1 . The assessee is a partner in three firms :
(i) M. M. Madalappa & Bros., Bangalore,
(ii) T. M. Muniswamiappa & Sons, Bangalore,
(iii) M. M. Madalappa and A. C. Balasubramania Mudaliar & Co.
2. The assessment for the three years 1958-59, 1959-60, and 1960-61 were completed by the Income-tax Officer on January 19, 1959, November 30, 1959, and November 29, 1961, under section 23(3) accepting the assessee's share income from the above firms as returned by the assessee. It was noted in the assessment orders that the share incomes were being accepted subject to rectification later. In the assessment year 1958-59, the assessee's share in M. M. Madalappa & Bros. was a loss and was not taken into account in the original assessment. In 1959-60, neither income nor loss was taken into account. In the assessment year 1960-61, a loss of Rs. 4,941 from this firm was deducted. Against the share income from the other two firms, in the assessment for 1958-59, it was noted 'tax earned'. In the other two years, no mention has been made as to the nature of the share income from the two firms. Subsequently, the assessments of the three firms came to be completed. It was found that there were higher profits in the two firms, and that the assessee's share of profit required to be revised. The Income-tax Officer issued notices to the assessee for all the years, which notices were shown to have been issued as 'Notices under section 154/155'. In the body of the notice, the notice being similar in terms for all the years, it was pointed out that :
'... there is a mistake apparent from the record within the meaning of section 154 of the Indian Income-tax Act, 1961. The rectification of the mistake, as per details given below, will have the effect of enhancing the assessment.'
3. At the foot of the notice, such rectification was shown to be intended to be made in respect of the share of profit from the three firms by taking the correct share as determined in the case of the firms. In due course, after hearing the assessee, the higher share of profit as determined in the case of the firms was included in the assessment. In passing the order in respect thereof, the Income-tax Officer mentioned section 154 of the Income-tax Act, 1961, as the section under which the said order was passed. Apart from taking the share of profit in the firms as determined in the firms' cases as above, the Income-tax Officer treated such share of profit in the firms as unearned income whereas the same had been treated in the original assessments as earned income. The assessee had been no objection to the enhanced share income being adopted, but objected to the Income-tax Officer, treating these as unearned income.
4. The Income-tax Officer passed orders sunder section 154 of the Income-tax Act, 1961, in all the three years son August 28, 1963, levying a special surcharge on the share incomes.
5. The assessee filed appeals to the Appellate Assistant Commissioner, objecting to the treatment of the share of profit from the firms as unearned income. The Appellate Assistant Commissioner, however, upheld the orders of the Income-tax Officer, observing as under :
'The section does not restrict the scope to the alteration of the quantum only. The nature of character of the income can also be corrected, if there is a mistake in the original assessment..... In case the character or nature of the share income is different from what was adopted previously, the Income-tax Officer can not only substitute the correct figure of income but can also consider the character or nature of the income in the orders of rectification. The legislature had advisedly used the word 'correction'. Correction means to set right, amend or substitute right for wrong.'
6. In that view, he confirmed the orders of the Income-tax Officer. A copy of the order of the Appellate Assistant Commissioner is annexure 'A' and forms part of the case.
7. The assessee appealed to the Appellate Tribunal. The contentions were :
'(i) The Income-tax Officer has wrongly passed the orders under section 154 of the Act, whereas, if at all, section 155 of the Act applied;
(ii) In any event, the order under section 154 was out of time for the assessment year 1958-59;
(iii) Even if the orders are to be read as orders passed under section 155 of the Act, there was no scope left under that section for changing the character of the income as taken in the original assessment;
(iv) If at all, section 147 of the Act applied, if the character of the income was to be changed.'
For various reasons set out in its order, the Appellate Tribunal held that :
'... the Appellate Assistant Commissioner was not right in holding that in an order under section 155 of the Act the inclusion of the correct share of the income left scope for such inclusion so as to even change the character of the income from earned income to unearned income.'
8. A copy of the Appellate Tribunal's order is annexure 'B' and forms part of the case.
9. The question of law is :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer, while passing the order under section 155 of the Act, was not justified in treating the share income of profit from the partnership firms as unearned ?'
10. This is a reference under section 256(1) of the Income-tax Act, 1961 (to be hereinafter referred to as the Act).
11. This reference comes to be made at the instance of the Commissioner of Income-tax, Mysore, Bangalore. The question of law referred for the opinion of this court is : 'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer, while passing the order under section 155 of the Act, was not justified in treating the share income of profit from the partnership firms as unearned ?'
12. The facts of the case are fully set out in the statement of case. It is not necessary to restate the same.
13. In this case we are concerned with the assessment of the assessee for the assessment years 1958-59, 1959-69 and 1960-61. The assessments made by the Income-tax Officer, according to him came to be rectified for two reasons. One of them was that, after the assessment of the firms concerned, the assessee's share in the profits of those firms came to be definitely ascertained. That showed that the assessee's total income was much more than that determined at the regular assessment. Therefore, it became necessary for him to amend the assessment orders made earlier. The second ground on which he rectified the assessment orders was that, at the time of the regular assessment he committed a mistake in considering the assessee's share in the income of the firms as earned income, whereas the same should have been treated as unearned income. While rectifying the assessments made, he enhanced the tax payable under those orders not only on the ground that the total assessable income was more than that determined under the regular respect of a portion of that income is more because the same is unearned income. Before rectifying the assessment orders the Income-tax Officer purporting to act under sections 154 and 155 called upon the assessee to show cause why the proposed enhancement of tax should not be made. But in the course of his final order, he purported to revise the assessment orders under section 154.
14. In paragraph 6 of its order, the Appellate Tribunal came to the conclusion that on the facts of the case, the Income-tax Officer could not have acted under section 154 and he should be deemed to have acted only under section 155. This is what the Tribunal said in that regard :
'We shall first deal with the objection that section 154 did not apply to the case at all, but section 155 applied. In essence we agree with the assessee's representative that it is section 155 that applies and not section 154. Section 154 deals with rectification of a mistake apparent from the record whereas section 155 deals with a case of a completed assessment of a partner requiring the amendment of the order of assessment. In this case, immediately, the order of assessment made originally in the circumstances mentioned earlier. Therefore, the order should have been passed by the Income-tax Officer only under section 155 of the Act. Even so, we do not think by merely styling the order as under section 154 of the Act, the order could be said not to fall under section 155 of the Act. It is clear from the notice issued by the Income-tax Officer in this connection, which was styled as a notice under section 154/155 of the Act, that the Income-tax Officer intended to pass the order section 155 of the Act. Therefore, so long as the Income-tax Officer had jurisdiction to pass the order under section 155 of the Act, we think the present order may properly be read as one made under section 155 of the Act.'
15. The question of law submitted for our opinion precludes us from considering whether the order of the Income-tax Officer can be said to have been made both under section 154 as well as under section 155. Our opinion is sought on the solitary question that, while action under section 155, the Income-tax Officer could have changed the basis of taxation. In other words, whether he could have treated as earned income by unearned income which he had earlier treated any portion of the income as having recourse to his power under section 155. It may be that the Income-tax Officer erred in treating that portion of the income as earned income. The mistake committed by him may be apparent from the record. But such mistakes cannot be rectified under section 155. That firm or association under circumstances mentioned therein. It has nothing to do with mistakes apparent or otherwise.
16. For the reasons mentioned above, out answer to the question referred to us is that the Income-tax Officer was not justified in treating the income in question as unearned. The assessee is entitled to his costs of this reference. Advocate's fee Rs. 250.