1. This is a reference made at the instance of the Commissioner under section 66(1) of the Indian Income-tax Act, 1922, which relates to the assessment year 1960-61 (accounting year ending March 31, 1960). The four assesses were partners in a firm named, Shoorji Vallabhadas & Co., which was acting as the managing agents of the Malabar Steamship Co. After the transfer of that managing agency to a limited company the said firm had income only from certain investments and dividends, and for assessment years 1952-53 and 1953-54, registration was applied for, but was refused on the ground that after giving up the managing agency, the firm had ceased to carry on business and, therefore, was not entitled to registration. From 1952-53 to 1958-59, the said entity was assessed as association of persons. For the assessment year 1958-59, the department adopted the somewhat unusual course of assessing both the association of persons as well as the individual members thereof, but on the matter being taken up to the Tribunal, it was held that the individual members could not be assessed separately in respect of the income which was assessed in the hands of the association of persons. That position was accepted by the department as far as the assessment year was concerned. As far as assessment year 1960-61 is concerned, the Income-tax Officer, by his order dated February 23, 1961, proceeded to determine the total income of the association of persons but, at the end of his order, stated as follows :
'Assessed under section 23(3). No demand, as the a shares of the co-owners are definite and they are assessed separately.'
2. On the same day, the same Income-tax Officer proceeded to pass an assessment order, also under section 23(3), in respect of the four assessees as members of that association of persons, and directed that, after giving credit for tax deducted at source, demand notice was to issue. The four assessees preferred appeals to the Appellate Assistant Commissioner who set aside the orders of the Income-tax Officer on the basis of the Tribunal's order for the earlier year, viz., assessment year 1959-60, which has already been referred to above. On appeal to the Tribunal by the revenue, the Tribunal, by its consolidated order dated February 26, 1964, held that in the present case there had clearly been an assessment on the association of persons, and it was, therefore, not open to the department to assessee the individual members of that association. It is from that order of the Tribunal that the present reference has arisen and the following question has been submitted to us :
'Whether, on the facts and in the circumstances of the case, the assessees could be assessed (except for rate purposes only) on their share from the association of persons, namely, Shoorji Vallabhadas & Co. ?'
3. Three contentions were advanced before us by Mr. Kaka on behalf of the assessees, and they were as follows :
1. On a proper reading of the Income-tax Officer's order, it must be held that the said officer has not exercised the option which he had in law.
2. Once the Income-tax Officer exercised his powers under section 23(3) and assessed the association of persons, he cannot stop short and say he will not raise a demand. In other words, the option to assessee the association or the individual has to be exercised before the assessment of the income of the association or the individual has to be exercised before the assessment of the income of the association is made under section 23(3). Mr. Kaka submitted that the assessment order having been made on the association, and the Income-tax Officer having exercised his power under section 23(3) in that behalf, the individual members of the association could not be assessed for the same assessment year.
3. In any event, the option has to be exercised judicially and, normally, it is the association of persons that must be assessed, unless it was not possible to assess the association, or it is necessary to assess the members thereof in order to prevent evasion or escapement of tax. For this proposition, reliance was sought to be placed by Mr.Kaka on the decision of the supreme Court in the case of M. M. Ipoh v. Commissioner of Income-tax : 67ITR106(SC) .
4. As far as the first proposition of Mr. Kaka is concerned, the whole case proceeded before the Tribunal on the footing that the Income-tax Officer had exercised the option; the first proposition of Mr. Kaka does not, therefore, arise in the present reference. As far as the third proposition of Mr. Kaka is concerned, the same also does not arise from the Tribunal's order in the present case which does not deal with it.
5. As far as the second proposition of Mr. Kaka is concerned, there is no warrant for the submission contained therein that the option to assessee the association or the individual should have been exercised before the assessment of the association was made under section 23(3). The option which the Income-tax Officer has exercised is implicit in the terms of section 3 of the Indian Income-tax Act, 1922, which is the charging section. As laid down by the Supreme Court in the case of Commissioner of Income-tax v. Kanpur Coal syndicate : 53ITR225(SC) , it is 'in making the assessment in the first instance' under section 23 that the Income-tax Officer has to exercise that option as 'part of the process of assessment.' In that case, which is the leading case on the subject of exercise of option, the Supreme Court has laid down that section 3 of the 1922 Act impliedly gives an option to the appropriate authorities to assess the total income and levy the tax on one or other of the assessable entities. There is, therefore, no substance in Mr. Kaka's submission that once the Income-tax Officer exercised his powers under section 23(3), he should not stop short and say be will not raise a demand. An assessment proceeding may culminate in a charge or it may stop short of that. In the former case, no person other than the party charged can thereafter be assessed, but in the latter case, it is open to the income-tax authorities, in exercise of that option, to charge any other party with tax which, in the exercise of that option, to charge any other party with tax which, in the present case, would mean the members of the association. Since exercise of the option is 'part of the process of assessment', the Income-tax Officer has to stop short of raising a demand if he decides not charge the assessee but to charge any of the other units of assessment mentioned in section 3. The question that arises in the present case is whether the Income-tax Officer has assessment order dated the of February 23, 1961, in respect of the association of persons, not merely assessed its total income, but made a charge within the terms of section 3 of the Act, or levied tax on it, in which case he would precluded from making a charge on any of the other units of assessment in respect of the same income and it would not longer be open to him to assess the individual members of the association. As a matter of plain language, the concluding words of the Income-tax Officer's order in the assessment of the association of persons would indicate that, as he proposed to charge the members of the association separately, he was not making a charge on the association of persons, and that it was for that reason, that he directed that no demand notice should issue against the association. The issuing of a demand notice was much stressed in the course of the arguments before us, but, in my opinion, the same is merely a procedural step in the various stages through which assessment proceedings have to pass, and has by itself, no relevance for the purpose of determining the question that arises in the reference.
6. It will be convenient at this stage to refer to the relevant sections of the Indian Income-tax Act, 1922. The charging section 3 enacts that 'income-tax is to be charged in accordance with and subject to the provisions of the relevant Finance 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'. As laid down by the Supreme Court in the case of Commissioner of Income-tax v. K. Adinarayana Murthy : 65ITR607(SC) , the scheme of the Act treats these as separate 'units of assessment'. As already stated above, it is section 3 that has been construed by the Supreme Court in Kanpur Coal Syndicate's case : 53ITR225(SC) as implying an option on the part of the income-tax authorities to assess any one of these assessable entities or units of assessment, and not to levy tax for the same income on more than one of the entities or units of assessment mentioned in section 3. Section 23(3) provides that, after hearing the parties, the Income-tax Officer is to pass an order in writing assessing the total income of the assessee and determining the sum payable by him on the basis of such assessment; and section 29 provides that when tax is due in consequence of such an order, a notice of demand in the prescribed form specifying the sum payable by the assessee is to issue.
7. In the present case, however, it is an admitted position that almost the whole of the income of the association of persons was from dividends on which tax has already been deducted at source. Though the Income-tax Officer has, by his order, made in the assessment of the association of persons directed that no demand should be made against that association, as the share of the members thereof were to be assessed separately, curiously enough, he has not passed any order for refund of the tax which was deducted at source by the companies concerned and, in the usual way, collected by the revenue through the machinery of such deduction at source. In that connection, reference must be made to section 18(5) of the Indian Income-tax Act, 1922, which lays down that any deduction made and paid to the account of the Central Government in accordance with the provisions relating to deduction of tax at source 'shall be treated as a payment of income-tax or super tax on behalf of the person from whose income the deduction was made'. It may be mentioned that the provisions in section 18(5) corresponds to section 199 of the present Income-tax Act, 1961. The question that arises, therefore, is whether by reason of the failure of the Income-tax Officer whilst passing the assessment order in the assessment of the association of persons to direct repayment of the tax already collected by the department from the association by the procedure of deduction thereof at source by the companies concerned the Income-tax Officer has, in fact, 'charged' the association of persons within the terms of section 3 of the Income-tax Act, or levied tax on that association, with the result that it would no longer be open to him to charge the members of that association individually, in exercise of the option which he had under the said section. It was the contention of Mr. Joshi that it was for the association of persons to make an application for refund under section 48 of the Indian Income-tax Act, 1922, consequent on the assessment order passed by the Income-tax Officer in the assessment of that association. A plain reading of section 48, however, leaves no room for doubt that it has no application to a case like the present one, in so far as sub-section (1) thereof would come into play only where there is an excess payment of tax, and sub-section (3) thereof is, in terms, inapplicable to the present case.
8. The most important question that arises in that connection is, what is the effect of a deduction of tax at source. A plain reading of section 18(5) of the Indian Income-tax Act, 1922, in my opinion, leaves no room for doubt whatsoever that the effect of such deduction is that it amounts to payment of tax by the assessee concerned. No authority is, in my opinion needed to clarify that position which emerges from the very terms of section 18(5). If, however, authority be needed, reference may be made, in that connection, to the judgment of the Calcutta High Court in the case of Commissioner of Income-tax v. Clive Insurance Co Ltd. : 85ITR531(Cal) , which was followed by this court in its decision in the case of Commissioner of Income-tax v. Tata Sons P. Ltd. : 97ITR128(Bom) . Though the question that was before the respective courts in the said two cases arose in the context of section 49D of the Indian Income-tax Act, 1922, these cases are, in my opinion, authorities for the proposition that when tax is deducted at source, it amounts to payment of tax by the assessee concerned. In this connection, it may be pointed out that the procedure for taxing an assessee may be said to pass through three stages. The first stage is what may be called 'assessment', a term which is used in different section of the Act in slightly different senses, but which, in its widest sense, can only mean what the Supreme Court has, in Kanpur Coal Syndicate's case : 53ITR225(SC) , cited above, characterised as the 'process of assessment', at page 228. The second stage in the machinery of taxation is the stage of making a 'charge' on the assessee within the terms of section 3 which in may opinion, would mean making an assessment order assessing the total income of the assessee and determining the amount of tax payable by him in accordance with section 23(1) or (3) of the 1922 Act. It follows from the decision of the Supreme Court in Kanpur Coal Syndicate's case, : 53ITR225(SC) , that once an assessee is 'charged' in that sense, the option which the appropriate income-tax authorities have under section 3 of the Indian Income-tax Act, 1922, must be held to have been exercised, and it would thereafter not be open to those authorities to tax any one of the other units of assessment mentioned in that section. The stage of the making of a charge is followed by the third stage, viz., the stage of the levy of tax or, what the same thing, the recovery thereof. Levy of tax can be effected by the process of direct collection consequent on an assessment order; or it can be effected indirectly by deduction at source in certain specified cases, followed by an assessment order. Deduction of tax at source is not a levy of tax unless and until it is followed by an assessment order making a charge of tax, either expressly, or by necessary implication as when it does not direct repayment to the assessee of tax already deducted at source. The levy of tax in either of these ways, viz., by direct collection or by deduction at source, is one stage further than the making of the charges, and if the making of the charge exhausts the option which the taxing authorities have under section 3 of the Act, a fortiori, the levy of tax would necessarily exhaust that option.
9. Viewing the matter in that light, the position in the present case is that it must be held that there has been a levy of part of the tax on the association of persons. The Income-tax Officer's ordered dated February 23, 1961, passed in the assessment of the association of persons assessed its total income at the figure of Rs. 66, 270, out of which the gross dividend income from shares standing in the name of the association is Rs. 62,438 on which tax has admittedly been deducted at source and paid over to the Central Government. Though the assessment order does not determine the tax payable by the association of persons and purports to state that the members of the association of persons and purports to state that the members of the association were to be 'directly taxed to tax in their assessments', it fails to direct repayment of the tax already deducted at source on the dividend income of the association. There has, therefore, been a payment of tax pro tanto by the association. Neither the fact that the Income-tax Officer has stated in the concluding part of his order that no demand notice is to issue, nor the reason given by him for not issuing that demand notice, can change that position for the simple reason that, as already stated above, the issuing or the not issuing of a demand notice is a mere matter of procedure, though, of course, it has certain legal consequences. I hold that the Income-tax Officer having levied tax as aforesaid on the association of persons, it was no longer open to that officer to charge the members of that association in respect of the same dividend income, as he purported to do. I take the view that if an Income-tax Officer is to exercise the option which he has under section 3 in a case in which tax has already been deducted at source, it is incumbent upon him to make an order for refund of the tax so collected. I would, therefor, answer the question referred to us in favour of the assessees.
S.K. Desai, J.
10. I agree, but would like to add a few words. A very short point is involved in this reference. The 1st Income-tax Officer, A-4 Ward, passed five orders on February 23, 1961, and in four of these orders, he purported to include in the individual assessment of the four persons comprising the association of persons, his (or her) respective shares from the said association of persons. However, on that date, the factual position was that the association of persons had already paid income-tax on its gross dividend income of Rs. 62,438 (the figure being taken from the assessment order passed by the said Income-tax Officer on the said association of persons). As pointed out in the judgment of my brother, Vimadalal J., as long as such tax had been paid, and it is clear that it was paid, since it had not been ordered to be returned or refunded, it was not open to the Income-tax Officer to seek to tax the four individual's share from the association of persons. The legal position appears to be that the Income-tax Officer has a choice : he may tax either the association of persons or the individuals comprising it. It is this choice that is referred to as option by the Supreme Court in the case of Commissioner of Income-tax v. Kanpur Coal Syndicate : 53ITR225(SC) . It is the same choice which is designated as an election again by the Supreme Court in Income-tax Officer v. Bachu Lal Kapoor : 60ITR74(SC) . If one of the two entities has already been taxed, it will not be open to the income-tax authorities to seek to tax the other entities so long as the tax has been collected from the first entity and is not returned to it by making an appropriate order for such return. In this view of the matter, the deduction of the Income-tax Tribunal that it was not open to the department to assess the individual member will have to be sustained, though for reasons different than the one given by it.
11. The question referred to us is answered in the negative and in favour of the assessee. The Commissioner must pay the assessee's costs of the reference.