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Civil Reference No. 10 of 1947, decided on 23rd May 1951.

Income-tax Act (XI of 1922)--------

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34-Income escaping assessment-Firm ceasing to exist on partition of property Assessment for 1936-1937 and 1937-1938 made against individuals as firm ceased to exist after assessment for 1935-36-Income-tax Officer becoming functus officio except where section 34 applies Notice under section 34 obligatory.

The firm was assessed to tax as a registered firm from 1931-32 to 1935-36, consisting of two partners-brother and sister. During the assessment proceedings for the year 1936-37 one of the partners L. informed the Income-tax Officer that the firm had been dissolved and firm's property partitioned. The Income tax Officer accepted the partition and assessed to tax L, both from the firm and other sources for the years 1936-37 and 1937-38, observing that the assessment of tire other partner would be made by the Income-tax Officer having jurisdiction over the area, the said partner was residing. After some time on the basis of some information the Income-tax Officer reopened the matter by issuing a notice under section 23(2) to the two partners of the defunct firm and assessed to tax the firm, making both the partners liable to pay the tax jointly and severally. On appeal the Appellate Assistant Commissioner gave some relief in the quantum but after giving a notice of enhancement made certain changes in the calculation and determination of tax on income already assessed. On further appeal to the Tribunal the assessee took the plea that the proceedings started were in the nature of section 34, proceedings which were barred by limitation. The Tribunal over-ruled the objection holding drat section 34 had no application to the case.

On reference, it was held, that after making the first assessment (in the status of individual) the Income-tax Officer became functus officio and that there was no power given to the Income-tax Officer to re-open an assessment except in cases where section 34 was applicable. It was a case of income escaping assessment or of under assessment and if this was not so the department's reopening the whole case became quite meaning less.

If Section 34 of the Act was not applicable, as was contented by the department and found by the Appellate Tribunal, the assessment could riot be re-opened ; and if section 34 was appli cable, the subsequent assessment was invalid by reason of want of proper notice under that section. The proceedings taken by the Income-tax Officer who assessed the firm by his order dated 31st March, 1941, were essentially proceedings which could only be taken under section 34. The effect of that order was to include in the income of the share in the income of the firm and to make him liable to pay tax on it.

The provisions of section 34 cannot be rendered inapplicable merely because income which is alleged to have escaped from the assessment of a particular person was included in the income of another person. Qua the person who is subsequently sought to be made liable for it, income must be held to have escaped assessment when the Income-tax Officer decides not to include it in his income.

Sir Rajendranath Mukerjee v. Commissioner of Income-tax (1934) I T R 71 ; and In re. Lacchiram Basantlal 58 Cal. 909 ref.

Fazal Din for Appellant.

Muhammad Hasan for Respondent.

MUHAMMAD MUNIR, C. J.

-This is a case stated by the Income tax Appellate Tribunal on the application of the assessee Lala Lal Chand Khosla, who, for the years of assessment 1936-37 and 1.937-38, has been assessed and held liable to pay tax on the total income of firm R. B. Lala Jaikishan Das.

Firm R. B. Lala Jaikishan Das was assessed as a registered firm from 1931-32 to 1935-36. It consisted of two partners, Lala Lal Chand son and Shirimati Gurdevi, daughter of R. B. Lala Jaikishan Das, who had died in June, 1922, and divided his pro perty by a will in equal shares to the two partners.

Sometime in the year 1937 differences arose between the brother and the sister, with the result that the latter went to Bombay where she filed in the High Court of Bombay a suit for partition against her brother. The litigation resulted in a preliminary decree in May, 1937, and a final decree in May, 1938. When the case for assessment for the year 1936-37 came up before the Income-tax Officer he was informed by Lala Lal Chand Khosla that the firm's property had been partitioned and that the firm no longer existed. On this the Income-tax Officer recorded the following order on the assessment file of the firm:--

"The property so far held jointly by Mr. Lal Chand Khosla and his sister Bibi Gurdevi has been partitioned. The firm does not exist. The assessment has been made individually on Mr. Khosla and the file of Bibi Gurdevi has been transferred to the Income-tax Officer, Bombay, where she is now residing. I accord ingly file the case."

On the assessment file of Lala Lal Chand Khosla, the order was as follows: --

"Mr. Lal Chand Khosla, and his sister Sht. Gurdevi were left property in equal shares by their father. They continued to hold it till 1937 when his sister Bibi Gurdevi filed a suit for partition of property in the Bombay High Court. This partition was made final by the High Court's decree dated 14th May, 1938. The estate of R. B. Lala Jaikishan Das (his father) has accordingly ceased to exist and the property has been divided and earmarked between him, Bibi Gurdevi and his son Mr. Prithvi Rai Khosla. Sofar the firm consisting of Mr. Khosla and his sister was registered and one-half share of each was assessed in their individual hands. But since at the present moment no such firm exists, assessment will be made individu ally. I have transferred the case of Bibi Gurdevi to Income-tax Officer, Bombay, as she is residing in Bombay. Mr. Prithvi Raj Khosla has been given the family's share in Ramnik Film Production, Calcutta. This is a partnership concern and will accordingly be assessed at Calcutta. Mr. Lal Chand Khosla will thus alone be assessed at Lahore."

After recording this preliminary order the Income-tax Officer on 21st September, 1938 proceeded to assess the income of Lala Lal Chand Khosla, both from the firm and other sources, for the years of assessment 1936-37 and 1937-38. The matter rested there until in March, 1941, on some information received, the successor of the Income-tax Officer who had recorded the order of 21st September, 1938 re-opened the matter by issuing a notice under section 23(2) to Lala Lal Chand Khosla and Sht. Gurdevi. The notice was issued on 24th March and was return able for 31st March, 1941. When the notice was taken for service to the house of Lala Lal Chand Khosla it was found that he was in Bombay. The notice was, therefore, affixed to his residence on 27th March, 1941. On the date fixed, namely 31st March, 1941. Partap Raj Khosla, son of Lala Lal Chand Khosla, appeared before the Income-tax Officer with counsel and the Income-tax Officer taxed the firm on an income of Rs. 40,844 and ordered the tax thereon to be recovered from Lala Lal Chand Khosla and Sht. Gurdevi jointly and severally. There was an appeal from this order to the Appellate Assistant Commissioner who reduced the income by Rs. 1,204. The income-tax Officer who had made the assessment on 31st March, 1941, had merely added Sht. Gurdevi's half share in the income from the firm to Lala Lal Chand Khosla's share and made both partners liable for the tax jointly and severally. The Appellate Assistant Commissioner considered this to be wrong and in his order, dated 25th May, 1942, remarked as follows:

"Correct procedure is to demand the full tax from the firm and on that being paid, allow with the Commissioner's per mission a refund to Mr. Lal Chand Khosla of the tax recovered on his share of the income from this firm. I, therefore, have served on the appellant the necessary notice of enhancement of the demand due."

The assessee appealed from this order of the Appellate Assis tant Commissioner to the Appellate Tribunal and objected to the competency and the propriety of the proceedings taken by the Ap pellate Assistant Commissioner, on the ground that the proceedings were in the nature of section 34 proceedings and were barred by time, having been taken after four years from the last day of the year of assessment 1936-37, in which the income was assessable. The Tribunal, however, rejected this objection re marking that section 34 had no application to the case as what had been done by the Appellate Assistant Commissioner was not assessment of income that had escaped assessment but merely calculation and determination of the tax on income already assessed.

On the assessee's application the Tribunal has formulated the following questions for determination by this Court;-

(1) Whether the assessment made on the firm is invalidated by reason of the fact that notices under sections 22 (2) and 23 (2) were issued in different names

(2) Whether a notice under section 34 of the Income-tax Act was necessary for resuming the assessment proceedings filed under the order of the Income-tax Officer, dated 21st September, 1938

(3) Whether the Income-tax Officer lawfully resumed the assessment proceedings relating to the firm after filing them under his order dated 21st September, 1938

(4) If not, whether the assessment made on the firm has been vitiated

(5) Whether the assessment has been vitiated by reason of the failure to serve personally on Lal Chand Khosla, the notice under section 23(2) dated 24th March 1941 although the son of the assessee had appeared on 31st March 1941 with counsel in the assessment proceedings

(6) Whether the income from the house property was legally assessed in the hands of the firm under the Act

(7) Whether the proceedings for the recalculation of the tax by the Appellate Assistant Commissioner fell within the purview of Section 34 of the Act. If so, were they barred by the pro visions of subsection (2) of section 34

It is unnecessary to answer each of these questions because we consider that the assessee's contention on the main point is good and unanswerable. The Income-tax Officer who had issued the notices under section 22 (2) and section 23 (2) had by his order, dated 21st September, 1938 finally disposed of the assess ment for the years 1936-37 and 1937-38. It had been brought to his notice that there had b.-en a final decree in a partition suit brought by one member of the firm against the other, and that neither any joint property nor any firm existed on the date of assessment. He was, therefore, quite competent to proceed under section 23 (5) (b) and deal with the matter as though the firm was a registered one. The statement of the case does not show whether the facts which empowered the Income-tax Officer to tax an unregistered firm as a registered firm, existed or not. But that is immaterial because whether clause (b) of subsection (5) of section 23 applied or not, the Income-tax Officer had finally deter mined the matter and filed the papers so far as the assessment of the firm for the years 1936-37 and 1937-38 was concerned. Lala Lal Chand Khosla, as one of the partners in the firm, could be made liable to pay income-tax on the firm's income in its entirety if it was assessed as an unregistered firm and on his own portion of the income if the firm was assessed as a registered firm. The Income-tax Officer chose the latter alternative. Having computed the entire income of the firm, he added Lala Lal Chand Khosla's share in that income to his income from other sources and deter mined the tax payable on it. The file relating to the assessment of the other partner Sht. Gurdevi he sent to Bombay, her share in the income of the firm to be added to her other income therein as sessing her total income and determining the tax payable on it. This ended the matter and the Income-tax Officer thereafter became functus-officio. There is no power given to an Income-tax Officer by the Income-tax Act to re-open an assessment except in cases to which section 34 of the Act is applicable and it is not the Department's case that section 35 of the Act was an authority for the procedure adopted by the Income-tax Officer who subsequently reopened the matter. If section 34 of the Act was not applicable, as was contended by the Department and found by the Appellate Tribunal, the assessment could not be re-opened ; and if section 34 was applicable, the subsequent assessment was invalid by reason of want of proper notice under that section. The proceedings taken by the Income-tax Officer who assessed the firm by his order, dated 31st March 1941, were essentially proceedings which could only be taken under section 34. The effect of that order was to include in the income of Lala Lal Chand Khosla Sht. Gurdevi's share in the income of the firm and to make him liable to pay tax on it. From the statement of the case it does not appear whether the result of splitting the income of the firm in two equal shares and adding one share of it to the income of Lala Lal Chand Khosla from other sources resulted in the application of a higher or a lower rate of tax, but there can hardly be any doubt that when the Income-tax Officer brought only Lala Lal Chand Khosta's share in the income of the firm, to his income from other sources he allowed the other portion of the income from the firm to escape from assessment qua Lala Lal Chand Khosla. If the firm had been assessed as an unregistered firm, Lala Lal Chand Khosla could have been made liable to pay tax on the entire income of the firm, and qua this tax he was an assessee within the meaning of subsection (2) of section 2 of the Act. The fact, therefore, that he was not assessed for the whole income of the firm and was required to pay tax only on his own share of the income from the firm, means that a portion of the income for which he could have been assessed had escaped assess ment. It was thus a case of income escaping assessment, or of underassessment, and if this was not so, the Department's re opening the whole case becomes quite meaningless. The learned counsel for the Income-tax Commissioner has referred to Sir Rajendranath Mukerjee v. Commissioner of Income-tax, Bengal, (1934 I T R 71) and In re. Lachhiram Basantlal (58 Cal. 909), but both these cases are plainly distinguishable. In fact the latter case supports the assessee's contention that income can be said to have escaped assessment where an assessment has been made which does not include that income. Here Sht. Gurdevi's share in the income of the firm must be said to have escaped assessment when in the assessment made on 21st September 1938 the Income-tax Officer decided to exclude it from the income of Lala Lal Chand Khosla. The provisions of section 34 cannot be rendered inappli cable merely because income which is alleged to have escaped from the assessment of a particular person was included in the income of another person. Qua the person who is subse quently sought to be made liable for it, income must be held to have escaped assessment when the Income-tax Officer decides not to include it in his income. The other case relied on by the learned counsel for the Commissioner appears at first sight to be similar to the present case but the difference between the two, and it is a fundamental difference, is that in the former after the issuing of a notice under section 22 (2) the Income-tax Officer transferred the file of Burn & Company to another Income-tax Officer who amalgamated in income of that company with the income of another company, which amalgamation was set aside by a superior competent authority, with the result that the assessment of Burn & Company was resumed by the order of that authority. A further distinction between that case and the present one is that the assess ment file of Burn & Company had remained pending right up to the resumption of the proceedings under the direction of the High Court. In the present case, however, the assessee's assessment was completed when by his order, dated 21st September 1938 the income-tax Officer decided not to include in his income the other half share of the income from the firm. Our reply therefore to the main question, which figures as question No. 2 in the statement of the case, is in the affirmative. As the reply to this question would be sufficient to dispose of the case, it is unnecessary to return a reply to the other question.

Reference answered in the affirmative.

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