Srinivasa Iyengar, J.
1. The Income-tax Appellate Tribunal, Bangalore Bench, has referred the following question for decision by this court:
2. Question in I.T.R.C. No. 2/1975:
'Whether, on the facts and circumstances of the case, the Appellate Tribunal is right in law in holding that the sum of Rs. 65,200 accruing to the assessee by virtue of the deed (of dissolution) dated October 6, 1965, was not includible (as revenue receipt) in the total income of the assessee for the assessment year 1967-68 ?'
3. Question in I.T.R.C. No. 32/1975:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the sum of Rs. 24,482 accruing to the assessee by virtue of the deed (of dissolution) dates October 6, 1965, was not includible (as revenue receipt) in the total income of the assessee for the assessment year 1967-68 ?'
4. The relevant assessment year is 1967-68, the accounting year being the one ended on June 30, 1966. The two cases relate the assessment of two partners of a firm by name Saravathy Construction Company which was constituted by a deed dated December 1, 1962, and consisted of five partners. Two of the partners, namely, M. N. Lakshmana Shetty, assessee in I.T.R.C. No. 2 of 1975 and M. N. Eswara Shetty, assessee in I.T.R.C. No. 32 of 1975, retired from the partnership with effect from July 1, 1965. This dissolution is evidenced by a document drawn up on October 6, 1965.
5. In accordance with the terms of the deed of dissolution, Lakshmana Shetty got a sum of Rs. 2,86,100 and Eswara Shetty, a sum of Rs. 45,064. The ITO was of the opinion that certain amounts which had accrued as profits to the firm had not been shown in the firm's accounts and the amounts distributed to these retiring partner included return of capital and profits, unaccounted profits and also amounts towards goodwill. Therefore, he proceeded to make an assessments including a sum of Rs. 73,276 so far as Lakshmana Shetty was concerned and a sum of Rs. 27,481 so far as Eswara Shetty was concerned. The assesses preferred appeals to the AAC contending that the inclusion of these two amounts was untenable. The AAC, however, did not accept the contention of the assesses, but reduced the amounts to Rs. 65,200 in the case of Lakshmana Shetty and Rs. 24,482 in the case of Eswara Shetty.
6. Feeling aggrieved by this, the assesses preferred appeals to the Tribunal. The Tribunal held that as the ITO had exercised option to assess the firm as such, he had to proceed on the basis of the assessment of the firm and not include amounts which were not included in the profits of the firm, in the individual assessments as attributable to their shares. The Tribunal held that the firm held that the firm had to be assessed and only the shares attributable to the partners had to be brought into their individual assessments thereafter.
7. It is urged by S. R. Rajasekharmurthy, learned counsel for the revenue that on the facts noticed by the assessing authorities, it was clear that certain profits had not been taxed in the hands of the firm and they were suppressed profits of the firm and, therefore, action taken by the income-tax authorities was correct. We are unable to agree with this submission. The ITO had assessed the firm, which was an assessable entity, on the basis of the profits earned by the firm. If there were any profits which had been undisclosed that should have been brought into the assessment of the firm. When the ITO has exercised his option to assess the firm in the first instance, the assessment of the firm would be the basis on which the share of the profits of the firm so far as partners were concerned had to be included in their individual assessments. If there was any income of the firm that had escaped assessment, the proper procedure was to take action for its reassessment and on the basis of the reassessment revise the assessment of the individual partners. This course was not followed by the ITO. The view taken by the Tribunal is correct.
8. We, therefore, answer the questions in both the cases in the affirmative and against the department. Parties, however, shall bear their own costs.