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Petitioner: MEKA VENKATAPPAIAH VS Respondent: ADDITIONAL INCOME-TAX OFFICER, BAPATLAHonorable Justice SUBBA RAON. V. B. Sankara Rao,C. Kondiah for V. Vedantachari
1966 P T D 586
1966 P T D 586
[Andhra Pradesh (India)],
Before Subba Rao, C. J. and Jaganmohan Reddy, J
MEKA VENKATAPPAIAH
versus
ADDITIONAL INCOME‑TAX OFFICER, BAPATLA
Writ Appeal No. 103 of 1956, decided on 28th February 1957.
Indian Income‑tax Act (XI of 1922), Ss. 18‑A(3), (6), (8), 29 & 35‑Advance tax‑Levy of penal interest for failure to pay Assessee being partner of unregistered firm assessed to income‑tax in prior years‑Assessed as individual for the first time in assessment year‑Whether "not hitherto assessed" within the meaning of S. 18‑A(3)‑Whether entitled to notice of demand under S. 29‑Failure to impose penal interest in regular assess ment‑Whether mistake apparent on the record‑Power of Income -tax Officer to rectify under S. 35.
The assessee was assessed as an individual for the first time for the assessment year 1947‑48. The assessment, after successive appeals to the Appellate Assistant Commissioner and the Appellate Tribunal, was finalised on 13th March 1952: On 25th June 1952, the Income‑tax Officer issued a notice to the appellant under section 18‑A(8) of the Indian Income‑tax Act, 1922, alleging that he had not paid advance tax and that therefore he was liable to pay penal interest under that section, to which the assessee filed objections. denying his liability to pay penal interest. On 31st October 153, the assessee received a notice under section 35 of the Act, proposing to rectify the assessment on the ground that while completing the assessment for 1947‑48, the penal interest under section 18‑A was not charged by mistake. The assessee's objections being negative by the Income‑tax Officer and also by the Commissioner on revision, he filed an application under Article 226 of the Constitution for the issue of a writ of certiorari to quash the proceedings of the Income‑tax Officer dated 31st October 1953. The contentions of the assessee were: (i) that he was not liable to pay penal interest under section 18‑A(3) as, until immediately before that assessment year he was a partner of a firm, which was assessed to income‑tax as an unregistered firm, and, therefore, it could not be said that he "had not hitherto been assessed" within the meaning of section 18‑A(3); (ii) that no notice of demand for penal interest was served on him under section 29; (iii) that the Income‑tax Officer must be deemed to have waived his right to collect the interest; and (iv) that the provisions of section 35 did not apply:
Held, (i) that the unregistered firm was a distinct assessable entity and was different from the assessee, who was a partner of that firm, and the assessee was a person "who had not hitherto been assessed" within the meaning of section 18‑A(3) of the Act; he should therefore have sent to the Income‑tax Officer an estimate of the tax payable by him, and, he not having done so, the Income‑tax Officer was entitled to add the interest payable under section 18‑A(6);
(ii) that a person who had not hitherto been assessed was not entitled to have a~ notice under section 29 of the Act, as he was under a statutory obligation to send the return voluntarily and pay the amount as prescribed by section 18‑A(3);
(iii) that even though a power of waiver was conferred on the Income‑tax Officer on 24th May 1953, retrospectively with effect from 1st April 1952, yet, as on the 25th June 1952, he had no power to waive the interest, no waiver could be implied on the basis of his inaction in pursuing the proceedings taken by him under section 18‑A of the Act;
(iv) that section 18‑A(3) cast a statutory obligation on the Income‑tax Officer to add penal interest in the manner laid down in subsection (6) to the regular assessment; if such an assessment was not made by mistake the omission was a clear mistake apparent from the record of assessment, and was therefore liable to be rectified under section 35 of the Act.
Satyanarayana Raju, J., affirmed.
Talipatigala Estate v. Commissioner of Income‑tax, Madras (1950) 18 I T R 320 and Commissioner of Income‑tax, West Bengal v. Figgies & Co. (1953) 24 I T R 405 applied.
Arunachalam Chettiar v. Commissioner of Income‑tax, Madras (1936) 4 I T R 173 in regard to the right of a partner of an unregistered firm to set off his share of loss against profits of a new business are no longer good law.
Commissioner of Income‑tax v. Arunachalam Chettiar I L R 47 Mad. 660 is no longer good law.
Venkatadri Somappa v: Venkataswami Chetti (1941) 9 I T R 284 must be confined to the interpretation of the Madras Agriculturists' Relief Act.
[Case‑law referred to.]
N. V. B. Sankara Rao for Appellant.
C. Kondiah for V. Vedantachari for Respondent.
JUDGMENT
SUBBA RAO, C. J.‑This is an appeal against the order of our learned brother Satyanarayana Raju, J., dismissing the application filed by the appellant under Article 226 . of the Constitution of India.
The appellant is a partner of the firm of Messrs Gopala Krishna Manure Depot and Turmeric Co., Tenali. Before 1947, the firm was assessed to income‑tax as an unregistered firm. Admittedly, the appellant was not assessed to income‑tax at any time before 1947‑48 as an individual. The Additional Income‑tax Officer, Tenali Circle, for the first time assessed the appellant to income‑tax as an individual for the assessment year 1947‑48 on a taxable income of Rs. 39,080 and determined the tax payable at Rs. 12,385‑1‑0. Against the said order, the appellant preferred an appeal to the Appellate Assistant Commissioner, Madras. In the appeal, the Appellate Assistant Commissioner gave him some relief. On further appeal to the Tribunal, the tax payable was reduced to Rs.2,479‑11‑0. Pending the appeal to the Appellate Assistant Commissioner, the Additional Income‑tax Officer, Tenali, issued a notice to the appellant on 25th June 1952, under section 18‑A(8) of the Income‑tax Act (hereinafter referred to as the Act) alleging that he had not paid the advance tax payable under section 18‑A(8) and, therefore, he was liable to pay penal interest under the said section in a sum of Rs. 3,632‑10‑0, being the amount of interest payable from 1st April 1947 to 13th March 1952, at 6 per cent. per annum on Rs. 12,227‑8‑0 and directing the said amount to be paid before 25th July 1952. The appellant filed` objections denying his liability to pay the said amount. On 31st October 1953, the appellant again received a notice under section 35 of the Act proposing to rectify the assessment under that section on the ground that, while completing the assessment for 1947‑48, the penal interest under section 18‑A(8) was not charged by mistake. The appellant filed the objections contending that the omission to charge penal interest was not due to any mistake apparent on the face of the record and therefore, the provisions of section 35 of the Act were not applicable. His contention was negatived both by the Income‑tax Officer, and on revision by the Commissioner of Income‑tax, Hyderabad. The appellant filed the aforesaid application under Article 226 of the Constitution of India for issuing a writ of certiorari to quash the proceedings of the Income‑tax Officer dated 31st October 1953. Satyanarayana Raju, J., rejected the contentions of the appellant and held that the rectification of the order of assessment was made in due compliance with section 35 of the Act and. on. that finding, dismissed the application. Hence, the appeal.
Learned counsel for the appellant contends that he was not liable to pay penal interest under section 18‑A(3) of the Act and, therefore, there was no mistake apparent on the face of the record to be rectified under section 35 of the Act. Section 18‑A of the Act provides for the advance payment of tax, in respect of income whereof deduction of income‑tax is not provided for at the time of payment. Under section 18‑A(3) any person, who has not hitherto been assessed, shall before the 15th day of March, in each financial year, if his total income of the period which would be the previous year for an assessment for the financial year next following is likely to exceed the prescribed amount, send to the Income‑tax Officer an estimate of the tax payable by him and pay the amount on such of the dates specified in subsection (1). Sub section (8) enjoins on the Income‑tax Officer, if on making the regular assessment he finds that no payment of tax has been made in accordance with the provisions of the section, to add the interest calculated in the manner laid down in subsection (6), to the tax assessed by him. Section 35 of the Act enables the Income‑tax Officer at any time within four years from the date of any assessment order passed by him on his own motion to rectify any mistake apparent from the record of the assessment. Section 35, therefore, enabled the Income‑tax Officer, in the present case, to rectify the omission to add the interest to the original assessment if such omission was a mistake apparent from the record. Under subsection (3) of section 18‑A, if no payment of tax had been made in accordance with the provisions of section 18‑A, a duty was cast on the Income‑tax Officer to add the interest in the manner laid down in subsection (6) to the regular assessment. If such an addition was not made by mistake, we have no doubt that the omission was a clear mistake apparent from the record of assessment and, therefore, liable to be rectified under section 35 of the Act. It is, therefore, contended by the learned counsel for the assessee that no interest ‑was payable by the assessee under subsection (6) of section 18‑A as no duty was cast upon the assessee to send to the Income‑tax Officer an estimate of the tax payable by him within the meaning of subsection (3). The material portion of subsection (3) reads:
"Any person who has not hitherto been assessed shall, before the 15th day of March in each financial year, . . send to the Income‑tax Officer an estimate of the tax payable by him on that part of his income to which the provisions of section 18 do not apply."
The contention is that the provisions of the subsection apply only to a person, who has not hitherto been assessed, but as the appellant's unregistered firm was assessed before the financial year 1947‑48, he was ‑ not bound to send his estimate of the income, and, therefore, he was not liable to pay interest calculated under the Act. The short question is whether the, assessment of the income of an unregistered firm, of which the assessee was a partner, could be relied upon by the appellant to escape his liability under subsection (3). To put it differently, on the basis of such an assessment, can it be said that the appellant "has not hitherto been assessed" within the meaning of subsection (3). The answer to the question raised depends upon whether an unregistered firm is a distinct assessable entity as distinguished from the individual partners of the said firm. To ascertain the legal characteristics of a firm, it will be convenient to collect the sections of the Act pertaining to an un registered firm.
Section 2(2): "assessee" means a person by whom income‑tax is payable.
Section 2(9): "person" includes a Hindu undivided family and a local authority.
Section 3: Where any. Central Act enacts that income‑tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act 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.
Section 14(2): The tax shall not be payable by an assessee‑
(a) if a partner of an unregistered firm, in respect of any portion of his share in the profits and gains of the firm computed in the manner laid down in clause (b) of subsection (1) of section 16 on which the tax has already been paid by the firm.
Section 16(1): In computing the total income of an assessee‑
(a) any sums exempted under . . . . . section 14 . . . . . shall be included.
(b) when the assessee is a partner of a firm, then, whether the firm has made a profit or a loss, his share (whether a net profit or a net. loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of the previous year increased or decreased respectively by his share in the balance of the profit or loss of the firm after, the deduction of any interest, salary, commission, or other remuneration payable to any partner in respect of the previous year . . . . .
Section 23 (3): On the day specified in the notice issued under subsection (2) or as soon afterwards as may be, the Income- tax Officer, after hearing such evidence as such person may produce and such other evidence as the Income‑tax Officer may require, on specified points, shall by an order in writing, assess the total income of the assessee, and determine the sum payable by him on the basis of such assessment.
(4) If any person fails to make the return required by any notice given . . . the Income‑tax Officer shall make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment and in the case of a firm may refuse to register it or may cancel its registration if it is already registered.
(5) (a) In the case of a registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm, including therein his share of its income profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined.
(b) In the case of an unregistered firm, the Income‑tax Officer may instead of determining the sum payable by the firm itself proceed in the manner laid down in clause (a) as applicable to a registered firm, if, in his opinion, the aggregate amount of the tax including super‑tax, if any, payable by the partners under such procedure would be greater than the aggregate amount which would be payable by the firm and the partners individually if the firm were assessed as an unregistered firm.
Section 24(1): Third proviso added by section 27 of the Indian Income‑tax (Amendment) Act, y1939 (Act VII of 1939):
Provided further that where the assessee is an unregistered firm which has not been assessed under the provisions of clause (b) of subsection (5) of section 23 in the manner applicable to a registered firm, any such loss shall be set off only against the income, profits and gains of the firm and not against the income, profits and gains of any of the partners of the firm, and where the assessee is a registered firm any loss which cannot be set off against other income, profits and gains of the firm shall be apportioned between the partners of the firm, and they alone shall be entitled to have the amount of the loss set‑off under this section.
Section 44: Where any business, profession or vocation carried on by a firm or association of persons has been discontinued, or where an association of persons is dissolved, every person who was at the time of such discontinuance or dissolution a partner of such firm or a member of such association shall, in respect of the income, profits and gains of the firm or association be jointly and severally liable to assessment under Chapter IV and for the amount of tax payable and all the provisions of Chapter IV shall, so far as may be; apply to any such assessment.
Section 48(1): If any individual, Hindu undivided family, company, local authority, firm or other association of persons, or any partner of a firm or member of an association individually satisfies the Income‑tax Officer or other authority appointed by the Central Government in this behalf that the amount of tax paid by him or on his behalf or treated as paid on his behalf for any year exceeds the amount with which he is properly chargeable under this Act for that year, he shall be entitled to a refund of any such excess.
Section 55: In addition to the income‑tax charged for any year, there shall be charged, levied' and paid for that year in respect of the total income of the previous year of any individual, Hindu undivided family, company, local authority, unregistered firm or other association of persons, not being a registered firm, or the partners of the firm or members of the association individually an additional duty of income‑tax (in this Act referred to as super‑tax) at the rate or rates laid down for that year by a Central Act.
Provided that where under the provisions of clause (b) of subsection (5) of section 23 an unregistered firm has been assessed in the manner applicable to a registered firm, super‑tax shall be payable by each partner of the firm individually on his share in the income, profits and gains of the firm and not by the firm itself."
The aforesaid fasciculus of sections clearly indicates that, for the purpose of the Income‑tax Act, an unregistered firm is a distinct assessable unit or assessable entity though, for the purpose of the Indian Partnership Act, it is not a legal entity but only consists of individual partners for the time being. A clear distinction is maintained between a firm and‑its partners. Section 3 charges the income of every firm and the partners of the firm in accordance with or subject to the provisions of the Act. While in the case of a registered firm, the total income of the firm is computed, but the tax is made payable only by the individual partners, in the case of an unregistered firm, not only the total income of the firm is computed but both income‑tax and super‑tax are payable only by the firm. Any loss incurred by an assessee, which is an unregistered firm, shall be set off against the income, profits and gains of that firm and not against the income, profits and gains of any of the partners of that firm. The Act does not adopt the legal concept of a firm being a separate juristic entity for all purposes of the Act and makes some exceptions. Section 23(5)(b) gives an option to the Income‑tax Officer in the case of an unregistered firm. Instead of determining the sum payable by the firm itself, he may proceed in the manner laid down in clause (a) as applicable to a registered firm, if, in his opinion, the aggregate amount of the tax including super‑tax, if any, payable by the partners under such procedure would be greater than the aggregate amount which would be payable by the firm and the partners individually if the firm were assessed as an unregistered firm. But till this option is exercised in the interests of the State, the separate entity of the firm is not disrupted. Section 44 specially provides for the assessment of the partners of a disrupted firm for, without that provision, with the disappearance of that entity, the tax becomes not eligible. While section 16(I) includes in the total income of a partner of an unregistered firm the income pertaining to his share of the unregistered firm, section 14(2) exempts that, income from tax. Though the Act engrafts some exceptions in the interests of revenue on the doctrine of an unregistered firm being a distinct assessable unit and though the said legal concept is not pursued in all its ramifications; the Act generally maintains its distinct legal existence for all material purposes of the Act. An unregistered firm is an assessee under the Act. The procedure prescribed, the computation of the income, the liability to pay income‑tax and super‑tax and the adjustment of losses are all on the basis that an unregistered . firm is a distinct juristic entity different from that of the partners. It, is not necessary in this case to consider the legal position of a registered firm for it is admitted that the firm was not registered before 1947‑48.
The question of the legal status of a firm in income‑tax law has been considered by Courts in different contexts. The words is assessee" and "assessment" have been defined with clarity by Lord Reid in Seth Badridas Daga v. Commissioner of Income‑tax, Central and United Provinces ((1949) 17 I T R 209).
At page 211, Lord Reid says:
"It will be convenient to begin with section 23 which deals with assessment . . The section requires the Income‑tax Officer to do two things : first to compute or `assess' a person's total income, and then to determine the sum payable as tax. Subsections (1) to (4) set‑out alternative methods of computation or assessment. In the normal case, the person whose income is being computed is the person who pays the tax and for that case these subsections also provide for the Income‑tax Officer taking the second step and determining the sum payable as tax. But the case of a firm is specially dealt with by subsection (5). This subsection only comes into operation after the total income of the firm has been computed or assessed under one of the earlier subsections. It draws a distinction between registered and unregistered firms. In the case of a registered firm the firm does not itself pay income‑tax and therefore the subsection directs that the sum payable by the firm shall not be determined, but that each partner's share of the firm's income shall be included in the assessment or computation of the total income. of that partner. Thereupon the sum payable by that partner as tax is to be determined on the basis of that assessment which includes his share of the firm's income."
As we have pointed out earlier, in the case of unregistered firms just like in the normal case, the firm, whose income is being computed, is also the person who pays the tax. For the purposes of income‑tax, with a few deviations, it is equated to that of any other person in that it is assessed for the purpose of computation of income as well as for the purpose of recovering the tax.
A Division Bench of the Madras High Court in Talipatigala Estate v. Commissioner of Income‑tax, Madras ((1950) 18 1 T R 320), considered the question whether proceedings under section 34 of the Act could be initiated against a firm, which was not assessed previously but one of the partners of the firm only had been assessed on his share in the firm. The learned Judges, in rejecting the applicability of section 34 to such a case, observed at page 327 thus:
"A partnership firm is different from the members composing it for income‑tax purposes and is recognised as a separate assessable unit under section 3 of the Income‑tax Act. Though according to the Partnership Act a partnership firm is not a single legal person, still for purposes of income‑tax the firm is regarded as having a separate status and existence and as a distinct entity apart from the individual partners who carry on the business of the firm. It is true that this principle is not carried to its logical conclusion in every respect and that there are a few exceptions recognised in the Act itself. But it cannot be said that the assessment of an individual partner in a particular year is a bar to the assessment of the firm for that year."
That was a converse case but still the principle equally applies to the present case.
The Supreme Court of India in Commissioner of Income‑tax, West Bengal v. Figgies & Company ((1953) 24 I T R 405) were dealing with the question whether a change in the constitution of a partnership brings necessarily into existence a new assessable unit or a distinct assessable entity. In that case Mahajan, J., as he then was, after bringing out the distinction between the status of a firm in the partnership law and that in the income‑tax law made the following useful remarks at page 409:
"The partners of the firm are distinct assessable entities, while the firm as such is a separate and distinct unit for purposes of assessment. Sections 26, 48 and 55 of the Act fully bear out this position. These provisions of the Act go to show that the technical view of the nature of a partnership, under English law or Indian law, cannot be taken in applying the law of income‑tax."
The above observations, though made in a different context, being that of r the Supreme Court must be given due weight. They indicate without any ambiguity that for income‑tax purposes a partner and a firm are separate and distinct units.
Another Division Bench of the Madras High Court in Narayana Chetty v. Income‑tax Officer ((1954) 26 I T R 310), dealt with the applicability of section 34 to the case of a firm, which was originally registered but whose registration was subsequently cancelled. The learned Judges held that the firm is an assessee under the Act and that there is no distinction between a registered firm and an unregistered firm in that respect. They pointed out that the firm does not cease to be an assessee, though, under section 23(5) of the Act, tax on the assessed income is apportioned between the several partners of the registered firm.
As we…
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