Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: COMMISSIONER OF INCOME TAX, BOMBAY CITY II VS Respondent: ASSOCIATED COMMERCIAL CORPORATIONHonorable Justice V. S. DESAI
1968 P T D 528
1968 P T D 528
[Bombay (India)]
Before Y. S. Tambe and V. S. Desai, JJ
COMMISSIONER OF INCOME TAX, BOMBAY CITY II
Versus
ASSOCIATED COMMERCIAL CORPORATION
Income‑tax Reference No. 30 of 1960, decided on 18th, June 1962.
Income ‑Time of accrual ‑ Firm of three partners --Purchase of goods at cost by one partner and agreement of dissolution between two partners‑Sale later by that partner at pro fit‑Suit by third partner‑Consent order appointing Commissioner to take account treating sale as sale by firm‑Award declaring other partners entitled to part of profits‑Profits whether accrue at time of sale of goods or later.
A, V and K were the three partners of a firm. The firm purchased a consignment of paints for Rs. 1,79,000. In September 1946, A represented to K that since the prices were falling they might not be able to sell the goods at a profit, but offered to purchase them at cost and suggested the dissolution of the firm. K agreed to A's proposal and on September 18, 1946, the terms of agreement were recorded on stamp paper in which it was stated that A and K had agreed that the firm should be dissolved as from that date and that A should purchase the paints for Rs. 1,79,000. Later K came to know in October 1946, that A secured the agreement by fraudulent misrepresentation and that A had sold the paints for Rs. 3,41,649 to one G. V. who denied having received a copy of the agreement, instituted a suit for rendition of accounts and dissolution of the firm making K and A defendants to the suit. The parties agreed that the firm should be deemed to have been dissolved on November 12, 1946, and that a Commissioner should take accounts ignoring the dissolution dated September 18, 1946, and treating the sale made by A to G as if it had been a sale by the firm. The court made a consent order appointing a Commissioner on the terms of the agreement between the parties. The Commissioner made his award on April 24, 1951, declaring that from the partnership, V was entitled to Rs. 25,092, A to Rs. 32,237 and K to Rs. 27,040 subject to the payment of the cost of the suit and the arbitration. In pursuance of the award the payments were received by the parties during the accounting year 1952‑53. V and K included their share of profits in their returns for the assessment year 1953‑54, but they did not state the relevant particulars of the firm in Part III of the return and their assessments were com pleted. Later the Income‑tax Officer initiated proceedings against the firm under section 34(1)(a) of the Indian Income‑tax Act, 1922, for the assessment year 1947‑48. Notice was served on A on October 20, 1955, but it could not be served on V and K and the assessment was completed on the firm. The Appellate Tribunal held that the assessment was invalid as the notice was issued after the firm was dissolved. A reference was made to the High Court on the questions whether the assessment was valid and whether, assuming that the profits were the profits of the firm, they were assessable in the assessment year 1947‑48 which corresponded to the year in which A sold the paints:
Held, (i) upon concession, that the assessment made on the firm was valid ;
(ii) that the sale to G, in October 1946, was by A and not the firm. Until the claim set up by the firm to the profits arising from the sale by A to G was adjudicated and determined in favour of the firm and the firm was declared to be entitled to the claim, the profits could not be said to have accrued to the firm. The profits, therefore, did not accrue to the firm in the accounting year relevant to the assessment year 1947‑48.
The scheme I of the Income‑tax Act shows that only those sums were taxable which accrued as income, i.e., they must have actually accrued or arisen. No amount can be said to accrue unless it was actually due. A claim to an amount is not tanta mount to the claim being due or having accrued.
A profit can be said to have accrued or a liability or loss can be said to have been incurred only when the profit is either actually due or the liability becomes enforceable. A mere claim to a profit or to a liability is not sufficient to make the profit to accrue or the liability to be incurred for the purposes of the Income‑tax Act.
Commissioner of Income‑tax v. Jai Parkash Om Parkash Co. Ltd. (1961) 41 I T R 718 applied.
[Case‑Law ref.].
STATEMENT OF CASE
By this application the Commissioner of Income‑tax, Bombay City II, Bombay; requires the Appellate Tribunal to refer to the High Court a question of law which is‑ said to arise out of the order of the Tribunal in I. T. A. No. 8062 of 1957‑58. The respon dent, while admitting that a question of law does arise, says that the question arises in a different form and that certain other questions of law also arise from‑the said order. Inasmuch as, in our opinion, questions of law do arise out of the aforesaid order, we hereby draw up a statement of the case agreed to by the parties and refer it to the High Court of Judicature at Bombay under section 66(1) of the Indian Income‑tax Act, 1922.
2. The assessee is an unregistered firm. The assessment year is 1947‑48 and the accounting year is the financial year 1946 47 ending on March 31, 1947. The firm was constituted under an oral agreement of partnership sometime in March, 1946 between three individuals, Amin, Valia and Kharas. The firm was to deal in lacquer and oil paints under the firm name of "Associated Commercial Corporation". The profits in the business were to be divided among the three partners, Amin getting 8 as share and Valia and Kharas 4 as each. Amin was to manage the business of the firm. The firm purchased paint for a sum of Rs. 1,79,000. This was the only purchase made by the firm.
3. Sometime in September 1946, Amin represented to Kharas (and not also to Valia) that no sale of goods could be effected as the prices were falling but he was willing to purchase the goods from the firm at cost to save the firm from future loss. It was also suggested to Kharas by Amin that the firm may be dissolved thereafter. Kharas, believing in the, representations of Amin, agreed to the suggestion and by a letter dated September 18, 1946, written on a stamp paper of Rs. 50, Amin recorded the terms of the agreement, the relevant portion of which is as under;
"It has been agreed between yourselves and me that our firm should be dissolved as from today and that I should purchase from the firm for the price of Rs. 1,79,000 the goods already delivered to the firm by the Western Textile Corporation as also all the rights, if any, of the firm against the. Corporation under the contract for purchase, including the right to take delivery of the undelivered balance of the goods contracted to be purchased, the right to obtain any refund that may be due from the price of Rs. 179,000 paid to the Corporation and the right, if any, in respect of the delivery by the Corporation (sic.) may make against the firm in respect of the contract between the Corporation and the firm."
This letter was purported to have been sent to both Valia and Kharas but Valia denied to have, received any such letter.
4. In about October 1946, Kharas came to know that Amin had secured the agreement by fraudulent misrepresentation and that Amin had actually sold the goods at Rs. 3,41,649 at a considerable profit. On or about October 23, .1946, Kharas instituted criminal proceedings against Amin for cheating but these were allowed to be dropped in view of subsequent events.
5. Valia, who had denied knowledge of any agreement between Amin and Kharas, on coming to know the true facts, thereafter filed a suit, being Suit No. 2120 of 1946, in the High Court of Bombay on or about November 12, 1946, asking for rendition of accounts and for dissolution of the firm. Amin was made the first defendant and Kharas co‑defendant. The High Court by consent order dated March 22, 1951, appointed an arbitrator for final determination of the dispute. The High Court further ordered that "the Arbitrator shall treat the partner ship as dissolved on the 12th day of November 1946". The arbitrator made his award on April 24,1951. According to the operative part of the award, Valia the plaintiff, was declared entitled to a sum of Rs. 25,092 from the partnership, Amin, the first defendant, to a sum of Rs. 32,237 and Kharas, the second defendant, to a sum of Rs. 27,040 subject to the payment of costs of the suit, etc., including the costs of the arbitration. The amounts, in due course, were received by the parties during the accounting year 1952‑53, but as per a statement prepared by Messrs Ardeshir Dinshaw Hormusji & Co., Solicitors, furnished to the income‑tax authorities the amounts that actually fell to the share of each were Rs. 35,877 for Amin towards his half share, Rs. 17,939 to Valia towards his share and Rs. 17,939 to Kharas towards his 4 share, making up a total of Rs. 71,755 (The dis crepancy in the above figures falling to the share of each was, however, not got reconciled by the Tribunal as that was not necessary in view of the decision reached by the Tribunal on other points).
6. After the above happenings, Valia, in due course, made his personal return of income for the assessment year 1953‑54 on November 4, 1953, but did not include in the said' return his share of profit from the partnership of Associated Commercial Corporation as above. But in the return filed by Messrs Anantrai Jadhavji & Co., in which Valia is a partner, a sum of Rs. 13,202 (and not either Rs. 25,092 or Rs. 17,939 as mentioned in the earlier paragraph) was included as .the share of profit of that firm in the firm of Associated Commercial Corporation. This was on the footing that Valia was a partner in the firm of Associated Commercial Corporation in a representative capacity on behalf of his firm. The assessment on Valia for the assess ment year 1953‑54 came to be made on October 29, 1954, and this assessment included the proportionate share of Valia from the of firm Associated Commercial Corporation received through his own firm of Messrs Anantrai Jadhavli & Co. as above. However, neither Valia nor his firm, Messrs Anantrai Jadhavji & Co., had declared in the relevant Part III of the return that Valia was a partner in the firm of Associated Commer cial Corporation. What was disclosed was merely, the fact that Valia had a share of profit in a joint venture business described in the statement of accounts furnished along with the return of Messrs Anantrai Jadhavji & Co. as under:
"Share of profit in joint business of Associated Commer cial Corporation."
7. Kharas, the other partner, however, in the return filed by him for the assessment year 1953‑54 on January 29, 1954, included his share of profit in the sum of Rs. 12,981. The assessment was made, including the above sum, on December 28, 1954. Kharas too, in the relevant Part III of the return, did not state that he was a partner in the firm of Associated Commercial Corporation. The share of profit received from the said firm was described in the statement furnished along with the return of income as under:
"Net profit from the business of Associated Commercial Corporation as per the award of Mr. K. N. Vakil."
In the assessment order the sum was included in the follow ing terms:
"During the year, under order of the High Court in Arbitra tion Suit No. 2120 of 1946 filed by the assessee and decided by Shri K. N. Vakil, the assessee has received profit from joint venture conducted‑several years ago from Tulsidas Amin and Anantrai Jadhavji Valia amounting to Rs. 12,981 which he has declared as profit."
"Income received on arbitration, as discussed, from the Associated Commercial Corporation."
8. Amin, the third partner, neither declared his share of profit from the assessee firm nor had he been assessed thereon in any year.
9. Subsequent to these proceedings in the case of Valia terminating in his assessment for the assessment year 1953‑54 on October 29, 1954, and in the case of Kharas on. December 28, 1954, wherein the share of profit in Associated Commercial Corporation was included as above, the Income‑tax Officer, who happened to be the same Income‑tax Officer as had made the assessment on Kharas, issued a notice under section 34(1)(a) for the assessment year 1947‑48 to the firm of Associated Commercial Corporation on September 21, 1955, and the notice was duly served on Amin on October 20, 1955. The notice was served on Amin not by any particular design or deliberate act, but as both Valia and Kharas happened to be out of Bombay at that time. No return was, however, filed by the firm. On January 16, 1956, after several notices under section 22(4) had proved infructuous the Income‑tax Officer wrote three letters separately to Amin, Valia and Kharas, informing them that although a notice under section 34 had been served on Amin on October 20, 1955, the return of income had not yet been filed and warning that "if you fail to file the return Within a week of receipt hereof, ex parte assessment will be made and tax will be collected from you in proportion, which please note". There was no reply from Amin but by a letter dated January 23, 1956, written by Messrs Kapadia Dainania & Co., chartered accountants, on behalf of Valia and Kharas, the accountants informed the Income‑tax Officer that the partnership was dissolved on November 12,1946, and that as per the arbitrator's award "our clients received a sum of Rs. 12,980‑5‑0 each as their share of net profit of the business of Messrs Associated Commercial Corporation and the same was included by them in their returns of total income and total world income for the assessment year 1953‑54 which please note". The letter further stated that they had no previous know ledge of the notice served on Amin under section 34 but that they would contact their solicitors "for the necessary documents and other proof which would enable them to file the return of total income of the above firm for the assessment year 1947‑48 in response to your notice under section 22(2) read with sec tion 34". An extension of time for about a month was asked for "within which they will file the return of total income of the above firm for the assessment year 1947‑48". A return .was thereafter duly submitted and in the forwarding letter dated April 4, 1956, the amount of profit falling to the share of Valia was shown to be Rs. 13,202 and in the case of Kharas Rs. 12,981 and the following explanation was added in respect thereto:
"The share of profits of Messrs Valia and Kharas as stated above are arrived at after deducting therefrom their respective legal costs in connection with the said arbitration proceedings.
In the absence of any further information in the matter, our clients have estimated the total profit of Messrs Associated Commercial Corporation at Rs. 52,366 being twice the sum of Rs. 26,183 accruing in aggregate to them as their 8 as share of profit in the above firm. The sum of Rs. 52,366 has been shown by our clients as the profit of the firm of Messrs Associated Commercial Corporation in its return of total income for the assessment year 1947‑48."
Thereafter, the assessment was duly completed by the Income‑tax Officer on a total sum of Rs. 1,31,025 on September 27, 1956, the assessment was confirmed in appeal by the Appellate Assistant Commissioner.
10. Several contentions were raised before the Tribunal in the second appeal and the first question to be decided was whether the assessment made on the firm was valid. As pointed out, the firm had been dissolved by the order of the High Court on November 12, 1946, whereas the notice under section 34 was issued on September 27, 1955, and served on October 20, 1955. The notice, however, was yet, issued to "Messrs Associated Commercial Corporation, Dreamland, 27, New Queens Road, Bombay", calling upon the assessee to file the return of income in the following terms:
"Whereas, I have reason to believe that your income assess able to income‑tax for the year ending 31st of March 1948, has (assessment year 1947‑48) escaped assessment, I, therefore, propose to assess the said income. I hereby require you to deliver to me not later than . . . or within 35 days of the receipt of this notice, a return in the attached form of your total income and total world income assessable for the said year ending 31st of March 1948" (Words underlined [Here in italics] by us).
The subsequent notices under sections 22(4) and 23(2) were also issued to "Messrs Associated Commercial Corporation" and the, assessment order was' also made on "Messrs Associated Commercial Corporation". Thus, admittedly, all the notices having been issued to the firm after it was dissolved and after it had discontinued its business and the assessment too had been made on the dissolved firm in the name of the firm, the Tribunal, relying on R. N. Bose v. Manindra Lal Goswami ((1958) 33 I T R 435), accepted the assessee's contention that the assessment was bad. The argument of the department that, although the notice was issued to, the firm and the notice had been served only on one of the three partners, since subsequently the other two partners too had been made parties to the assessment and the two partners, Valia and Kharas, had duly submitted the return of income signed by both of them and they had accepted the subsequent notices on behalf of the firm, the assessment should be held to have been jointly and severally made on all persons who were partners at the time of the dissolution of the firm, was not accepted by the Tribunal. The Tribunal observed:
"We are afraid this cannot save the situation for the depart ment. There can be no escape from the fact that in spite of the knowledge of dissolution, the notices were not issued in the joint names of the persons who were partners at the time of the dissolution nor was the assessment ultimately made jointly and severally on the persons who were partners at the time of the dissolution of the firm. The mere fact that the notice was served on one of them and the other two partners had acquiesced in the proceedings started by such initial notice by their subsequent act of filing the return and not calling in question, the authority of the Income‑tax Officer in proceeding against a dissolved firm in the name of the firm, the assessment cannot be said to have been made in accordance with the requirements of the provisions of section 44 of the Indian Income‑tax Act. Respectfully following, therefore, the judgment of the Calcutta High Court in the above case, we would hold that the assessment is invalid and would quash the order of the Income‑tax Officer accordingly."
The contention of the assessee regarding the validity of the assessment and the finding of the Tribunal thereon is elaborately discussed and stated in paragraphs 6, 7 and 8 of the Tribunal's order. A copy of the said order is annexed hereto as Annexure "A" and forms part of the case.
11. Another contention before the Tribunal was whether having regard to the fact that two out of the three partners had already been assessed in respect of their share of profit in the firm it was open to the Department to start proceedings against the firm subsequently and make the assessment on the firm. This contention did not find favour with the Tribunal and the Tribunal held, relying, on several authorities referred to in the order of the Tribunal, that an assessment could validly be made against the firm which was a distinct legal entity under the Income‑tax Act even if some of the partners of the firm had already been assessed in respect of their share of profit. The contention of the assessee and the finding of the Tribunal will be found in paragraphs 10 to 19 of the Tribunal's order already made annexure hereto as above.
12. The third contention in the appeal was in regard to the validity of the notice issued under section. 34(1)(a). The argument of the assessee was that the income‑tax Officer having already known of the existence of the firm and having assessed the share of profit of Kharas earlier could not subsequently proceed under section 34(1)(a) against the firm on the ground of omission or failure to disclose fully and truly all material facts necessary for the assessment. The Tribunal did not agree with the contention and it held that so long as no return had been made by, the assessee firm the proceedings under sec tion 34(1)(a) had been validly started. The finding of the Tribunal will be found in paragraph 21 of its order already made annexure hereto. Since this finding is not based on the interpretation of the section, but is based on a clear finding of fact of the firm riot having submitted its return of income, no question of law can be said to arise out of the aforesaid order.
13. Another question that the Tribunal had to decide was Whether the profits of the firm were to be assessed in the assess ment year 1947‑48 as held by the Department or in the assessment year 1953‑54 as contended by the assessee. We have already pointed out that, although actually the goods belonging to the firm were sold in the accounting year 1946‑47, relevant to the assessment year 1947‑48, the profits whether they belonged to the firm or whether they belonged to Amin, who had purchased the goods from the firm and sold the same in his own name, was not decided until the High Court had made its order in March 1951, and the arbitrator had given his award accordingly in April 1951. The argument on behalf of the assessee was that the property in the goods had duly passed to Amin when Kharas, acting as an agent of the firm, had 'agreed to the taking over of the goods, by Amin at cost and that, therefore, when the sale was made by Amin the profit made was not the profit of the firm but it was the profit of Amin. It was only in view of the deception practised by Amin that Valia and Kharas could have the sale avoided and on that footing claim a share of profit as if the sale had been made by the firm and not by Amin. Therefore, the profit could not be said to accrue in the assessment year 1947‑48 when actually the sale took place but only in the year 1952‑53 when the arbitrator decided that the sale be held as, that of the firm and each partner entitled to a share of profit therein accordingly. But it was further contended that since the amounts were actually received from abitrator in the accounting year 1952‑53 the profits could only be taxed in the assessment year 1953‑54. Whereas the Tribunal accepted the contention that the profits could not be taxed in the assessment year 1947‑48, it did not accept the contention that the profits could be only taxed when they were actually received in the assessment year 1953‑54. It held that the profit, having accrued in the assessment year 1952‑53, could be taxed only in the assessment year 1952‑53. The Tribunal has dealt with this question in paragraph 22 of its order which is already made annexure hereto.
14. On these facts the questions of law that, therefore, arise are:
"(1) Whether, on the facts and in the circumstances of the case, the assessment made on `Associated Commercial Corporation is valid in law?
(2) In view of the fact that Valia and Kharas had already been assessed in respect of their share in the profits of the firm, whether it was competent to the Department to initiate proceedings and make an assessment subsequently on the firm itself?
(3) Whether, on the facts and in the circumstances of the case, the profits were assessable in the assessment year 1952‑53 and, if not, whether they were assessable in the assessment year 1947‑48 or 1953‑54?" G. N. Joshi with R. J. Joshi for the Commissioner.
N. A. Palkhivala with B. A. Palkhivala and S. P. Bharucha for the Assessee.
JUDGMENT
V. S. DESAI, J.‑In this reference under section 66(1) of the Indian Income‑tax Act, the following three questions are referred to this court by the Income‑tax Appellate Tribunal:
"(1) Whether, on the facts and in the circumstances of the case, the assessment made on `Associated Commercial Corpora tion' is 'valid in law?
(2) In view of the fact that Valia and Kharas had already been assessed in respect of their shares in the profits of the firm, whether it .was competent to the Department to initiate proceedings and, make an assessment subsequently on the firm itself?
(3) Whether, on the facts and in the circumstances of the case, the profits were assessable in the assessment year 1952‑53 and, if not, whether they were assessable in the assessment year 1947‑48 or 1953‑54?
Of these three questions, questions Nos. 1 and 3 have been raised at the instance of the department and question No. 2 at the instance of the assessee. The assessee is an unregistered firm. It was constituted under an oral agreement of partnership sometime in March 1946, between three persons, namely, Amin, Valia and Kharas. The business of the firm was to…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.