1971-VIL-325-GUJ-DT

Equivalent Citation: [1972] 86 ITR 481

GUJARAT HIGH COURT

Date: 17.09.1971

COMMISSIONER OF INCOME-TAX, GUJARAT II

Vs

HIMATLAL BHAGUBHAI.

BENCH

Judge(s)  : B. J. DIVAN., P. N. BHAGWATI.

JUDGMENT

The judgment of the court was delivered by

BHAGWATI C.J.-This reference arises out of a proceeding for reassessment of the income of the assessee for the assessment year 1960-61. The assessee is a Hindu undivided family. It was at all material times a partner in four firms through its manager and karta. The original assessment of the assessee for the assessment year 1960-61 was completed by the Income-tax Officer on 16th December, 1960. It seems that at that time only one of the four firms had been assessed, and, therefore, the share income of the assessee from that firm as determined by the Income-tax Officer assessing that firm was included in the assessment of the assessee. So far as other three firms were concerned, their assessments were pending and the Income-tax Officer assessing the assessee, therefore, accepted the share income of the assessee in those firms as declared in the return filed by the assessee and completed the assessment on the basis of the share income so disclosed by the assessee. It was expressly stated by the Income-tax Officer in the order of assessment that the share of the assessee in these firms was being "taken as declared subject to rectification under section 35 of the Act", The assessment of the three firms was thereafter completed by the respective Income-tax Officers having jurisdiction over them and the Income-tax Officer dealing with the case of the assessee received allocation reports from these Income-tax Officers stating the share income of the assessee as determined in the assessment of those firms. On receipt of the allocation reports the Income-tax Officer could have rectified the assessment of the assessee by correcting the share income of the assessee in the three firms under section 35(5) of the Indian Income-tax Act, 1922 (hereinafter referred to as "the old Act"), but the Income-tax Officer failed to do so within the period limited by the section, viz., four years from the date of the final orders passed in the case of the firms. The result was that the rectification proceedings under section 35(5) became time-barred. But, the time for taking action under section 147(b) of the Income-tax Act, 1961 (hereinafter referred to as "the new Act")-- that being the section applicable for reopening the assessment of the assessee by reason of section 297(2)(d)(ii) of that Act--was still available since the return of income was filed by the assessee subsequent to the commencement of the new Act ; and the Income-tax Officer, therefore, issued a notice for reopening the assessment of the assessee under section 147(b) and served it on the assessee on 29th March, 1965. The ground on which the Income-tax Officer sought to reopen the assessment was that in consequence of information contained in the allocation reports received by him subsequent to the original assessment, he had reason to believe that the share income of the assessee from the three firms to the extent to which it was not declared in the return had escaped assessment. The Income-tax Officer accordingly reopened the assessment and brought the share income of the assessee in the firms to tax on the basis of allocation reports received from the Income-tax Officers having jurisdiction over the firms. The assessee appealed against the order of assessment to the Appellate Assistant Commissioner ; and in the appeal the main contention taken up by the assessee was that the only power of the Income-tax Officer to disturb the assessment already made was by way of rectification under section 35(5) ; and if the time limited by section 35(5) for making rectification was passed, the Income-tax Officer could not resort to section 147(b) in order to achieve that which he was prohibited from doing by reason of lapse of time under section 35(5). The assessee also urged that the conditions requisite for applicability of section 147(b) were not satisfied and the Income-tax Officer had, therefore, no jurisdiction to reopen the assessment. Both these contentions were negative by the Appellate Assistant Commissioner, who took the view that section 35(5) and section 147(b) were not mutually exclusive and action could be taken under either section provided the conditions of that section were satisfied and since the conditions prescribed in section 147(b) were satisfied, the Income-tax Officer was entitled to initiate action under that section despite the fact that action could also be taken under section 35(5) and such action was barred by lapse of time limited by that section. The assessee thereupon preferred an appeal to the Tribunal. In that appeal the assessee was successful in persuading the Tribunal to hold that sections 35(5) And 147(b) were mutually exclusive ; and if a case falls within section 35(5), action can be taken only under that section and if the time-limit prescribed by that section for taking action has expired, the Income-tax Officer cannot circumvent the bar of limitation by taking resort to section 147(b). The Tribunal observed :

"Section 155 (that being the section of the new Act corresponding to section 35(5) of the old Act) is a special provision and has been enacted only to facilitate the variations and alterations of the partners" shares in the firm and for that purpose it has also prescribed a period of limitation within which the income-tax Officer has to carry out the rectification. In our view section 147(b) cannot abrogate the tenure of section 155. Therefore, we hold that the initiation of proceedings under section 147(b) is bad in law and in this view of the matter, the Tribunal allowed the appeal and set aside the order of reassessment. The Commissioner was obviously aggrieved by this decision of the Tribunal and he, therefore, moved for a reference and on his application the Tribunal referred the following question for the opinion of this court :

Whether, on the facts and in the circumstances of the case, proceedings, for assessment under section 147(b) were validly initiated ?"

This question, widely framed as it is, takes in both the aspects of the controversy between the parties. One is whether section 35(5) excludes the applicability of section 147(b) in a case where action by way of rectification could be taken under section 35(5) but it has become barred by lapse of time ; and the other is whether the conditions requisite for the applicability of section 147(b) are satisfied on the facts of the present case. Both these aspects of the question were keenly debated before us and, for reasons which we shall presently state, our decision must be in favour of the revenue.

The first aspect of the question which arises for determination is as to the inter-relation between section 35(5) and section 147(b). If a case falls within section 35(5) and also within section 147(b), does section 35(5) exclude the applicability of section 147(b) ? Are sections 35(5) and 147(b) mutually exclusive ? This question becomes relevant because it was common ground between the parties that the present case was covered by section 35(5) and action by way of rectification could have been taken by the Income-tax Officer under that section but he allowed the time to expire and by his inaction made it impossible to initiate action under that section and it is in this context that we have to determine whether action could be taken by the Income-tax Officer under section 147(b). Now, it is well, settled that once an assessment is made, it is final and conclusive unless there is some provision of law which permits its finality to be disturbed : see Commissioner of Income-tax v. Khemchand Ramdas. There are in the new Act several provisions which permit interference with the finality of an assessment. They are to be found in sections 146, 147, 154 and 155 of the new Act. Section 146 provides that where a best judgment assessment is made under section 144, an assessee may apply to the Income-tax Officer to cancel the best judgment assessment and to make a fresh assessment on any one of the three grounds specified in the section. There is a time-limit prescribed in the section for making this application and it is one month from the date of service of the notice of demand issued in consequence of the assessment. Section 147, which is an oft-quoted section, permits the Income-tax Officer to reopen an assessment, if the conditions specified in clause (a) or clause (b) are satisfied. Where the Income-tax Officer seeks to reopen the assessment under-clause (a), he must issue a notice within 8 years or 16 years from the end of the relevant assessment year, according as the case falls within sub-clause (i) or (ii) of section 149(1)(a) ; and where he seeks to reopen the assessment under clause (b) he is required to issue a notice within four years from the end of the relevant assessment year as provided in section 149(1)(b). Then there is power conferred on the Income-tax Officer under section 154 to rectify any mistake apparent from the record of the assessment. This power can be exercised only if there is a mistake apparent from the record and there is a time-limit prescribed under the section for exercise of the power and that time-limit is four years from the date of the order sought to be amended. Section 155 confers power on the Income-tax Officer to rectify an order of assessment in certain specified cases. Sub-section (1) of section 155 is the counterpart of section 35(5) ; it deals with the case of rectification of the assessment of a partner, where it is found 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 as included is not correct. There are similar provisions in the other sub-sections of section 155 dealing with different situations. There is a time-limit provided in each of these cases, within which power to rectify the assessment must be exercised by the Income-tax Officer. We are not referring here to the powers of appeal and revision since these powers are necessary concomitants of every judicial or quasi-judicial adjudication and the assessment made by the Income-tax Officer can always be interfered with in appeal or revision. But, it may be pointed out that in appeal and revision also, time-limits are provided in the relevant sections. These sections are all enabling sections which permit disturbance of the finality of an assessment at various stages under different conditions and within different time-limits. Each section is an independent section with its own distinctive conditions and, its own particular time-limit and if the conditions are satisfied and action is taken within the time-limit, it opens the door for interfering with the finality of the assessment. It may be that a particular door provided by a section for penetrating the finality of an assessment is closed because the conditions of entry through that door are not satisfied or the time-limit within which the entry can be made has expired, but that does not mean that if the conditions of entry through another door provided by a different section are satisfied and the entry is sought to be made within the time-limit specified in that section, such entry should not be permissible. Take for example, a case where a best judgment assessment is made by the Income-tax Officer under section 144 and the assessee fails to make an application for cancelling it within one month from the date of service of the notice of demand as contemplated under section 146. Can it  suggested for a moment that in such a case, if there is a mistake apparent from the record of the assessment, the Income-tax Officer cannot rectify the assessment under section 154 merely because the time-limit specified in section 146 having expired, no action can be taken to disturb the finality of the assessment under that section ? Similarly, can it be urged in such a case that even if the Income-tax Officer finds that income of the assessee has escaped assessment while making the best judgment assessment, he cannot reopen the assessment under section 147, clause (a) or (b)? If action under a particular section is not taken within the time-limit prescribed by that section, it would not be possible to disturb the finality of the assessment by action under that section but if the conditions of another section are satisfied and the time-limit specified in that section is still available, there is no reason why resort to that section should be held to be not available to the revenue. Where there are several distinct powers conferred on the Income-tax Officer to disturb the finality of an assessment, the Income-tax Officer may exercise any one of them provided the conditions for its exercise are satisfied and it is sought to be exercised within the time prescribed for it. It is, therefore, not possible to accept the contention of the assessee that section 35(5) [that being the section of the old Act corresponding to section 155, sub-section (1) of the new Act), and section 147(b) are mutually exclusive. The conditions for the applicability of the two sections are different and distinct and they have got their own particular time-limits. The scope and object of the two sections are also different. Section 35(5) is enacted for the purpose of correlating the partners' assessment with the assessment of the firm and rectification under section 35(5) may result in enhancement or reduction of the assessment while the underlying purpose of section 147(b) is to bring to tax escaped income and action under section 147(b) must, therefore, ordinarily result in enhancement of the assessment. Sections 35(5) and 147(b) operate in different fields but these fields overlap in a common segment and in this common segment the Income-tax Officer may exercise the power of interfering with the finality of assessment under either section. Even if action cannot be taken under one section because the time-limit for taking such action has expired, the other section can be availed of for disturbing the finality of the assessment, provided the conditions of that section are satisfied and time is still available for taking action under that section.

This view which we are taking is fully supported by a number of decisions of various High Courts. The Bombay High Court pointed out in Commissioner of Income-tax v. D. R. Naik :

"............... that a mistake might be remedied under section 35, is no reason why the assessment should not be altered under section 34, if the case falls within that section. I see no reason for supposing that sections 34 and 35 are mutually exclusive."

It is true that at the date when this decision was given, section 35(5) was not on the statute book, but the observations made in regard to the inter-relation between sections 34 and 35 must apply equally when we consider the impact of section 35(5) on the scope and ambit of section 147(b), which is equivalent to section 34(b) of the old Act. The same view has been taken by the Madras High Court in two decisions, namely, Salem Provident Fund Society v. Commissioner of Income-tax and V. S. Arulanandam v. Income-tax Officer as also by the Allahabad High Court in A. H. Wheeler and Co. P. Ltd. v. Income-tax Officer. There is also a later decision of the Allahabad High Court in Hira Lal Sutwala v. Commissioner of Income-tax, which is more directly in point. The case there was very much similar to the present case before us with only this difference that the position was the reverse. There the assessment of a partner was sought to be rectified by the Income-tax Officer under section 35(1) on completion of the assessment of the firm. The argument advanced on behalf of the assessee was that action for including the correct share of the assessee could be taken by the Income-tax Officer, only under section 34(1) since the provisions of that section were applicable and that section excluded the applicability of section 35(1). The High Court of Allahabad negatived this contention of the assessee observing :

The circumstances in which an order under section 34(1) and an order under section 35(1) can be passed are not mutually exclusive and may overlap. There is nothing in the provisions of the two sections to suggest any conflict between them of such a nature that the provisions of one section will not apply if those of the others will apply ......... Therefore, it cannot be said that if a case is governed by section 34(1) it may not be governed by section 35(1)."

It must, therefore, be held that merely because the case falls within section 35(5) and. the time for taking action under that section has expired, it does not mean that action under section 147(b) cannot be taken, if the conditions of that section are satisfied and action is sought to be taken within the time limited in that section.

But, one other contention against the applicability of section 147(b) was raised on behalf of the assessee and it was that the assessment of the share of a partner in the income of the firm subject to rectification is in the nature of deferred or piecemeal assessment and section 147(b) cannot be availed of for the purpose of completing a deferred or piecemeal assessment. The assessee urged that such a deferred or piecemeal assessment of the share of a partner in the income of the firm is permissible only by reason of section 35(5) and the correct share of the partner in the income of the firm can, therefore, be brought to assessment only by resort to the machinery provided in section 35(5) and the Income-tax Officer cannot reopen the assessment of a partner for the purpose of including the correct share of the partner in the income of the firm under section 147(b). Now, the proposition of law on which this contention is based can hardly be disputed, namely, that it is not open to an Income-tax Officer to make piecemeal assessment or to defer a part of the assessment and seek to complete the deferred or piecemeal assessment by invoking section 147(b), but the contention proceeds on a wrong assumption that the assessment of a partner made on the basis of his share in the income of the firm as declared in the return is deferred or piecemeal assessment. When it is said that income-tax law does not permit piecemeal or deferred assessment, what is meant is that the Income-tax Officer must make the assessment once and for all and he cannot say that he will assess a part of the income at one time and another part, at another time. The Income-tax Officer cannot leave out an item of income from consideration on the ground that he would bring it to tax at a later date. This was precisely what happened in Chuni Lal Nayyar v. Commissioner of Income-tax, where the Income-tax Officer knew at the time when he made the assessment that the assessee had a particular share in the income of a firm and yet did not include it in the assessment and, subsequently, tried to bring it to tax by seeking to avail of the provisions of section 34 of the old Act. The Punjab High Court held on these facts that the Income-tax Officer had no jurisdiction to reopen the assessment of the assessee for the purpose of including his share in the profits of the firm under section 34 of the old Act. So also in Debi Prasad Malviya v. Commissioner of Income-tax, the Income-tax Officer, while making the assessment, knew that the assessee had a one-third share in a partnership firm and the profits from that firm had to be included in his total income and yet he completed the assessment without including the share of the assessee in the income of the firm, stating that necessary action for revising the assessment by inclusion of the assessee's share in the profits of the firm would be taken later, on receipt of the report of the Income-tax Officer assessing the firm and, in the context of these facts, the Allahabad High Court observed :

"Section 23 of the Indian Income-tax Act contemplates that the Income-tax Officer should make a complete assessment on the basis of the total income of an assessee. It is not open to him to make assessments piecemeal and in a case where the Income-tax, Officer has proceeded to assess one part of the income and has decided to assess the rest of the income on a later date, he cannot rely on the provisions of section 34 for the purpose of reopening the assessment."

Similar were the facts in the case before the Madras High Court in T. Manavedan Tirumalpad v. Commissioner of Income-tax B. There also, the Income-tax Officer had omitted to include in the assessment of the assessee income arising to him from a particular source, though he was aware of the existence of that source and he completed the assessment leaving the question of assessment of income from that source to be considered later. The Madras High Court held that the assessment made by the Income-tax Officer was piecemeal assessment and section 34 could not be called in aid to complete an assessment which the Income-tax Officer had deliberately deferred. It is, therefore, clear that the Income-tax Officer must complete the assessment once and for all and he cannot defer assessment of any particular item of income to be done at a later point of time. The assessment must be one single assessment and not piecemeal assessment. If the Income-tax Officer has assessed only a part of the income while making the assessment and deferred the other part of the income for consideration at a later date, section 147 of the new Act which corresponds to section 34 of the old Act cannot be invoked for the purpose of completing the deferred assessment.

But, the question arises whether the assessment of a partner on the basis of his share in the income of the firm as declared in the return can be said to be deferred or piecemeal assessment. Now, one thing is clear and there is ample authority for it, that a partner can be assessed even though the assessment of the firm has not been completed : See Hira Lal Sutwala v. Commissioner of Income-tax. When a partner is assessed before the assessment of the firm, the Income-tax Officer assessing the partner would not know what is precisely the share of the partner in the income of the firm. The Income-tax Officer may in such a case complete the assessment of the partner without including in it the share of the partner in the income of the firm and then proceed to rectify the assessment of the partner under section 35(5) when the assessment of the firm is completed and the correct share of the partner in the income of the firm is determined. This would be a case of piecemeal assessment but the Income-tax Officer would be competent to bring the share of the partner in the income of the firm to tax by reason of the provision enacted in section 35(5). If the Income-tax Officer fails to take action for rectifying the assessment within the time limited by section 35(5), it may be possible to say that it would not be open to the Income-tax Officer to reopen the assessment of the partner for the purpose of including the share of the partner in the income of the firm under section 147 because of the principle that section 147 cannot be availed of for the purpose of completing a deferred or piecemeal assessment. But, the Income-tax Officer may, instead of leaving out of consideration the share of the partner in the income of the firm, proceed to assess it on the basis of such material as is available before him. The Income-tax Officer may estimate the share of the partner in the income of the firm on the basis of the material before him or he may accept the share in the income of the firm as declared by the partner and include it in the assessment of the partner. Where the Income-tax Officer follows this course, what he does is to assess the share of the partner in the income of the firm. The Income-tax Officer in such a case completes the assessment by taking the share of the partner in the income of the firm at the figure declared by the assessee. There is no law which says that the Income-tax Officer cannot take the income of the assessee from a particular source at the figure declared by the assessee or that he must probe further and determine what is in his opinion the correct income of the assessee from such source. If the Income-tax Officer takes the share of the partner in the income of the firm as declared by the partner and completes the assessment it is as much a completed assessment as it would be where the correct share of the partner in the income of the firm is taken from the assessment of the firm. There is no question in such a case of a deferred or piecemeal assessment. Now, there must be a provision for disturbing the finality of such a completed assessment, because when the assessment of the firm is completed, the correct share of the partner in the income of the firm would be determined and that would ordinarily, in most cases, be different from that assessed by the Income-tax Officer in the completed assessment of the partner. The correct share of the partner as determined on the assessment of the firm may be more or may be less ; in either case, the completed assessment made on the partner must be rectified with a view to bringing the correct share of the partner to tax. Section 35(5) was, therefore, enacted for the purpose of enabling the Income-tax Officer to disturb the finality of the completed assessment made on the partner by correcting the share of the partner in the income of the firm as originally assessed. It would thus be seen that in cases where the share in the income of the firm is included in the assessment of the partner before the assessment of the firm is completed, section 35(5) is an enabling provision which permits disturbance of finality of the assessment. It is not a provision which entitles the Income-tax Officer to make a deferred or piecemeal assessment which he otherwise could not have done. It is not true that but for section 35(5) the Income-tax Officer could not include in the assessment of the partner his share in the income of the firm, either as estimated by the Income-tax Officer or as declared by the partner. That is something which the Income-tax Officer could, always do as part of the process of assessment and such an assessment would not be deferred or piecemeal assessment. The principle that section 147 cannot be availed of for the purpose of completing a deferred or piecemeal assessment cannot, therefore, have any application in such a case.

Some reliance was placed on behalf of the assessee on the words "subject to rectification under section 35(5)" used in the order of assessment. But, we fail to see how these words can throw any light on the nature of the power which the Income-tax Officer possesses to make an order of assessment on the partner by including his share in the income of the firm, before the assessment of the firm is completed. Even if the words "subject to rectification under section 35(5)" had not been used, the Income-tax Officer could have still rectified the assessment under section 35(5) when he found, on the assessment of the three firms being completed, that the correct share of the assessee in the three firms was more than that declared by him. We are, therefore, of the view that the Income-tax Officer was entitled in the present case to take action under section 147(b), if the conditions of that section were satisfied.

That takes us to a consideration of the second aspect of the question, namely, whether the conditions of section 147(b) were satisfied in the present case so as to entitle the Income-tax Officer to reopen the assessment of the assessee. Now, so far as this aspect of the question is concerned, there were, in the main, two arguments advanced on behalf of the assessee to repel the applicability of section 147(b). The assessee contended in the first place that by reason of the fiction enacted in section 35(5), the record of the firm must be deemed to have merged with the record of the assessee and, therefore, the information contained in the allocation reports received from the Income-tax Officers having jurisdiction over the three firms was information from the record of the assessee and, not being extraneous information, it was not sufficient to justify initiation of proceedings under section 147(b). Now, it is true that information sufficient to warrant initiation of proceedings under section 147(b) must be extraneous information outside the record of the assessee but it is not correct to say that by reason of section 35(5) the record of the firm, must be deemed to have become the record of the assessee. The fiction enacted in section 35(5) is only a limited fiction for the purpose of attracting the applicability of section 35(1). All that it says is that where it is found on the assessment of the firm 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, shall be deemed to be rectification of a mistake apparent from the record within the meaning of section 35. It does not provide that the record of the firm shall be deemed to be the record of the assessee. It is no doubt true that section 35(5) had to be enacted because a view was taken by the courts that the record of the firm being different from the record of the assessee, it cannot be said that there is a mistake apparent from the record of the assessee when it is found, as a result of the assessment of the firm, that the share of the partner in the profit of the firm included in the assessment of the partner is not correct. But the fiction created by section 35(5) is a limited fiction, the purpose of which is merely to say that what was not a mistake apparent from the record of the assessee shall be deemed to be a mistake apparent from the record of the assessee. We cannot carry the fiction further and say that the record of the firm must also, therefore, be deemed to be the record of the assessee. The information contained in the allocation reports must, in the circumstances, be regarded as information received from an extraneous source so as to justify initiation of proceedings under section 147(b).

It was then contended on behalf of the assessee that this was not a case of escapement of income from assessment but it was a case of income suffering non-assessment. The argument of the assessee was that the correct share of the assessee in the three firms could not be brought to tax owing to inaction of the Income-tax Officer in taking proceedings for rectification within the time limited by section 35(5) and, therefore, it could not be said that the income of the assessee had escaped assessment. It did not suffer assessment because of the inaction of the Income-tax Officer to take proceedings under section 35(5). This argument is clearly fallacious. In order to determine the applicability of section 147(b), what has to be seen is whether income of the assessee escaped assessment at the time of the original assessment and not whether escaped income could have been brought to tax by the Income-tax Officer by resorting to some other provision of law but he failed to take action under such other provision. The correct share of the assessee in the three firms in the present case escaped assessment at the time of original assessment and inaction on the part of the Income-tax Officer to proceed under section 35(5) with a view to bringing it to tax cannot have the effect of converting escaped income into non-assessed income. It may be that the Income-tax Officer could have brought escaped income to tax under section 35(5) if he had taken action under that section within the time, but that does not mean that escaped income thereby ceases to be escaped income so as to be outside the scope and ambit of section 147(b). There is, therefore, no substance in this contention of the assessee as well.

It is clear that the allocation reports received from the Income-tax Officers having jurisdiction over the three firms conveyed information to the Income-tax Officer assessing the assessee that the correct share of the assessee in the profits of the three firms to the extent to which it was in excess of that declared in the return had escaped assessment at the time of the original assessment and it must, therefore, be held that the conditions for the applicability of section 147(b) were satisfied and the Income-tax Officer was entitled to reopen the assessment of the assessee under that section.

Our answer to the question referred to us must, therefore, be in the affirmative. The assessee will pay the costs of the reference to the Commissioner.

 

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