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D.R. Dhanwate Vs. Commissioner of Income-tax, M.P., Nagpur and Bhandara - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation;Labour and Industrial
CourtMumbai High Court
Decided On
Case NumberI.T. Reference No. 37 of 1960
Judge
Reported in[1961]42ITR253(Bom)
ActsIncome Tax Act, 1922 - Sections 34 and 34(1)
AppellantD.R. Dhanwate
RespondentCommissioner of Income-tax, M.P., Nagpur and Bhandara
Appellant AdvocateR.J. Kolah, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
.....in the prescribed form, it becomes clear that it is obligatory on the assessee to include in his total income the income of his wife and the income of his minor child. admittedly, the assessee has not done so and his failure to do so, according to mr. joshi, amounts to his failure to disclose the material facts necessary for the assessment of the assessee for that year. the assessee admittedly has not done this also during his assessment proceedings and in this view of the matter also during his assessment proceedings and in this view of the matter also, there had been a failure on his part to disclose fully and truly all material facts necessary for his assessment for that year. 8. the first question that has to be considered in whether it was obligatory on the assessee to include in..........(1st additional), nagpur. he acting under sub-section (6) of section 23 of the act, determined the total income of the firm at rs. 2,00,176. out of the income he apportioned rs. 29,597 as the share of the assessee; rs. 22,797 as the share of his wife parvatibai and rs. 22,797 as a share of his minor son, yeshwantrao. on the same day he completed the assessment of the assessee as well as parvatibai and yeshwantrao. in the assessment order made by him, the income-tax officer did not include the share of income of parvatibai and yeshwantrao in the income of the assessee. on the other hand, the income-tax officer assessed that income and taxed it in the hands of parvatibai and yeshwantrao. it appears that some time in the year 1955, taking advantage of the voluntary disclosure scheme of the.....
Judgment:

Tambe, J.

1. This is a reference under section 66(1) of the Income-tax Act. We are here concerned with the assessment year 1947-48 the account year ending with March 31, 1947. At the material time the assessee was a partner in a firm styled as Shivraj Fine Art Litho Works, Nagpur. The other partners being his wife Parvatibai and six sons, out of whom one Yeshwantrao was a minor. He was admitted to the benefits of partnership. The share of each partner was two annas in a rupee. The firm was being treated as registered for purposes of income-tax since 1939. On November 26, 1947 the assessee submitted his return to the Income-tax Officer. As regards his share of profits in the registered firm he stated 'as per firm's case'. He further disclosed a certain income by way of interest and income from sources other than those mentioned in the form. In part (c) of disclosed that his minor son, Yeshwantrao Dhanawate, was admitted to the benefits of the partnership. In that column he also disclosed that in addition to the two annas share, he was being paid Rs. 6,800 as honorarium. The assessment of the firm as well as the assessments of the assessee and other partners of the firm were taken together on February 25, 1948 by Mr. Bandwar, the then Income-tax Officer (1st Additional), Nagpur. He acting under sub-section (6) of section 23 of the Act, determined the total income of the firm at Rs. 2,00,176. Out of the income he apportioned Rs. 29,597 as the share of the assessee; Rs. 22,797 as the share of his wife Parvatibai and Rs. 22,797 as a share of his minor son, Yeshwantrao. On the same day he completed the assessment of the assessee as well as Parvatibai and Yeshwantrao. In the assessment order made by him, the Income-tax Officer did not include the share of income of Parvatibai and Yeshwantrao in the income of the assessee. On the other hand, the Income-tax Officer assessed that income and taxed it in the hands of Parvatibai and Yeshwantrao. It appears that some time in the year 1955, taking advantage of the voluntary disclosure scheme of the Government, the partners of the firm made some disclosures under the said scheme. As a result of compromise arrangement, the income of the firm was enhanced by a sum of Rs. 1,35,000. The Income-tax Officer took action under section 34 against the firm and enhanced its income by the said amount. The Income-tax Officer also took action under section 34 against the assessee and the other partners for the purpose of revising the assessment. This revised assessment was made on February 29, 1956. The total income of the firm, as already stated, was enhanced by a sum of Rs. 1,35,000. Thus its total income computed amounted to Rs. 3,35,176. The said income was apportioned among the partners. The amount apportioned to the share of D. R. Dhanawate came to Rs. 46,472 and the amount apportioned to the share of Parvatibai and Yeshwantrao came to Rs. 39,672 each. The revised assessment of the assessee also was done by the Income-tax Officer on the same day and in that assessment he added a sum of Rs. 79,344 representing the income that had been apportioned to the share of Parvatibai and Yeshwantrao to the income of the assessee. The income of the assessee was thus computed at Rs. 1,26,276. Feeling aggrieved by the order so far as it went to include the share of profits of Parvatibai and Yeshwantrao in his income, the assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax, Nagpur. The appellate authority relying on a decision of the Nagpur High Court, D. R. Dhanawate v. Commissioner of Income-tax, allowed the appeal on February 27, 1956, and directed the Income-tax Officer to delete the addition of the aforesaid amount Rs. 79,344 from the total income of the assessee.

2. At this stage it would be convenient to refer to the relevant facts giving rise to the decision in D. R. Dhanwatay v. Commissioner of Income-tax , which arose out of the assessee's assessment for the year 1946-47. For that year also on reopening the assessment case by a notice under section 34(1)(b) of the Act, the Income-tax Officer had sought to revise the assessment of the assessee by including the share of income of his wife and a minor son.

3. To resume the narration of the facts of this case, against the aforesaid under of the Appellate Assistant Commissioner of February 27, 1956, the Department did not prefer an appeal to the Tribunal, but on the other hand, on March 21, 1956, a notice was issued by the Income-tax Officer under clause (a) of sub-section (1) of section 34 calling upon the assessee to file a fresh return within 35 days of the receipt of the notice. It was further stated in the notice that it was being issued after obtaining the necessary sanction of the Commissioner of Income-tax, M.P. & Bhopal, Nagpur. The Income-tax Officer again passed an order on July 31, 1956, bringing to assessment in the hands of the assessee the share income of the assessee's wife and minor child under section 16(3) of the Act. The reason given by him is contained in paragraph 14 of his order, which is in the following terms :

'As stated above the assessee has year after year since 1940-41 onwards failed to show in his return the share income of his wife and minor sons from the firm, Shivraj Fine Art Litho Works, although the instructions contained in the return. The mere fact that the constitution of share incomes in his own return. The mere fact that constitution of the firm was before the Income-tax Officer when he made the assessment cannot absolve the assessee of his responsibility of showing certain items of income in his own return. The assessee has successfully avoided proper incidence of taxation for years together by not showing in his return the income which was properly chargeable in his hands under the law. Action under section 34(1)(a) is, therefore, warranted in this case.'

4. Against this order the assessee took an appeal to the Appellate Assistant Commissioner, who by his order dated April 22, 1957, confirmed the order of the Income-tax Officer. The assessee then took a second appeal before the Tribunal and that appeal also was dismissed. The Tribunal upheld the order of the Income-tax Officer under both the parts of section 34(1)(a). The assessee then moved the Tribunal under sub-section (1) of section 66 praying that the case be referred on a reference to this court. The Tribunal has now referred the case and the question of law arising out of the order of the Tribunal referred to us, is :

'Whether on the facts and in the circumstances of the case the assessment order passed by the Income-tax Officer dated July 31, 1956, as a result of the proceedings initiated under section 34(1)(a) is valid in la ?'

5. Mr. Kolah, learned counsel for the assessee, contends that on the facts and in the circumstances of the case, the Income-tax Officer was not justified in taking action under section 34(1)(a) of the Act. To take action under that section it is necessary to establish that the assessee has failed to make a return or that the assessee has failed to disclose fully the truly all material facts necessary for the assessment case, therefore, clearly did not fall under the first part of the section. The assessee has also fully disclosed that the other partner Parvatibai was his wife and the minor child Yeshwantrao was his son, who was only admitted to the benefits of the partnership. The Income-tax Officer, therefore, had at the time of the assessment before him all the necessary information to enable him to include the share incomes of Parvatibai and Yeshwantrao in the income of the assessee under section 16(3) of the Act. There being thus no failure to disclose fully and truly all the material facts on the part of the assessee, the case also did not fall under the second part of section 34(1)(a). According to Mr. Kolah, it is no part of the duty of the assessee to include in his total income the share incomes of his wife and minor son. He placed reliance on an unreported decision of this court in Parvatibai Kishanlal Tiwari v. Commissioner of Income-tax decided by a Division Bench of this court of February 24, 1956.

6. Mr. Joshi, learned counsel for the Department, on the other hand, contends that the case falls under the second part of section 34(1)(a) of the Act. We may at this stage state that even though the Tribunal had found that the case fell under both the parts of section 34(1)(a), Mr. Joshi concedes that the case does not fall under the first part of sections 34(1)(a). As already stated, according to Mr. Joshi, the case falls under the latter part of the section, namely, failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessee's assessment for the year 1947-48. He contends that on a true construction of this clause read together with the provisions of sections 3, 22, 23, 16(3) and Note (3) of the Notes contained in the prescribed form, it becomes clear that it is obligatory on the assessee to include in his total income the income of his wife and the income of his minor child. Admittedly, the assessee has not done so and his failure to do so, according to Mr. Joshi, amounts to his failure to disclose the material facts necessary for the assessment of the assessee for that year. In the alternative alternative Mr. Joshi argues that even assuming that it was not obligatory on the assessee to include in the return of his total income filed by him the income of his wife and minor child, it undoubtedly was obligatory on him to tell the Income-tax Officer in his assessment proceedings that the income of his wife and his minor child should be included in his total income. The assessee admittedly has not done this also during his assessment proceedings and in this view of the matter also during his assessment proceedings and in this view of the matter also, there had been a failure on his part to disclose fully and truly all material facts necessary for his assessment for that year.

7. As regards the decision on which reliance is placed by Mr. Kolah Mr. Joshi submits that that decision had been given without noticing the relevant provisions of law and is, therefore, not binding on us.

8. The first question that has to be considered in whether it was obligatory on the assessee to include in the return of his total income filed by him the income of his wife and his minor son and whether his failure to do so would amount to a failure to disclose fully and truly all material facts necessary for his assessment for that year. We would now proceed to examine the provisions to which we were referred by Mr. Joshi. Section 3, which is a charging section, provides :

'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 respect of the total income of the previous year....'

9. Section 22 requires a person whose total income during the previous year exceeds the maximum amount which is not chargeable, to make a return in the prescribed form of his total income and total world income during that year. The material part of sub-section (3) of section 16 provides :

'In computing the total income of any individual for the purpose of assessment, there shall be included -

(a) so much of the income of a wife or minor child of such individual as arises directly or indirectly -

(i) from the membership of the wife in a firm of which her husband is a partner;

(ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner.....'

10. Section 59 deals with the powers of the Central Board of Revenue to make rules. Clause (e) of sub-section (2) empowers the Central Board of Revenue to provide for any matter which by this Act is to be prescribed. Sub-section (5) of section 59 provides that rules made under this section shall be published in the Official Gazette and shall thereupon have effect as it enacted in this Act. In exercise of the powers conferred on it by clause (c) of sub-section (2) of section 59, the Central Board of Revenue has prescribed the rules and rule 19 provides that the return of the total income and total world income for individuals, Hindu undivided family, etc., required under sub-sections (1) and (2) of section 22 shall be in the prescribed form and shall be verified in the manner indicated therein. Part 1 of the form relates to the details that are to be filled in by the assessee regarding his sources of income. In the form it is mentioned that in filling this Part Note No. 3 should be taken into consideration. These Notes are given for guidance in filling up the return furnished to the person making a return. The material part of Note 3 is in the following terms :

'Sources of income : The following income must be included in your return under the appropriate head :

(a) so much of the income of your wife as arises directly or indirectly from :

(i) her membership in a firm of which you are a partner;.... (b) so much of the income of your minor child as arises directly or indirectly from : (i) his or her admission to the benefits of the partnership in a firm of which you are a partner.'

11. It is the say of Mr. Joshi that under section 3, income-tax is levied on the total income of the assessee and sub-section (1) of section 22 makes it obligatory on the assessee to make a return in the prescribed form of his total income. Note 3, which forms part of the prescribed form under sub-section (5) of section 59, has the force of law as if it has been a part of the enactment. Note 3 costs a statutory obligation on an assessee to include in his income the share income of his wife and minor child when the source of income is a share in profits of a partnership of which the assessee, his wife and the minor son are the partners.

12. It is difficult to accept this contention. No doubt, the heading given to Note 3 is 'sources of income', but the body of the Note does not in terms say that income of the wife and the minor child arising from their membership in a firm of which the assessee is a partner, is to be included and shown in the total income of the assessee. On the other hand, the words used are that it is to be included in the return, under the appropriate head. What then is the appropriate head Mr. Joshi says that 'appropriate head' is clause (b) of item 4 of Part 1 of the prescribed form of return. Under that clause the assessee has to disclose his share of profits in the registered firm. This return is to be made under section 22 of the Act and the aid section casts an obligation on the assessee to disclose his total income and not the income of any other person. It is true that under sub-section (3) of section 16, the income of the wife and the minor child is included in the total income of the assessee at the time of computation of his total income, but on language of sub-section (3) of section 16 it cannot be said that that is an income of the assessee as such in the strict sense though it may be chargeable to tax in his hand. Section 16 provides that in computing the total income of an individual for purpose of assessment, the income of the wife or a minor child of such individual as arises directly or indirectly from the membership of the wife and from admission of the minor to the benefits of the partnership is to be therein included. The provision thus first recognises that the income truly is the income of the wife or the minor child of the individual. It then directs its inclusion in the total income of the individual at the stage of computation of his total income. That being the position on the language of sub-section (3) of section 16, it cannot be clearly and definitely said that clause (b) of item 4 of Part 1 would be the appropriate head for the disclosure required to be made in the return under Note 3 of rule 19.

13. Mr. Kolah on the other hand referred to Note 9 of rule 19, which is in the following terms :

'Business, profession or vocation : If you are a partner in registered firm or if your firm has applied for registration you must complete item 4(b) of Part 1 and if you are a partner in an unregistered firm you must complete item 4(c) of Part 1.

14. For the purpose of completing item 4(b) of Part 1, the share of the partner is to be determined as follows :

(i) The share is the share to which he was actually entitle during the previous year and not the share to which he was entitled on the date on which the assessment is to be made.

(ii) It includes all interest (whether on loan or capital account and whether actually paid or not) and all salary, commission or other remuneration paid, payable or credited to him.'

15. Now, this Note 9 is a specific provision giving directions to the persons filling in the form regarding item 4(b) of Part 1 and it is to be noticed that this Note does not mention that the income of the wife and minor child is to be included by the assessee in his income in filling the column against Item 4(b). It is, therefore, difficult for us to accept the contention of Mr. Joshi that the appropriate head for showing the income of the wife and the minor child is Item 4(b) of Part 1. No other head was pointed out to us by Mr. Joshi from the first Part of the form. For reasons stated above it is, therefore, not possible to accept the contention of Mr. Joshi that there is statutory obligation cast on an assessee in filing return of his total income to include in it, the income of his wife and minor child arising directly or indirectly from their membership in a firm of which he also is a partner. We, therefore, see no reason to take a view other than the on taken by a Division Bench of this court in the aforesaid decision (I.T. Reference No. 35 of 1955) wherein it is observed that it is not obligatory upon the assessee to include in his assessment the deemed income which arises by reason of section 16.

16. We would, however, for the sake of argument, assume that it is obligatory on the assessee in making a return to include in his total income the income of his wife and minor child. The question that next arises for determination is whether failure on his part to do so would amount to a 'failure to disclose fully and truly all material facts necessary for his assessment for that year'. As already stated, it is Mr. Joshi's contention that that would amount to a failure to disclose fully and truly all material facts within the meaning of section 34. We find it difficult to accept this contention of Mr. Joshi also, To accept this contention we will have to read in the section, 'failure to disclose fully and truly in his return all material facts necessary for his assessment for that year'.

17. That would involve adding something to the section, for which we find neither any warrant nor any justification. In our opinion, therefore, even assuming that it was the duty of the assessee to include the income of his wife and minor child in his income and show it so in his return, failure on his part did not amount to 'failure to disclose fully and truly all material facts necessary for his assessment for the relevant year'. This brings us to the next contention of Mr. Joshi.

18. As already stated, it is his contention that the assessee had not in his assessment proceedings told the Income-tax Officer or disclosed to the Income-tax Officer that the income of his wife and minor son are to added to his income in computing his total income, and, therefore, it is failure on his part to disclose fully and truly all material facts. To put such a strict construction on the clause in the case of an assessment of a partner in a registered partnership is, in our opinion, not warranted. The assessment of a partner in a registered firm cannot be completely divorced from the assessment of the firm of which he is a partner. These two assessments are not in two different water tight compartments. These two assessments are not in two different water tight compartments. But as would be seen from the provisions of the then sub-sections (5) and (6) of section 23, the two assessments are complementary to one another. In making the assessments of a registered firm and its partners, the Income-tax Officer had first to assess the total income of the firm and thereafter the total income as determined was apportioned by him among the partners according to their shares. Though the firm is a separate and distinct unit of assessment no tax was levied on the income of a registered firm in its hand, but each partner's share of the registered firm's determined income was added to his other income and tax levied thereon on the basis of his total income. The assessment of a registered firm is thus a preliminary step in the matter of the assessment of its partners and forms part of their assessment. The disclosures made by the partners of a registered firm in the assessment of the firm would, therefore, as well be disclosures made by him all the material facts necessary for the purpose of his own assessment. It is not disputed before us that on the material on record it is clear that in the assessment of the firm, it has been disclosed by the assessee to the Income-tax Officer that Parvatibai was his wife and that Yeshwantrao was his son. It was also disclosed that Partivatibai was a partner in the firm and Yeshwantrao was admitted to the benefits of the partnership. These facts were know to the Income-tax Officer at the time he made the assessment of the firm as well as of the assessee, his wife and son Yeshwantrao. All these assessments were made on one and the same day and by the Income-tax Officer. The Income-tax Officer could all well have, on the basis of the facts disclosed to him, included in the total income of the assessee the income derived by Parvatibai on account of her membership in the firm and Yeshwantao's income derived by him on account of his admission to the benefits of the partnership.

19. In our opinion, therefore, it has not been established that the requirement of section 34(1)(a) were satisfied in order to enable the Income-tax Office to issue a notice on March 21, 1956, under section 34(1)(a) of the Act. Consequently, the order of assessment passed by the Income-tax Officer on July 31, 1956, cannot be upheld.

20. Mr. Joshi next contends that of any rate it should be held that the Income-tax Officer was justified in adding to the income of the assessee the income of Parvatibai and Yeshwantrao apportioned to them on reopening the assessment on disclosure of additional income of Rs. 1,35,000 under what the Tribunal calls 'the Voluntary Disclosure Scheme' of the Government. It is the argument of Mr. Joshi that as the income of Rs. 1,35,000 was not disclosed by the assessee, there had been a failure on his part to make a full and complete disclosure of these material facts necessary for the purpose of his assessment. The Income-tax Officer, therefore, had power under section 34(1)(a) to re-open the assessment and serve a notice on the assessee and thereafter to make a fresh assessment and add the respective sums of Rs. 16,875 as income of Parvatibai and another sum of Rs. 16,875 as income of Yeshwantrao to the income of the assessee as these sums represent the shares of Parvatibai and Yeshwantrao in the undisclosed income of Rs. 1,35,000. There are, however, difficulties in the way of Mr. Joshi. The question in this form was not raised before the Tribunal. Further, the other difficulty in the way of Mr. Joshi is that we are not dealing with the case arising out of the order of the Income-tax Officer of February 29, 1956, but of date July 31, 1956, consequent on the second notice issued on March 21, 1956, by the Income-tax Officer.

21. For reasons stated above, in our opinion, the question referred to us will have be answered in the negative. Costs of the assessee of this reference shall be paid by the Department.

22. Question answered in the negative.


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