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Income‑tax Reference Cases Nos. 18, 19 and 20 of 1967, decided on 12th November 1968.

Reassessment‑Amount invested by partners in firm treated as income of firm‑Deleted on appeal with direction proceed against individual partners to consider assessability a ssessment of amount in hands of partners‑Whether valid Whether new Act makes any difference‑Indian Income‑tax Act, 1922, S. 34(3), second proviso‑Income‑tax Act, 1961, Ss. 147 3(3), Explanation.

The appeal filed by a firm challenging the assessability of the Count invested by its partners was allowed by the Appellate assistant Commissioner who issued a direction to the officer to proceed against the individual partners under the second proviso section 34(3) of the Indian Income‑tax Act, 1922, and consider assessability or otherwise of the part or whole of their invest ment in the firm. On the basis of this direction the officer reopened the assessments of the partners and assessed the amounts in their hands as income from undisclosed sources. The Appellate Assistant Commissioner, however, held that the direction in the firm's appeal was not valid and hence the proceed ings of the officer were time‑barred. The Tribunal agreed with this view. On a reference :

Held, the view of the Tribunal was right and even Explana tion 3 to section 153(3) of Income‑tax Act, 1961, cannot assist the department as the Appellate Assistant Commissioner had not recorded a finding that the sum which was excluded from the total income of the firm was the income of the three partners and the partners of the firm had no opportunity of being heard when the Appellate Assistant Commissioner made his direction.

Income‑tax Officer v. Murlidhar Bhagwan Das (1964) 52 I T R 335 S C ref.

S. R. Rajasekhara Murthy for G. R. Ethirajula Naidu for the Commissioner.

K. Srinivasan for the Assessees.

A. M. Patel, R. M. Patel and Rambhai M. Patel. were the three partners of a firm called Select Pictures Circuit. These three partners had each invested a sum of Rs. 40,000 in another concern called Cine Syndicate & Traders (Pvt.) Ltd. when the income of the partnership firm was assessed in respect of the assessment year 1950‑51 that sum of Rs. 1,20,000 which had been so invested by the partners was treated as the income of the firm by Income‑tax Officer and assessed accordingly. But the appeal preferred by the firm was allowed by the Appellate Assis tant Commissioner who recorded a finding that that sum of money was not the income of the firm. He accordingly held that it was not taxable income of the firm.

But the Appellate Assistant Commissioner issued a direction in the appeal to the Income‑tax Officer that he should proceed against the individual partners of the firm under the second proviso to section 31(3) of the Income‑tax Act, 1922, and consider the assessability or otherwise of the part or the whole of their investment in the Cine Syndicate & Traders (Pvt.) Ltd. On the basis of this direction the Income‑tax Officer reopened the assessment of the partners and assessed a sum of Rs. 40,000 in the hand of each of them as income from undisclosed sources for the assessment year 1950‑51.

But the Appellate Assistant Commissioner was of the opinion that the direction of the Appellate Assistant Commis sioner in the firm's appeal was not a valid direction and that the proceeding commenced by the income‑tax Officer on the basis of such direction was clearly time‑barred. The appeal preferred by the department to the Appellate Tribunal was dismissed.

In these references, the questions of law referred to this Court under section 256(1) of the Income‑tax Act, 1961, reads :‑

"(Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the find ing or the directions of the Appellate Assistant Commissioner in the firm's appeal was nova valid one which would give jurisdic tion to the Income‑tax Officer for initiating the proceedings under section 147 of the Income‑tax Act

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the proceedings under section 147 of the Income‑tax, Act, 1961, were barred by time "

It is clear that the answer to the second question depends upon the answer to the first. If the first question has to be answered in favour of the assessee, the second also should be answered in the same way.

The view taken by the Tribunal was that in the order made by the Appellate Assistant Commissioner under section 31 of the Income‑tax Act, 1922, it was not within his competence to make a direction that the Income‑tax Officer should proceed to reopen the assessment on the partners of the firm who were not the appealing assessees. That view which the Tribunal took receives support from the decision of the Supreme Court in Income‑tax Officer v. Murlidhar Bhagwan Das ((1964) 52 I T R 335 (S C)) in which it was explained that a direction which could be made by the appellate authority under section 31 should be one which is necessary for the disposal of the appeal or for giving relief to the appealing assesses, and that there is no power in the appellate authority to record a finding or to issue a direction which is not necessary for that purpose.

In the appeal preferred by the firm what the Appellate Assis tant Commissioner had to decide was whether the sum of Rs. 1,20,000 was or was not the income of the firm, and, if he reached the conclusion that that was not, that should have been the end of the matter. The elucidation made by the Supreme Court makes it clear that any expression of opinion on the question whether that some of money was taxable as income in the hands of the partners bad no relevance to the appeal which the Appellate Assistant Commissioner had before him.

But Mr. Rajasekhara Murthy, for the department, contended, as it was contended before the Tribunal, that the view taken by the Supreme Court in Income‑tax Officer v. Murlldhar Bhagwan Das stands superseded by Explanation 3 appearing under sub section (3) of section 153 of the Income‑tax Act, 1961. That Explanation reads:

"Where, by an order referred to in clause (ii) of subsection (3), any income is excluded from the total income of one person and held to be the income of another person, than, an assess ment of such income on such other person shall, for the purposes of section 150 and this section, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order, provided such other person was given an opportunity of being heard before the said order was passed."

Since it is clear that, if the reassessment made by the Income tax Officer in the case of the assessee before us was made to give effect to the direction contained in the order made by the Appellate Assistant Commissioner in the firm's appeal, the reassessment proceedings would not be time‑barred. Mr. Rajase khara Murthy, for the department, urged that, although that direction could have no efficacy for the purpose of the second proviso to section 34(3) of the old Act, it could effectively constitute the basis for a proceeding under section 147 , read with section 153 of the new Act. But Mr. Srinivasan, appearing for the assessee, maintained that the third Explanation to section 153(3) on which Mr. Murthy depends can have no relevance since the direction to which it refers is one made under section 250 of the new Act and a direction such as the one made by the Appellate Assistant Commissioner under section 31 of the old Act does not attract the provisions of that Explanation. He also maintained that even otherwise that Explanation can have no efficacy if the direction which was made by the Appellate Assistant Commissioner could not be made by him either under section 31 or under section 250, and that that was so in the cases before us.

It is not, in our opinion, necessary to express any opinion on this submission made by Mr. Srinivasan since it is possible for us to express our opinion on the two questions before us on other grounds.

Now, Explanation 3 appearing under section 153(3) has no application unless the order under clause (ii) of subsection (3) of that section incorporates a finding that the income excluded from the total income of one person was the income of another. It has again no application unless that other person was given an opportunity of being heard before that order was passed.

Now, even on the assumption that the order made by the Appellate Assistant Commissioner under section 31 of the old Act can be regarded as an order to which clause (ii) of sec tion 153(3) refers, and on that question we abstain from express ing any opinion, it is undisputed that the Appellate Assistant Commissioner who made the direction on which the Income‑tax officer depended did not record a finding that the sum of Rs. 1,20,000 which was excluded from the total income of the firm was the income of the three partners. It is also uncontro verted that when the Appellate Assistant Commissioner made his direction. the partners of the firm had no opportunity of being 4eard. So we reach the conclusion that the Tribunal was right in taking the view that the third Explanation appearing under section 153(3) of the new Act on which the department depended could be of no assistance to it, although we reach that conclusion for reasons other than those on which the Tribunal depended.

Our answers to the two questions before us should therefore be in favour of the assesses. Our answer to the first question is that the appellate Tribunal was right in law in holding that the direction of the Appellate Assistant Commissioner in the firm's appeal was ,n invalid direction and that it conferred no jurisdiction on the Income‑tax Officer to initiate proceedings under section 147 of the Income‑tax Act, 1961. Our answer to the second question is that the. Appellate Tribunal was right in holding that those proceedings under section 147 was barred by time.

The assessees will get their costs. Advocate's fee, Rupees Two hundred and fifty (Rs. 250), one set.

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