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Commissioner of Income-tax Vs. Kapoorchand Shrimal - Court Judgment

LegalCrystal Citation
Overruled ByKapurchand Shrimal Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 5 of 1971
Judge
Reported in[1974]95ITR20(AP)
ActsIndian Income Tax Act, 1922 - Sections 25A and 25A(2)
AppellantCommissioner of Income-tax
RespondentKapoorchand Shrimal
Advocates:P. Rama Rao, Advs.
Excerpt:
(i) direct taxation - partition of joint hindu family (jhf) - sections 25a and 25a (2) of indian income tax act, 1922 - whether assessments made by income-tax officer (ito) on jhf without passing order under section 25a valid - department contended such assessments valid but assessee contended assessments invalid - error in making assessments - such error can be rectified by commissioner of income-tax or appellate authority not by collateral proceeding - no time limit prescribed to pass order under section 25a (1) - held, assessments valid but require modification - tribunal to direct ito to modify assessments in light of section 25a (2). (ii) deduction - whether bad debt of rs. 42,009 trading loss deductible in assessment year 1958-59 - money advanced to debtor - money advanced in course.....sriramulu, j. 1. at the instance of the commissioner of income-tax, andhra pradesh, hyderabad, the following two questions of law have been referred to this court for our decision, under section 66(1) of the indian income-tax act of 1922, by the hyderabad bench of the income-tax appellate tribunal;' (1) whether, on the facts and in the circumstances of the case, the assessments made by the income-tax officer on the hindu undivided family of sri kapoorchand shrimal, for the years under reference, without passing an order under section 25a, were valid in law (2) whether, on the facts and in the circumstances of the case, the sum of rs. 42,009 was a trading loss deductible in the assessment for the year 1958-59?' 2. the material facts, so far as they are relevant for answering the above.....
Judgment:
Sriramulu, J.

1. At the instance of the Commissioner of Income-tax, Andhra Pradesh, Hyderabad, the following two questions of law have been referred to this court for our decision, under Section 66(1) of the Indian Income-tax Act of 1922, by the Hyderabad Bench of the Income-tax Appellate Tribunal;

' (1) Whether, on the facts and in the circumstances of the case, the assessments made by the Income-tax Officer on the Hindu undivided family of Sri Kapoorchand Shrimal, for the years under reference, without passing an order under Section 25A, were valid in law

(2) Whether, on the facts and in the circumstances of the case, the sum of Rs. 42,009 was a trading loss deductible in the assessment for the year 1958-59?'

2. The material facts, so far as they are relevant for answering the above questions, may briefly be stated. The assessment years concerned are 1955-56, 1957-58 to 1961-62, the relevant accounting years being the years ending Deepavali except for the cloth business. The assessee is a Hindu undivided family named 'Kapoorchand Shrimal'. In the course of the assessments for these years, by its letters dated October 10, 1960, January 16, 1961, and March 11, 1962, the assessee brought to the notice of the Income-tax Officer, that all the movable and immovable properties of the Hindu undivided family were partitioned by metes and bounds on July 10, 1960, and the Hindu undivided family had become disrupted and extinct and requested him to pass an order recording complete partition under Section 25A of the Indian Income-tax Act, 1922 (hereinafter called 'the Act'). In his letter dated March 17, 1962, the Income-tax Officer acknowledged receipt of the assessee's letter dated March 11, 1962, on March 12, 1962, and intimated the assessee that the matter was receiving his attention and that it would be disposed of in accordance with law. In their letter dated March 21, 1962, the assessee's chartered accountants, M/s. S.G. Dastagir & Company, invited the attention of the Income-tax Officer to the earlier letters and raised a contention that an order under Section 25A has to be passed before the completion of the assessment for the year 1957-58, and that the assessment made without first disposing of the assessee's application under Section 25A would be invalid in law.

3. For diverse reasons, the Income-tax Officer did not dispose of the said application made by the assessee under Section 25A before he could complete the assessments for those years. The Income-tax Officer completed the assessments for the aforesaid assessment years between August 31, 1962, and March 26, 1966.

4. The Income-tax Officer, thereafter, started an enquiry under Section 25A of the Act and, ultimately, by his order dated March 30, 1965, refused to record the partition under Section 25A of the Act. Aggrieved by the order of the Income-tax Officer refusing to record the partition under Section 25A of the Act, the assessee preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, by his order dated November 8, 1967, allowed the appeal and directed the Income-tax Officer to record the partition under Section 25A of the Act as on July 10, 1960. The order of the Appellate Assistant Commissioner accepting the partition of the assessee's family on July 10, 1960, has become final, since the department did not challenge the correctness of that order before the Income-tax Appellate Tribunal.

5. Aggrieved by the assessments so made by the Income-tax Officer, the assessee preferred first appeals to the Appellate Assistant Commissioner. The assessee, inter alia, challenged the validity of those assessments on the ground that it was incumbent upon the Income-tax Officer to pass an order on the assessee's application under Section 25A of the Act, before he completed the assessments and not having done so in this case, all the assessments for the assessment years under reference were invalid in law. The Appellate Assistant Commissioner rejected that contention and held that all the assessments were quite valid in law.

6. In disposing of the appeals against the assessment for the assessment year 1955-56, the Appellate Assistant Commissioner rejected the assessee's aforesaid contention on two grounds : (i) the original assessment for the year 1955-56, made on September 30, 1959, was cancelled by the Appellate Assistant Commissioner in appeal on March 24, 1962, and, therefore, the assessee's letters dated October 10, 1960, January 16, 1961, or March 11, 1962, which dates fell during the period when the assessments stood cancelled, could not be said to be a claim for partition made at the time of making an assessment under Section 23 of the Act for that year; and (ii) the assessments did not become invalid or illegal by reason of the omission of the Income-tax Officer to make an order under Section 25A(1) of the Act for the reasons stated by him in the assessment order for the year 1957-58.

7. Against the orders of the Appellate Assistant Commissioner rejecting its contention relating to the validity of the assessments, the assessee preferred second appeals before the Income-tax Appellate Tribunal. In those appeals, the assessee, inter alia, raised an objection that the assessments were invalid in law because the Income-tax Officer had not passed an order on its applications under Section 25A of the Act before he completed those assessments. The Tribunal held that the assessee's letters dated October 10, 1960, and January 16, 1961, contained a valid claim for recording partition of the joint family and that the claim covered all the assessment years in regard to which the assessments were pending. The difficulties expressed by the Income-tax Officer for not passing an order under Section 25A(1) of the Act before he completed, the assessments were more imaginary than real and, in any case, he could not refuse to recognise and follow an express and imperative provision of law on the ground of practical difficulties. Relying upon the decisions of the Supreme Court in Additional Income-tax Officer v. A. Thimmayya, : [1965]55ITR666(SC) and Kalwa Devadattam v. Union of India, : [1963]49ITR165(SC) , the Tribunal held that, if a claim was made at the time of making an assessment of a Hindu undivided family that it had been partitioned, the Income-tax Officer was bound to make an enquiry and that an assessment completed without such an enquiry was invalid in law. The Tribunal, accordingly, accepted the contention of the assessee and held that the assessments for all the assessment years under reference were void.

8. In the assessment year 1958-59, the assessee claimed deduction of a bad debt of Rs. 42,009 in the account of Lalgirji Vinodgirji. The said sum of Rs. 42,009 was due and outstanding to the assessee in the account of Lalgirji. For the recovery thereof, the assessee filed a suit against Lalgirji. Lalgirji denied the claim of the assessee and made a counter-claim for Rs. 1,50,000 against the assessee based on business dealings between him and the assessee. The suit was, ultimately, mutually settled by the parties. Under the settlement, each party withdrew its claim against the other. The assessee, therefore, claimed that the debt of Rs. 42,009 due from Lalgirji became bad and irrecoverable in the relevant accounting year and that it should be deducted as a bad debt in the computation of its business income.

(1) The Income-tax Officer rejected the assessee's claim. On appeal, the Appellate Assistant Commissioner allowed the assessee's claim, and the department's appeal against the Appellate Assistant Commissioner's order was dismissed by the Income-tax Appellate Tribunal. Before the Income-tax Appellate Tribunal, the assessee claimed deduction of the said amount either as a bad debt or as a trading loss or as a deduction under Section 10(1) of the Act. The Income-tax Appellate Tribunal held that the settlement of the suit effected by the assessee was wholly and exclusively for the purpose of its business and the loss suffered by it was, therefore, a trading loss. The Tribunal, accordingly, held that the Appellate Assistant Commissioner had rightly allowed the said sum as a deduction in the computation of the business income of the assessee for the year 1958-59. On the above facts, the Income-tax Appellate Tribunal, at the instance of the Commissioner of Income-tax, Andhra Pradesh, Hyderabad, referred the aforesaid two questions of law to this court for its decision under Section 66(1) of the Indian Income-tax Act, 1922.

9. The first question that falls for our decision in this reference is whether an assessment made without first disposing of the assessee's claim for complete partition under Section 25A of the Act is valid in law. The department contends that such an assessment is valid, but the assessee contends that such an assessment is invalid.

10. For a proper appreciation of the above contention, it is necessary to read the relevant portion of Section 25A of the Act. It reads :

' 25A. Assessment after partition of a Hindu undivided family.--(1) Where, at the time of making an assessment under Section 23, it is claimed by or on beh'alf of any member of a Hindu family hitherto assessed as undivided that a partition has taken place among the members of such family, the Income-tax Officer shall make such enquiry thereinto as he may think fit, and, if he is satisfied that the joint family property has been partitioned among the various members or groups of members in definite portions, he shall record an order to that effect:

Provided that no such order shall be recorded until notices of the enquiry have been served on all the members of the family. (2) Where such an order has been passed.....the Income-tax Officer shall make an assessment of the total income received by or on behalf of the joint family as such, as if no partition had taken place, and each member or group of members shall, in addition to any income-tax for which he or it may be separately liable and notwithstanding anything contained in Sub-section (1) of Section 14, be liable for a share of the tax on the income so assessed according to the portion of the joint family property allotted to him or it; and the Income-tax Officer shall make assessments accordingly on the various members and groups of members in accordance with the provisions of Section 23 :

Provided that all the members and groups of members, whose joint family property has been partitioned, shall be liable jointly and severally for the tax assessed on the total income received by or on behalf of the joint family as such. (3) Where such an order has not been passed in respect of a Hindu family hitherto assessed as undivided, such family shall be deemed, for the purposes of this Act, to continue to be a Hindu undivided family. '

11. The learned standing counsel for the income-tax department contended that no time limit' has been fixed for the disposal of Section 25A application. Although the Income-tax Officer passed an order under Section 25A after the completion of some of the assessments, still it was an order rejecting the claim of partition. Therefore, on the dates on which the assessments were made, no order recognising the partition had been passed by the Income-tax Officer. Hence, the assessee, Hindu undivided family, must be deemed to continue under Section 25A(3) of the Act. The assessments made were, therefore, valid in law. Even assuming that the Income-tax Officer was in error in not passing an order under Section 25A before the completion of the assessments, still it is a mere irregularity of procedure and no injustice had resulted therefrom to the assessee. Therefore, the assessments made cannot he considered as void or invalid. In the view it had taken that the order under Section 25A should be passed before completing the assessments, the Tribunal should have directed the Income-tax Officer to make the assessments afresh according to law for all the assessment years and should not have cancelled those assessments as void.

12. As against those arguments, the learned counsel, Sri Y.V. Anjaneyulu, for the assessee, contended, that Section 25A of the Act is a mandatory provision of law. In making the assessments, the Income-tax Officer could not have ignored such a mandatory provision of law. Although the Income-tax Officer rejected the claim of partition, the Appellate Assistant Commissioner, in appeal, by his order dated November 8, 1967, accepted the claim of partition with effect from July 10, 1960. Since the Appellate Assistant Commissioner had accepted the claim of partition with effect from July 10, 1960, the crucial date was July 10, 1960, and not November 8, 1967, when the Appellate Assistant Commissioner passed the order. On July 10, 1960, the assessee, Hindu undivided family, became disrupted and was, thereafter, not in existence at all. All the assessments that have been made by the Income-tax Officer were subsequent to July 10, 1960, on the Hindu undivided family which was non-existent. Therefore, the assessments on a non-existing entity were invalid. In these circumstances, the Tribunal was right in not directing the Income-tax Officer to make fresh assessments according to law.

13. The assessment years concerned are 1955-56 and 1957-58 to 1961-62. The Income-tax Officer issued notice to the assessee under Section 18A(1) of the Act, calling upon it to pay advance tax for the assessment year 1960-61. In that connection the assessee in its letter dated October 10, 1960, brought to the notice of the Income-tax Officer that the Hindu undivided family had partitioned all the joint family properties amongst its members in definite portions. The assessee repeated its claim of partition in its further letters to the Income-tax Officer, dated January 16, 1961, and March 11, 1962, and requested the Income-tax Officer to pass an order under Section 25A of the Act. The Income-tax Appellate Tribunal found that the assessee had made a valid claim of partition through those letters.

14. For diverse reasons, the Income-tax Officer could not make an enquiry into the claim till he completed the assessments for all the assessment years. The assessments for the years under reference were completed between August 31, 1962, and March 26, 1966.

15. Subsequent to the making of those assessments, the Income-tax Officer, after notice to the assessee, enquired into the assessee's claim of partition. Not being satisfied with the assessee's claim that the joint family properties had been divided by metes and bounds, the Income-tax Officer rejected the assessee's claim by his order dated March 30, 1965. On appeal, the Appellate Assistant Commissioner, by his order dated November 8, 1967, accepted the assessee's claim of partition and directed the Income-tax Officer to record an order under Section 25A of the Act recognising the partition with effect from July 10, 1960.

16. In Commissioner of Income-tax v. Tatavarthy Narayanamurthy, : [1972]83ITR58(AP) a Full Bench of this court held that the material point of time is the date with effect from which the partition of the joint family has been accepted by the income-tax authorities, and the word ' where ' occurring in subsection (3) of Section 25A could only mean ' cases in which '. In view of the Full Bench decision, it is obvious that, although the partition of the Hindu undivided family had been recognised by the Appellate Assistant Commissioner by his order dated November 8, 1967, the effective date of partition is July 10, 1960, with effect from which the Appellate Assistant Commissioner had accepted the partition of the Hindu undivided family under Sub-section (3) of Section 25A in cases in which an order under Section 25A(1), recognising a partition, has not been passed, the Hindu undivided family will be deemed to continue for the purposes of the Act.

17. Under the Act as it originally stood, a Hindu undivided family was regarded by Section 3 as a unit of assessment, but no machinery was set up for levying tax or for enforcing liability to tax on the members of the family, if before the order of assessment the family was divided. Absence of this machinery was more acutely felt because of Section 14(1), which provided that tax shall not be payable by an assessee in respect of any sum which he received as a member of a Hindu undivided family. Income received by a Hindu undivided family could not, therefore, be assessed and collected from the members of the family, if at the time of making the assessment the family was divided. To rectify what was obviously a lacuna, the legislature incorporated Section 25A for assessment and enforcement of liability to tax income received by a Hindu undivided family which was no longer in existence at the date of assessment.

18. Thus, it is clear that Section 25A of the Act is only a machinery or a procedural section, and not a charging section. The scheme of Section 25A has been explained by the Supreme Court in Additional Income-tax Officer, Cuddapah v. A. Thimmayya thus :

'...... a Hindu undivided family hitherto assessed in respect of its income will continue to be assessed in that status notwithstanding partition of the property among its members. If a claim is raised at the time of making an assessment that a partition has been effected, the Income-tax Officer must make an inquiry after notice to all the members of the family and make an order that the family property has been partitioned in definite portions, if he is satisfied in that behalf. The Income-tax Officer is by law required still to make the assessment of the income of the Hindu undivided family, as if no partition had taken place and then to apportion the total tax liability and to add to the separate income of the members or groups of members the tax proportionate to the portion of the joint family property allotted to such members or groups of members and to make under Section 23 assessment on the members accordingly. If no claim for recording partition is made, or if a claim is made and it is disallowed or the claim is not considered by the Income-tax Officer, the assessment of the Hindu undivided family which has hitherto been assessed as undivided will continue to be made as if the Hindu undivided family has received the income and is liable to be assessed. '

19. As to what is the effect of the Income-tax Officer's failure to make an order on an assessee's claim under Section 25A of the Act, Shah J. (as he then was) observed thus :

' Failure to make an order on the claim made does not affect the jurisdiction of the Income-tax Officer to make an assessment of the Hindu family which had hitherto been assessed as undivided. The Income-tax Officer may assess the income of the Hindu family hitherto assessed as undivided notwithstanding partition, if no claim in that behalf has been made to him or if he is not satisfied about the truth of the claim that the joint family property has been partitioned in definite portions, or if on account of some error or inadvertence he fails to dispose of the claim. In all these cases his jurisdiction to assess the income of the family hitherto assessed as undivided remains unaffected, for the procedure for making assessment of tax is statutory. '

20. Since the Income-tax Officer's failure to pass an order under Section 25A on an assessee's application does not affect the jurisdiction of the Income-tax Officer to make the assessment, any error or irregularity in the assessment may be rectified in the manner provided by the statute alone, and the assessment is not liable to be challenged collaterally, or by way of a suit.

21. In other words, it means that an Income-tax Officer who is bound to enquire into an assessee's claim of partition under Section 25A, when made by an assessee, if for any reason fails to do so, it is only an irregularity or an error which does not affect the jurisdiction of the Income-tax Officer to make the assessment and, therefore, such an error can be rectified in accordance with the procedure laid down by the Act, i.e., by any officer superior to the Income-tax Officer, viz., the Commissioner of Income-tax, or by the appellate authorities, i.e., the Appellate Assistant Commissioner or the Tribunal.

22. In Kalwa Devadattam v. Union of India in the matter of the claim of an assessee under Section 25A of the Act, the Supreme Court observed that:

' The method of assessment and the procedure to be followed in that behalf were statutory, and any error or irregularity in the assessment could be rectified only in the manner provided by the statute, for Section 67 of the Indian Income-tax Act barred a suit in any civil court to set aside or modify any assessment made under the Act.'

23. In Madhava Prasad v. Commissioner of Income-tax, : [1970]75ITR599(All) , the Allahabad High Court held that:

' Though the Income-tax Officer passed the order of assessment on a Hindu undivided family before the Appellate Assistant Commissioner passed an order recognising the partition of the family, when the matter reaches the Appellate Tribunal after several years, the Tribunal can give appropriate directions as contemplated by Sub-section (2) of Section 25A of the Indian Income-tax Act, 1922. However, even if the procedure laid down in the sub-section is followed, the assessment on the footing that the family was joint cannot be avoided. '

24. Section 25A is attracted only when and at the time of making the assessment a Hindu family hitherto assessed as undivided, or any member of it, claims that a partition has taken place among the members of such family in definite portions. The expression 'at the time of making the assessment ' means ' in the course of the process of assessment '. (See Rajmal Paharchand v. Commissioner of Income-tax, [1950] 18 I.T.R. 1 (E. Punj.).)

25. In Esthuri Aswathiah v. Commissioner of Income-tax, [1966] 62 I.T.R. 816, 820 (Mys.), the Mysore High Court held that :

' Section 25A which says that 'where at the time of making an assessment under Section 23' does not say that the assessment should relate to the year during which the partition was made. So long as the Income-tax Officer is making an assessment under Section 23, whatever might be the period to which that assessment relates, the assessee can seek a finding from him that there has been a partition, whether or not the partition has any impact or relevance to the assessment which is being made. It is surely not necessary for the assessee to wait until the assessment is made with respect to the year during which the partition was made before he could seek an order under Section 25A. '

26. From the aforesaid discussion, and on a careful perusal of the facts mentioned by the Tribunal in the statement of the case submitted by it, it is evident that, in the course of the process of assessments, the assessee-Hindu undivided family, which was hitherto assessed as undivided, made a claim of partition of the joint family properties amongst its members in definite portions. Although the claim was made on October 10, 1960, i.e., in the accounting year relevant to the assessment year 1961-62, it did not mean that it related only to that assessment year and not to other years, the assessments of which years were pending. The Income-tax Officer was bound to enquire into the claim made by the assessee under Section 25A of the Act, after notice to all the members of the family. The order under Section 25A has not been made by the Income-tax Officer before the assessments for the assessment years under reference were made, for whatever reason that may be. Though the Income-tax Officer rejected the assessee's claim of partition, still the Appellate Assistant Commissioner, in appeal, accepted the assessee's claim with effect from July 10, 1960. The order under Section 25A should, therefore, be considered to have been made on July 10, 1960, and not on the date on which the Appellate Assistant Commissioner passed the order, i.e., November 8, 1967.

27. Since the order recognising partition was made while the assessments were pending, and the assessments were completed after the date of partition of the Hindu undivided family by metes and bounds, the Income-tax Officer was bound to follow the procedure laid down under Section 25A(2) of the Act, that is to say, that the Income-tax Officer should have still made the assessments on the total income received by or on behalf of the joint family, as if no partition had taken place, and then to apportion the total tax liability, and to add to the separate income of the members or the groups of members, the tax proportionate to the portion of the joint family property allotted to such members or groups of members and to make, under Section 23, assessments on the members accordingly.

28. For all the assessment years under reference the assessments have been made on the Hindu undivided family as if no partition had taken place. The Income-tax Officer, however, did not apportion the income-tax assessed on the total income received by the Hindu undivided family and assess each member in accordance with the provisions of Section 25A(2) of the Act, by adding to the income, for which such member may be separately liable, tax proportionate to the portion of the undivided family property allotted to him. This was, because, on the dates on which he made the assessments, he had rejected the assessee's claim of partition and refused to record an order under Section 25A. But the Appellate Assistant Commissioner, subsequently, held otherwise and directed the Income-tax Officer to record partition. Hence the manner in which the assessments made by the Income-tax Officer although justified on the dates on which he made those assessments and in the view he had taken, yet those assessments ceased to be in accordance with the provisions of Section 25A(2), by reason of the Subsequent event of the order of the Appellate Assistant Commissioner recording partition.

29. Section 25A(2) is only a procedural or machinery section, but not a charging section, and if the error has not resulted in any injustice to the Hindu undivided family it can be corrected either by the Commissioner of Income-tax or by the appellate authorities, i.e., the Appellate Assistant Commissioner or the Income-tax Appellate Tribunal.

30. Since the error in making the assessments in contravention of a machinery section does not affect or relate to the jurisdiction of the Income-tax Officer to make the assessment, the assessments made in that manner cannot be said to be void. Such an error or irregularity, in our considered opinion, can be rectified by the Commissioner of Income-tax or the appellate authorities, but not by a collateral proceeding or a suit in a civil court.

31. What exactly is the meaning of Section 25A(2) of the Act, and as to which is the manner in which assessments on members have to be made in case an order recognising partition has been recorded by the Income-tax Officer under Section 25A(i), are clearly expressed by the Full Bench of the Allahabad High Court in Kailash Nath Bhargava v. Commissioner of Income-tax, [1962] 46 I.T.R. 928 (All.). The majority of the judges observed that :

' The word 'assessment' in the last portion of Section 25A(2) is not used in the sense of fresh proceeding initiated under Section 23. The computation of income may very well be made in a proceeding against another person and the liability determined and be properly described as an 'assessment' under Section 23. It is not, therefore, necessary that before a notice under Section 29 is issued there should be a fresh assessment proceeding against the person from whom tax is sought to be deducted.'

32. The meaning of the word ' assessment ' has been clearly explained by the Privy Council as early as in 1938 in Commissioner of Income-tax v. Khemchand Ramdas, [1938] 6 I.T.R. 414 (P.C.), thus ;

' The word 'assessment' is used in Income-tax Acts, as meaning sometimes the computation of income, sometimes the determination of the amount of tax payable, and sometimes the procedure laid down in the Act for imposing liability upon the taxpayer. '

33. In the light of the above two decisions, it is obvious that when an Income-tax Officer records a partition under Section 25A(1) of the Act, he is not required to make assessments on the members by adopting the whole procedure laid down under Section 23 of the Act. What he has to do is to make the assessment in two stages. First, the Income-tax Officer has to compute the total income of the Hindu undivided family as if no partition had taken place, determine the tax, apportion the tax between the members of the family in accordance with the portions of the joint family properties received by them, and to add such tax liability to the tax payable by those members on the separate incomes earned by them.

34. Since the Income-tax Officer is not required to adopt the entire procedure of making the assessment, which is laid down under Section 23 of the Act, he has only to modify the assessments made in this case, in the manner stated by the Supreme Court in Additional Income-tax Officer v. A. Thimmayya.

35. Section 25A(l) does not itself lay down any time limit for passing an order under Section 25A of the Act. In whatever year such a claim of partition has been made by the assessee, still all the assessments made subsequent to the order of the Income-tax Officer, recognising the partition under Section 25A have to be completed in accordance with Section 25A(2) of the Act. Such claim of partition should, therefore, be considered as relevant not only to the assessment year, in the relevant accounting year of which such a claim is made, but also to all the assessment years, the assessments of which are pending completion.

36. Since the Income-tax Officer has omitted to make an enquiry into the claim and pass an order under Section 25A(1) before completing the assessments, it was only an error or an irregularity of procedure, and it did not touch the jurisdiction of the Income-tax Officer to make the assessments. We are unable to agree with the learned counsel for the assessee or the Tribunal that the assessments made by the Income-tax Officer in this case for all the assessment years under reference are void. Nor can they be said to be invalid. We find support for our view in the decision of the Supreme Court in Lakshminarain Bhadani v. Commissioner of income-tax, : [1951]20ITR594(SC) . In that case, the Hindu undivided family, of which the appellant 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 joint family had become divided and necessary steps had been taken by the members to have an order passed under Section 25A(1) of the Income-tax 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 of the Income-tax Act, to make a return in respect of the escaped income. The appellant sent a return in response to that notice. Thereafter, the Income-tax Officer made an assessment on the escaped income of Rs. 37,098 and issued a notice of demand on the appellant as the karta and on the other two members of the joint family. The notice required the full payment of the amount of tax due on the escaped income and did not apportion the liability for it amongst the three members of the family.

37. On those facts, it was contended that the proceedings were irregular and that the appellant was not liable to pay anything. That contention was rejected by the income-tax authorities as well as by the Tribunal and the High Court expressed the view that there were irregularities both in initiating the proceedings and completing the same, but decided against the appellant on the ground that there was no prejudice against him. On appeal, the Supreme Court made the following observations, but, nevertheless, dismissed the appeal; that is to say, the demand was not quashed, Those observations are :

' On a true construction of Section 25A(1), it appears that the Income-tax Officer in the first place has to make an assessment of the total income as if no partition had taken place. That means that he has to find out what the total income was and calculate the amount of tax payable thereon as if it was payable by one unit. Having done that, it is the duty of the Income-tax Officer under the section to apportion the amount payable by the unit amongst the members of the joint family according to the portion of the joint family property allotted to each of them. That duty also appears to be imperative having regard to the concluding words of Section 25A(2). In the present case, the' Income-tax Officer has omitted to make any apportionment. That fact is noticed in the judgment of the High Court and also by the Income-tax Appellate Tribunal. In the judgment of the High Court, it has been stated that this could be put right. In our opinion, it is necessary that the Income-tax Officer should issue the notice of demand against each of the members of the family in accordance with the concluding words of Section 25A(2) and that should be done. '

38. Since the appeals against the assessments were pending before the Tribunal, and, in our view, these assessments were not invalid or void, the Tribunal, in our opinion, should have, without cancelling the assessments, directed the Income-tax Officer to modify the assessments in accordance with Section 25A(2) of the Act. We are, therefore, unable to justify the order of the Tribunal cancelling the assessments.

39. Hence our answer to question No. (1) referred to us by the Tribunal is that the assessments made by the Income-tax Officer, without passing an order under Section 25A, are valid but only require modification. In giving effect to our order, the Tribunal shall direct the Income-tax Officer to modify the assessments in the light of Section 25A(2) of the Act.

40. Then we conic to the second question, referred to us. This question relates to the assessment year 1958-59. In allowing the assessee's claim of bad debt of Rs. 42,009 the Tribunal found as a fact that the moneys were advanced to Lalgirji in the course of its business and that such advance was intimately connected with its business operations. Since the suit filed by the assessee against the debtor had to he compromised in view of the cross-claim made by the debtor, the amount had become either irrecoverable as a loan in the relevant accounting year, or had become a trading loss to the assessee in the relevant accounting year. The Tribunal also found that the assessee had considered the possibilities of recovering the amount, and also the possibility of Lalgirji securing a decree against it and also the interest of the business, and ultimately agreed to forgo its claim. This was done wholly and exclusively for the purposes of its business. Thus, we find that the allowance of the claim of the assessee as trading loss was based upon two facts found by the Tribunal, i.e., (i) that the moneys were advanced in the course of the trade, and (ii) the forgoing of the claim was wholly and exclusively in the interest of its business. These findings are binding on us, since they are based on material on record. In view of these findings, we are unable to say that the Tribunal was not justified in allowing the claim of the assessee. We, therefore, answer the second question referred to us in the affirmative, i.e., the sum of Rs. 42,009 was a trading loss deductible in the assessment for the year 1958-59. In the circumstances of this case, we direct that each party shall bear its costs. Advocate's fee Rs. 250.


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