 of the Act. section 246(1)(f) enacts that an assessee aggrieved by an

order under s. 155 has a right of appeal against that order to the AAC. There is no provision in that section which bars the appellant from

questioning the correctness of the reassessment of the firm which has led to the amendment or rectification of his own individual assessment in

respect of precluded from denying his liability for the enhanced share of income under this section consequent upon the reassessment of the firm.

The Tribunal did not say in its order that the assessee was seeking to question even the total income of the firm under the reassessment order or the

apportionment. Nevertheless the Tribunal apparently though that s. 247 would act as a bar to the appeal filed by the assessee, where the assessee

denies his liability to the additional tax on the enhanced share income following the reassessment on the firm. We do not think that the Tribunal is

right in invoking s. 247 having regard to the particular ground of objection raised by the assessee in his appeal. Section 247 only bars a partner

from raising in his appeal, any matter regarding the determination of the total income of the firm and the apportionment there of between the

partners of the firm. This section does not preclude an assessee from raising the question of liability for his share of income in his individual

assessment. In the present case, the order which was sought to be questioned in the appeal was an order under s. 155 of the Act. Section 246

specifically provides for an appeal against an order under s. 155, vide clause (f) of s. 246(1). This provision giving a right of appeal to the assessee

against an order under s. 155 must be regarded as seriously meant. this right of appeal cannot be shut down merely because of anything enacted

under s. 247 which, as we have already observed, only imposes a bar on a partner from questioning in an appeal determination of the total income

of the firm and the allocation of the total income amongst the partners. There is nothing either under s. 247 or under s. 246(1)(f) which precludes

an assessee from challenging in an appeal it is open to the assessee to deny his liability for an enhanced assessment on any ground which is open to

him, other than those which pertain to the determination of the total income of the firm and the allocation as between the several partners of the

firm. The reference to s. 187 by the Tribunal as a technical objection to the entertainment of the assessee''s grounds of appeal was, therefore,

wholly misplaced. Our answer to this question of law is, therefore, against the Department and in favour of the assessee.

It only remains for us to deal with one further submission made by Mr. Balakrishnan in the course of his arguments. He urged that in the

reassessment proceedings in which the remaining partners participated, an assessment order was finally rendered by the ITO ask matter of

compromise between the Department and the remaining partners concerned. According to learned counsel since the assessee was not a participant

in the reassessment proceeding and was not a party to the comprise or settlement with the Department, the enhancement of his share of income will

not be binding; on him. Learned counsel referred to s. 19(2)(e) of the Indian Partnership Act, 1932. This provision of the Partnership Act enacts

that in the absence of any usages or custom of trade to the contrary, a partner''s implied authority would not empower him to admit any liability in a

suit or proceeding against the firm. According to learned counsel, either during his continuance as a partner in the firm or after his retirement from

the firm, the assessee did not give any special authority to the other partners to enter into a settlement with the ITO admitting a lager liability for tax

than that originally imposed on the firm and its partner under the original assessment for the year 1960-61. Learned counsel, accordingly, submitted

that in terms of s. 19(2)(e) of the Partnership Act, the revision of his share income following the reassessment of the firm cannot be enforced

against him.

The answer to this submission of the learned counsel is to be found in a reported judgment by a Bench of this court in S.B. Ameeruddin Vs.

Income Tax Officer, . In that case, a partner retired from the firm. There was a deed of indemnity executed by the remaining partners in favour of

the retiring partner. By that deed, the continuing partners undertook to indemnity the retired partner against all claims that might arise after the date

of dissolution in respect of the period before the date of dissolution. There was also a specific provision to the effect that any demand that may be

made by the Income Tax Department on the firm or in respect of the retiring partner will also be covered by the indemnity. This indemnity clause

was put forward by the retiring partner to resist the additional assessment made on him subsequent to the dissolution of the partnership. This court,

however, held that the deed of indemnity was powerless against the provisions of s. 155 of the I.T. Act which enables the ITO to readjust the

share income of a partner following the reassessment of the total income of the firm. The court observed that s. 155 is not subject to any agreement

between the parties not was the apportionment of the total income of the firm amongst the partners as provided in s. 187(1) made subject to any

agreement between the parties. This judgment repelled a similar contention raised by the assessee in that case based on s. 19(2)(e) of the

Partnership Act. It laid down the position that s. 187(1) can be invoked even for the purpose of making a consequential adjustment of the share

income of a retiring partner following the reassessment of the firm. The crucial ruling given by the court on that case is to be found in the following

words (p. 368) :

It is not in dispute that under this provision (section 155(1)), if the petitioner has continued to be a partner of the firm and the assessment of the

firm was a subject of reassessment u/s 147, the assessment of the petitioner could be amended or revised. The petitioner''s contention is that his

assessment as a partner could not be reopened after his retirement even when there is a reassessment of the firm. We are unable to agree with this

contention of the petitioner.... The reassessment proceedings also could, therefore, be initiated in respect of a firm in which there has been a change

in the constitution of a firm or where the firm is dissolved or discontinued at the time when the proceedings were initiated On a plain reading of

section 187, therefore, the reassessment could be made on the reconstituted firm and if the firm''s reassessment relates to an accounting period in

which the petitioner had continued as a partner of the partnership firm, his assessment could be corrected or amended in respect of that assessment

year to include the correct share income u/s 155. It is immaterial whether on the day when the reassessment was made against the firm or no the

day when rectification of the order u/s 155 was made, the partner continued in the partnership or not.

In coming to this conclusion, the court followed a decision of the Bombay High Court in SETH CHIMANLAL LALBHAI, IN RE., . This part

of the judgment in S.B. Ameeruddin Vs. Income Tax Officer, , completely answer the first question in the this reference against the assessee.

In view of the reasons stated above, the first question in the reference is answered against the assessee and the second question against the

Department. There will be no order as to costs.