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Ramniwas Hanumanbux Somani Vs. S. Venkataraman, Income-tax Officer, C-iii Ward, Bombay and anr. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberAppeal No. 9 of 1959
Judge
Reported in[1961]43ITR152(Bom)
ActsIncome Tax Act, 1961 - Sections 34; Income Tax Act, 1922 - Sections 44
AppellantRamniwas Hanumanbux Somani
RespondentS. Venkataraman, Income-tax Officer, C-iii Ward, Bombay and anr.
Appellant AdvocateN.A. Palkhivala, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
.....44 of income tax act, 1922 - assessee was initially partnership firm - after dissolution of firm notice was issued under section 34 - assessee contended that notice ought to be have been addressed in names of partners who were partners at time of relevant assessment year - case was one of succession falling under section 26 (2) - where succession takes place at end of accounting year case would fall within scope and ambit of section 26 (2) - firm cannot escape assessment notice under section 22 (2) by dissolving itself at end of an accounting year - proceedings under section 34 treated as proceedings of original assessment under sections 22 and 23 - held, impugned notice rightly issued upon assessee. - - , on the ground that he had reason to believe that due to the omission..........a return... to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the act, or excessive loss or depreciation allowance has been computed,... he may in cases falling under clause (a)... serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22 and may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this act shall, so.....
Judgment:

Tambe, J.

1. This appeal arises out of a writ petition filed by the appellant under article 226 of the Constitution of India, on the original side of this court, wherein he had prayed for the issue of a writ in the nature of certiorari or other appropriate writ or direction, calling for the records of the case and, after going into the question of the legality thereof, quash and set aside the notices issued by the Income-tax Officer, C. III Ward, Bombay, under section 34(1) and section 22(4) of the Act. The appellant further prayed for the issue of a writ in the nature of prohibition and/or mandamus or other appropriate writ under article 226 of the Constitution, restraining and prohibiting the respondents, their officers, servants and agents from taking any steps or proceedings in enforcement, furtherance, pursuance or implementation of the aforesaid notices.

2. The material facts averred by the appellant in his petition were that in 1940, a firm called Motilal Somani & Co., was started with Nathmal Hazarimal, Ramprasad Benilal, Rameshwar Mahadeo and the appellant as its partners. Ramprasad Benilal died in or about 1946. Thereupon, another partnership was formed in 1947 in the same name and style of Motilal Somani & Co., with Nathmal Hazarimal, Rameshwar Mahadeo, Puranmal Pannalal and the appellant as its partners. (During the course of the judgment, we will refer to this partnership as the second partnership.) This partnership was dissolved in the year 1948. The exact date of dissolution has not been stated. Thereafter, in 1948 another partnership was formed in the name and style of Motilal Somani & Co., with Puranmal Pannalal and the appellant as partners. (We will refer to this partnership as the third partnership.) This partnership was also dissolved in 1955. After the dissolution of the said partnership, the business was carried on by the appellant alone in the name and style of Motilal Somani & Co. On December 15, 1955, the appellant sent an intimation to the Income-tax Officer under section 25(2) of the Income-tax Act, to the effect that the firm of Motilal Somani & Co., was dissolved as and from November 14, 1955, by the mutual consent of both the partners, and on and after November 14, 1955, the business had become the sole proprietary concern of the appellant, Ramnivas Hanumanbux. The business of the aforesaid firms was carried on, and the present business of the appellant also is being carried on at 158/64 Kalbadevi Road, Bombay.

3. On or about March 25, 1958, the first respondent took out a notice under section 34(1) against Messrs. Motilal Somani & Co., on the ground that he had reason to believe that due to the omission or failure on the part of Messrs. Motilal Somani & Co., to make a return to disclose fully and truly all material facts necessary for the assessment for the year 1949-50, certain income chargeable to income-tax has escaped assessment for that year. It has been found by the learned judge dealing with the petition that attempts were made on 26th, 27th and 28th of March, 1958, to serve this notice on Messrs. Motilal Somani & Co., or the Partners thereof. The affidavits made by the employees of the Income-tax Department disclose that although they went to serve this notice, no one representing Messrs. Motilal Somani & Co., could be contacted, and in spite of their attempts to find out the addresses of the partners of Messrs. Motilal Somani & Co., they could not obtain any information about the said addresses. These affidavits also disclose that although the appellant was carrying on business in the very premises in the name and style of Motilal Somani & Co., he also could not be contacted. The result thereof was that the notice under section 34 was affixed on the premises of Messrs. Motilal Somani & Co., i.e., 158/64 Kalbadevi Road, Bombay 2, where the appellant was carrying on his business at the material time. The notice under section 34 also contained a notice under section 22(2). Since, however, no return was field as directed under the notices under sections 34 and 22(2), a notice under section 22(4) addressed to Messrs. Motilal Somani and also the four partners, who were partners of the firm in the account year 1947-48, was also issued. This notice has been served personally upon three out of the four partners including the appellant. The appellant, by his petition under article 226 of the Constitution, challenged the validity of the aforesaid notices, i.e., notice under section 34 read with section 22(2) and the notice under section 22(4) of the Act.

4. The challenge raised on behalf of the appellant before the learned judge, dealing with the petition, was two-fold. In the first instance, it was contended that the notice under section 34 addressed in the name of Messrs. Motilal Somani & Co., was bad in law. A notice under section 34 ought to have been addressed in the names of the partners, who were partners at the time relevant to the assessment year 1949-50, i.e., who were partners during the accounting year 1947-48. The argument of Mr. Palkhivala was that that firm was dissolved in the year 1948, and was not in existence at the time the notice under section 34 was issued some time in March, 1958, and, therefore, the notice in the name of the firm could not have been issued. When an assessment is sought to be made against a firm that stood dissolved, it could only be made either under section 26 or under section 44. Section 26, however, was not applicable to the facts of the present case, because the business of the firm of the firm of Motilal Somani & Co., was discontinued in the year 1948 upon its dissolution, and, therefore, the apposite provisions of law were section 44 of the Act, and that required issuing of notices against the partners, who were partners of the firm during the accounting year 1947-48, i.e., the assessment year 1949-50. The second contention raised was that, at any rate, the service of notice under section 34 effected by affixing it on the premises of the firm was bad in law. On the basis of these two contentions, it was urged that as there was no valid notice issued under section 34 and/or it was not validly served, the proceedings started by the Income-tax Department under section 34 of the Act were without jurisdiction and bad in law. The appellant thus prayed for the aforesaid reliefs.

5. Mr. Justice Shelat, who heard the petition, held that, on the facts stated by the petitioner himself in the petition, it was a case of succession within the meaning of section 26(2) of the Act, and was not a case of discontinuance of business within the meaning of section 44. Section 44, therefore, had no application to the facts of the present case, but the case fell under sub-section (2) of the Act, and under that provision, the person who would be liable to be assessed would be the person carrying on business at the relevant time, as well as the person who succeeded to that business. Both would be liable in respect of the actual share in the income, profits and gains of the previous year. The partnership consisting of four partners - Nathmal Hazarimal, Rameshwar Mahadeo, Puranmal Pannalal and the appellant - was carrying on business at the material time. That firm was succeeded by the partnership of two partners - Puranmal Pannalal and the appellant. Both these firms would be liable to be assessed under section 26(2) of the Act. He also proceeded to consider as to who would be the assessee for the purposes of section 34, to whom the notice has to be served under that section, in order that an Income-tax Officer would have jurisdiction under that section to reassess. He came to the conclusion that the assessee for the purposes of section 34 was the firm of Messrs. Motilal Somani & Co., owing to whose omission or failure, certain income, profits and gains which were chargeable during the assessment year 1949-50 to income-tax, had escaped assessment, and in this view of the matter also, he held that the notice issued in the name of the firm was valid in law. As regards the second contention, he held that there was no defect in the service of the notice by affixing it on the last known address of the firm. Consistently with these findings, the learned judge dismissed the petition. Feeling aggrieved by that decision, the appellant has preferred this appeal.

6. Mr. N. A. Palkhivala, who appears for the appellant, raised before us also two contentions. In the first instance, he contends that on the date of the issue of the notice, i.e., in March, 1958, the firm that was doing business for the accounting year 1947-48 (Samvat year 2004) had been dissolved, and, therefore, the issuing of notice in the name of the non-existent firm was bad in law. During the course of the argument, he stated that he accepts the findings of the learned judge that this was not a case of discontinuance of the business falling under section 44 of the Act, but was a case of succession of the business within the meaning of section 26 of the Act. But, according to him, sub-section (2) of section 26 has no application to the facts of the present case. The subject-matter of that sub-section is apportionment of profits of an accounting year when in the middle of an accounting year, a person carrying on business, profession or vocation, has been succeeded in such capacity by another person. In the instant case, the partnership that carried in business during the account year 1947-48 (Samvat 2004), i.e., the second partnership, had not been succeeded in the midst of that accounting year by the third partnership. Sub-section (2) of section 26 therefore has no application to the facts of the present case, and the learned judge was in error in holding that the case fell under sub-section (2) of section 26 of the Act. According to Mr. Palkhivala, barring section 44 and section 44 and section 26, there is no other provision in the in the Income-tax Act, which would enable the Income-tax Officer to reopen assessment under section 34 of the Act, when the assessee firm stood dissolved on the date of the issue of the notice. He also referred us to the decisions reported in Raju Chettiar v. Collector of Madras, Commissioner of Income-tax v. Sanichar Sah Bhim Sah and Commissioner of Income-tax v. Express Newspapers Ltd.

7. Before we proceed to consider the contentions raised by Mr. Palkhivala, it is necessary to state that Mr. Joshi, learned counsel for the first respondent, stated before us that the first respondent was not accepting the correctness of the finding of the learned judge that section 44 had no application to the facts of the present case. According to Mr. Joshi, the appellant came to the court with a positive case that the business of the second firm had been discontinued in the year 1948, and therefore the case fell under section 44 of the Act, and under the provisions of that section, it was necessary to issue notice to the individual partners and not to the firm. According to Mr. Joshi there are no averments in the petition to make out a case of succession to the business of the second firm by the third firm. Referring to the concluding portion of the judgment of Mr. Justice Shelat, he stated that the respondent was not called upon to reply at the trial stage, and therefore, it would not be correct to say that it is not in dispute that in spite of the changes made in the constitution of the firm of Messrs. Motilal Somani & Co., the same business was carried on all throughout. It has been admitted before us that the respondent was not called upon to reply at the trial stage. If that be so, then there is some force in the contention raised by Mr. Joshi, as no occasion arose for the respondent to make any concession, and, therefore, it would not be apposite to say that it was not in dispute that in spite of the changes made in the constitution of the firm of Motilal Somani & Co., the same business was carried on all throughout. Turning to the averments made by the appellant in the petition, we do not find any specific averment that the third firm succeeded to the business of the second firm. On the other hand, as already stated, the case urged by the appellant before the learned judge was that the business of the second firm was dissolved. No doubt, there is some material on record, namely, the letter written by the appellant on December 15, 1955, to the Income-tax Officer which may lead to an inference that the appellant had succeeded to the business of the third firm but there is no material at all on record to show that the third firm had succeeded to the business of the second firm. On the averments in the petition, and the contentions raised by the appellant at the trial stage, the case urged by him was one under section 44. If that be the true position, then the submission made on behalf of the appellant that in a case falling under section 44, notice cannot be issued against the firm, but will have to be issued against the persons, who were partners at the relevant time, cannot be sustained, in view of the decision of their Lordships of the Supreme Court reported in Abraham v. Income-tax Officer, Kottayam, where in after considering the various provisions of law, their Lordships observed at page 430 :

'In effect, the Legislature has enacted by section 44 that the assessment proceedings may be commenced and continued against a firm of which business is discontinued as if discontinuance has not taken place. It is enacted manifestly with a view to ensure continuity in the application of the machinery provided for assessment and imposition of tax liability notwithstanding discontinuance of the business of firms. By a fiction, the firm is deemed to continue after discontinuance for the purpose of assessment under Chapter IV.'

8. These observations of their Lordships relate to section 44 as it stood prior to its amendment in the year 1958, which came into effect on April 1, 1958. Mr. Dwarkadas, who gave a reply on behalf of Mr. Palkhivala in this case, tried to distinguish this decision on the ground that the observations made by their Lordships were made on a concession made by the other side. It is difficult to accept the submission. On the other had, reading the judgment as a whole, it is clear that after considering the various provisions of the Act, their Lordships recorded their conclusions as reproduced above. It appears that what was implicit in section 44 prior to its amendment in 1958, has not been made explicit by the amendment.

9. We would, however, proceed to consider the question on the footing that the case is one of succession falling under sub-section (2) of section 26, the third firm succeeding to the business of the second firm. Even on this footing, we are unable to accept the contention of Mr. Palkhivala that that sub-section would have application only when succession takes place in the midst of an accounting year, when the income of that year is shared between persons carrying on business, profession or vocation, and the person succeeding to him. That sub-section reads : 'Where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person, such person and such other person shall, subject to the provisions of sub-section (4) of section 25, each be assessed in respect of his actual share, if any, of the income, profits and gains of the previous year.' To accept the contention of Mr. Palkhivala, it would be necessary to read 'during the course of accounting year' after the clause 'in such capacity' occurring in the sub-section make it abundantly clear that sharing of profits of any particular accounting year between the person carrying on business and the person succeeding to him is not a condition precedent to its application. On the terms of sub-section (2), in our opinion, case where succession takes place at the end of the accounting year would also fall within the scope and ambit of that sub-section. The finding recorded by the learned judge, therefore, on this aspect of the case is not open to challenge.

10. Even assuming that the provisions of sub-section (2) of section 26 are not attracted to the facts of the present case, the succession to the business of the second firm by the third firm having taken place at the end of the accounting year 1947-48, in our opinion, it was open to the Income-tax Officer to issue a notice under section 34 of the Act in the name of the firm even though it stood dissolved at the time of the issue of the notice. We are here concerned with clause (a) of sub-section (1) of section 34 of the Act, and the material part, as it stood then, reads :

'34.(1) If - (a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return... to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the Act, or excessive loss or depreciation allowance has been computed,... he may in cases falling under clause (a)... serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22 and may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section.'

11. This provision enables the Income-tax Officer to issue a notice against an assessee, whose income has escaped assessment by reason of his (assessee's) omission or failure to disclose fully and truly all material facts necessary for his assessment. In other words, the notice contemplated by this section is issued against the person, who was the assessee in the original assessment. The clause 'provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section' indicates that by fiction of law notice issued under section 34 is treated as if it is a notice originally issued under sub-section (2) of section 22 of the Act. It is difficult to assume that a firm can escape assessment notice under section 22(2) by dissolving itself at the end of an accounting year and thus avoid payment of income-tax on the income of that year. Now, it is an admitted position that the income said to have escaped assessment is the income of the account year 1947-48 (Samvat year 2004). It is an admitted position that income was the income of the second firm. It is also an admitted position that the original assessment made in respect of that income was made in the name of the second firm even though at that time it had already been dissolved. No objection was raised to the assessment by the second firm on the ground of its dissolution. The second firm thus being the original assessee, section 34 enables the Income-tax Officer to issue notice against that assessee, and, therefore, in our view, the notice issued under section 34 in the name of the second firm was not bad in law. It is, therefore, not possible to accept the contention of Mr. Palkhivala that the dissolution of the second firm in 1948 came in the way of the Income-tax Officer from issuing a notice under section 34 in the name of the firm. We find support for the view taken by us in the two decisions of their Lordships of the Supreme Court in Lakshminarain Bhadani v. Commissioner of Income-tax and Y. Narayana Chetty v. Income-tax Officer, Nellore. In Laxminarain Bhadani v. Commissioner of Income-tax the facts were that a joint Hindu family, of which the appellant before their Lordships was the karta, was assessed to income-tax for the year 1939-40. In 1944 the Income-tax Officer considered that certain income of the family taxable in 1939-40 had escaped assessment. In the meanwhile, the family had become divided and an order had been passed under section 25A(1) of the Act. The Income-tax Officer issued a notice in the name of the joint Hindu family and served it on the appellant under section 34 read with section 22 to make a return in respect of the escaped income and the appellant sent a return in response to that notice. Thereafter, the Income-tax Officer made an assessment on the escaped income and issued a notice of demand on the appellant as the karta and on the two other members of the family. One of the contentions raised by the appellant was that the proceedings were irregular and that he was not liable to pay the tax inasmuch as notices under section 34 were not issued to the members of the family but were issued in the name of the family. The High Court expressed the view that there were irregularities both in initiating the proceedings and in completing the same. This finding of the High Court was, however, not accepted by their Lordships, and it was held that as the Income-tax Officer was proceeding to assess the income of the family as in 1939-40, the proceedings were validly initiated and it was not necessary to issue the notice under section 34 read with section 22 to every member of the family. It has to be noticed that at the time the notice was issued under section 34, the joint family was no more in existence, but stood disrupted sometime before it. Mr. Dwarkadas, in distinguishing this case, stated that the decision proceeded on the provisions of sub-section (2) of section 25A of the Act. We are unable to read anything in the judgment to hold that the aforesaid conclusions of their Lord-ships were based on the provisions of section 25A(2) of the Act. The reason given by their Lordships for the view taken by them is that at the time the assessment was opened under section 34, the position was as if the Income-tax Officer was proceeding to assess the income of the Hindu undivided family in 1939-40. As already stated, such a position arises in view of the clause 'and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section' occurring in section 34. In Narayana Chetty v. Income-tax Officer, Nellore, the notice under section 34 was issued in the name of the firm after it stood dissolved, and the notice was served on one of the partners of the dissolved firm. A contention was raised before their Lordships that, in view of the dissolution of the firm, notice under section 34 ought to have been issued against the individual partners of the firm. That not having been done, the proceedings taken under section 34(1) were invalid and bad in law. Repelling this contention, their Lordships observed :

'Mr. Sastri concedes that under section 63(2) a notice or requisition under the Act may in the case of a firm be addressed to any member of the firm but his contention is that this applies to a firm in existence and not to a firm dissolved. If the appellants' case is that as a result of dissolution of the firms, the firms had discontinued their business as from the respective dates of dissolution, they ought to have given notices of such discontinuance of their business under section 25(2) of the Act. Besides, in the present case, the main appellant has in fact been served personally and the other partners who may not have been served have made no grievance in the matter. We are, therefore, satisfied that it is not open to the appellants to contend that the proceedings taken by the Income-tax Officer under section 34(1) are invalid in that notices of these proceedings have not been served on the other alleged partners of the firms.'

12. The decisions on which reliance was placed by Mr. Palkhivala are not, in our opinion, of any assistance to the appellant. None of them relates to a notice issued to a firm under section 34 of the Act. In Commissioner of Income-tax v. Sanichar Sah Bhim Sah it was held that as the Hindu undivided family did not exist on the date the Income-tax Officer initiated the proceedings under section 28(1)(c) and also on the date on which the penalty was imposed the proceedings were invalid. The same was the position in Raju Chettiar v. Collector of Madras. The proceedings taken under section 28 cannot be equated with the proceedings taken under section 34 of the Act. As already stated, the proceedings under section 34 are treated a proceedings of the original assessment under sections 22 and 23 of the Act. In Commissioner of Income-tax v. Express Newspapers Ltd. It was held that the assessment made on a company long after it was struck off the register of companies was not valid and a fresh assessment was not possible on the original return as it had ceased to exist. We are here not considering the case of a company, and the analogy of this case, in our view, has no application to the facts of the present case.

13. The second contention raised by Mr. Palkhivala was that the service of notice by affixation of its copy was not a good service, because the provisions of Order V, rule 19, have not been complied with. According to Mr. Palkhivala, after affixation of a copy of the notice it was necessary for the serving officer to make a report about it on an affidavit to the Income-tax Officer, and it was incumbent on the Income-tax Officer to examine the serving officer, and get himself satisfied about it before holding that there was proper service on the assessee. This contention overlooks the material on record. It is not necessary to reproduce all that had been stated in the judgment of Mr. Justice Shelat, inasmuch as it has not been challenged before us that the serving officer was justified in effecting service by affixing a copy of the notice on the business premises. The only contention raised is that after affixing the notice to the business premises, the serving officer should have reported the matter to the Income-tax Officer, who, in his turn, should have considered the report and then held the service good. Suffice it to say that exhibit 'G', page 19 of the record, collectively shows that Mr. Thade, the serving officer, before effecting the service, by affixing it to the business premises, had made a report to the Income-tax Officer. On a perusal of the report, the Income-tax Officer ordered Mr. Thade to effect service by affixing it to the business premises. thereafter, Mr. Thade went to effect the service. He again was unable to get information about the whereabouts of the assessee. He then effected service of the notice under section 34 by affixing a copy thereof to the business premises. Thereafter, he made a report of these facts to the Income-tax Officer (page 18 of the record) and on perusal of the report, the Income-tax Officer has made an order on March 28, 1958, in the following terms : 'I am satisfied that the service is in order'. This being the material on record, it is difficult to accept the contention of Mr. Palkhivala that the provisions of Order V, rule 19 had not been complied with. The second contention, therefore, in our opinion, also should fail.

14. In the result, the appeal fails and is dismissed with costs.

15. Appeal dismissed.


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