Satish Chandra, C.J.
1. These three references relate to the assessment year 1949-50. In Income-tax Reference No. 597 of 1964, the Tribunal referred two questions to us. In Income-tax Reference No. 336 of 1972, the Tribunal has referred another two questions which were called for by this court. Income-tax Reference No. 159 of 1970 is in respect of imposition of penalty in the sum of Rs. 5,000 for the assessment year 1949-50.
2. A firm styled as M/s. Nanak Chand Agarwal was floated in May, 1945. It did business at Panagarh in the district of Burdwan in Bengal. This firm carried on business for about three years only. Its assessments for the years 1947-48 to 1949-50 were completed by the ITO, Burdwan.He found the partners of the firm were Murarilal and Nanak Chand having a share of 10 annas and six annas, respectively.
3. For the assessment year 1947-48, the ITO, Burdwan, intimated the ITO, Dehra Dun, that Murarilal's ten annas share in that firm came to Rs. 33,217. Murarilal in his assessment accepted this, but claimed that the capital invested by him in the Panagarh firm was taken by him as loans from several parties, to whom he had paid interest. He claimed Rs. 6,549 as interest and Rs. 1,620 for travelling expenses. The ITO allowed this deduction and assessed the balance of Rs. 25,048 as the assessee's share income from Panagarh business in Muralilal's individual assessment. He had an income of Rs. 1,173 from grain dealing business. Thus, his assessment was completed at a total income of Rs. 26,221 by an order dated 25th February, 1952.
4. Murarilal filed an appeal. In the appeal, he submitted that there were four other partners with, him in the Panagarh business, and, therefore, proportionate share of profits only should be assessed in his hands. In support, he referred to entries in his books of account, making allocation of this income amongst the respective alleged partners. He also stated that one of these partners had suffered tax on the amount of his share.
5. The AAC rejected this submission by an order dated 28th August, 1952. He held that in spite of being called upon to do so, the assessee did not produce the partnership deed. No return has been filed on behalf of the firm.
6. For the next assessment year 1948-49, Murarilal claimed that out of the amount of Rs. 47,166 reported by the ITO, Burdwan, to be his ten annas share in Panagarh business, a sum of Rs. 7,931 was deductible for interest paid on loans for capital invested in the Panagarh business, and Rs. 9,217 for general expenses. The ITO disallowed a sum of Rs. 1,000 towards the general expenses, and allowing Rs. 16,148, he assessed Murarilal's share income at Rs. 31,018. Adding Rs. 1,981 as income from grain dealing, he assessed Murarilal at a total income of Rs. 32,999 by an assessment order dated 16th September, 1952.
7. Although this assessment order was passed after the decision of the appeal on 28th August, 1952, Murarilal did not raise the plea that there were four other partners with him in the Panagarh business. Murarilal did not file any appeal against the assessment order for the year 1948-49.
8. For the assessment year 1949-50, the ITO, Burdwan, reported by his letter dated 1st October, 1953, that Murarilal's share income from Panagarh business was Rs. 1,24,696. Murarilal accepted this figure, but claimed Rs. 20,672 as deductible allowance in respect of interest paid on loans and expenses. The ITO disallowed Rs. 1,500 as inadmissible expenses and allowed the rest of the amount claimed. He assessed the share income at Rs. 1,05,524. Adding Rs. 1,494 for other income, his total income was assessed at Rs. 1,07,018 by an order dated 28th November, 1953.
9. Murarilal filed an affidavit dated 9th November, 1953, before the ITO. In this, he stated that seven persons had lent amounts of money to him. The various amounts and the amount of interest paid to each was mentioned. Details of the expenses incurred by him were also stated in this affidavit. In this affidavit, he mentioned that his share of ten annas was shared by five persons. It was also stated that the account books which record the payment of the share of profits to the partners were in the custody of Sri Amar Nath, who is not producing the books.
10. As is apparent from the ITO's order, this affidavit was relied upon to support the plea of payment of interest and the expenses because the original account books were not forthcoming. No plea that Murarilal was not liable to be assessed except on a two annas share was even whispered before the ITO for the assessment year 1949-50. This order also was not subjected to any appeal.
11. It appears that there was some difficulty in realising the income-tax demand from Murarilal. When the recovery was pressed he made certain disclosures from which the ITO believed that in fact a sub-partnership consisting of Murarilal and four other persons as partners existed. This sub-partnership was represented by Murarilal in the Panagarh business. He issued notice under Section 34(1)(a) to all the five partners. By an elaborate order dated 19th March, 1958, he held that the five persons constituted a sub-partnership in the Panagarh business. The firm had filed no returns under Section 22(1). The return filed under Section 22(2) was belated. No accounts were produced. So default under Section 22(4) has also been committed. He assessed the ten annas share in the Panagarh business for the assessment year 1949-50 at Rs. 93,016. No action was taken for the earlier two years, namely, 1947-48 and 1948-49, because it had become barred by time.
12. The assessee-firm went up in appeal, but failed. It met with the same fate before the Tribunal.
13. The ITO initiated penalty proceedings for the assessment year 1949-50. Having found the assessee guilty of concealment, he levied a penalty of Rs. 10,000 for the assessment year 1949-50. The assessee appealed, but failed. On further appeal, the Tribunal upheld the liability to penalty, but reduced the amount to Rs. 5,000.
14. In Income-tax Reference No. 597 of 1964, the Tribunal has, at the instance of the assessee, submitted, for our opinion, the following questions of law :
'1. Whether the objection to jurisdiction of the Income-tax Officer could be raised in appeal before the Appellate Assistant Commissioner ?
2. Whether, on the finding that Murarilal had joined the firm of Nanak Chand Agarwal, Burdwan, in the representative capacity on behalf of the partnership constituted by Murarilal, Amar Nath, Devichand, Shanti Prasad and Gujarmal, the ten annas share of profit in the firm of Nanak Chand Agarwal, Burdwan, was rightly taxed in the hands of the assessee-firm ?'
15. In Income-tax Reference No. 336 of 1912, the following two questions were called for by this court and have been referred :
'1. Whether, upon the facts and in the circumstances of the case, the finding of the Tribunal that the Income-tax Officer had jurisdiction to initiate the proceedings under Section 34(1)(a) of the Indian Income-tax Act, 1922, is right in law ?
2. Whether, on the facts and in the circumstances of the case, the, finding of the Tribunal that there was a partnership consisting of Murarilal, Amarnath, Devichand, Shanti Prasad and Gujarmal which was entitled to the share income of Murarilal to the extent of 10 annas in the firm, Nanak Chand Agarwal, Burdwan, is right in law ?'
16. In Income-tax Reference No. 159 of 1970, which relates to penalty, the Tribunal has referred the following question :
'Whether, on the facts and in the circumstances of the case, the Tribunal was legally right in holding that the penalty could be validly levied upon it under Sections 28(1)(a) and 28(1)(b) of the Indian Income-tax Act, 1922?'
17. The assessee did not raise an objection that the ITO, 'C' Ward, Dehra Dun, had no jurisdiction because, according to the territorial classification, only the ITO, 'B' Ward, could make the assessment. The AAC repelled this submission on the ground that it could not be raised for the first time in appeal. The Tribunal upheld this view. It observed:
'No arguments were addressed by the learned counsel for the assessee on the ground of jurisdiction. '
18. It also expressed the opinion that Section 64 of the Act provides that where any question arises as to the place of assessment, such question shall be determined by the Commissioner. The proviso to Section 64, inter alia, says that if the assessee has not made a return, he shall not call in question the place of assessment after the expiry of the time allowed by the notice under Section 34 for the making of the return. The objection before the AAC was taken after the expiry of the time allowed under Section 34. Further, the objection could be decided by the Commissioner. The AAC was, therefore, justified in repelling the submission.
19. In our opinion, the view expressed by the Tribunal is perfectly correct. The first question has to be decided against the assessee.
20. The next question is whether the finding that there was a partnership consisting of live persons is right in law.
21. In support of the finding, the Tribunal relied upon the statement of Murarilal, who was cross-examined by the other partners. He had made a clean breast of the whole thing. His statement is entitled to belief. He produced the partnership deed of the sub-partnership. It was evident that Murarilal and four others had entered into a partnership to share the proiits of the Panagarh business in which Murarilal represented them all. The ten annas share pertaining to Murarilal was in fact owned by the Jive persons in equal share, i. e., two annas each. It is true that the sub-partnership deed was signed by only two persons, namely, Murarilal and Amar Nath. The other three had not signed it. But none the less that the sub-partnership was, in fact, in existence is evident from the conduct of the various partners as well as from documentary evidence referred to by the Tribunal. On the basis of the material, the Tribunal held that the revenue authorities were justified in holding that there was in existence a sub-partnership, consisting of Murarilal, Amar Nath, Devichand, Shanti Prasad and Gujarmal, which partnership owned the share of ten annas held in the name of Murarilal in the Panagarh firm. The duration of this sub-partnership was co-extensive with that of the main firm.
22. We have heard learned counsel, but we are not satisfied that the finding is vitiated by any error of law. It was, in our opinion, right in law. This question has, therefore, to be answered against the assessee.
23. The next question is whether, on the aforeasid finding, the ten annas share income could rightly be taxed in the hands of the assessee-firm, and whether the ITO had jurisdiction to initiate proceedings under Section 34(l)(a)?
24. On this aspect of the case, learned counsel for the assessee stressed that Murarilal had in the very beginning informed the ITO that the ten annas income was shared by five persons, of which he was one. But this plea was rejected. Subsequently, the ITO changed his opinion and proceeded on the basis that a sub-partnership existed. It was also submitted that the ITO having assessed the entire ten annas income in the hands of Murarilal as an individual, he could not, in law, assess the same in the hands of the unregistered firm.
25. For the three assessment years, Murarilal took up the plea that he had taken loans from several persons, and he utilised these loans for investing the capital in the Panagarh business. He claimed deduction of the interest paid by him on these loans. Before the ITO he never claimed that the persons from whom he had taken loans were really partners in the business and that the sub-partnership owned the ten annas share in the Panagarh business. For the assessment year 1947-48, the ITO observed:
'The assessee has a 0-10-0 share in the registered firm styled as M/s. Nanak Chand Agarwal, Panagarh. The capital invested in the Panagarh firm by the assessee was from a number of loans taken by the assessee, regarding which full explanation has been obtained and placed on file. In the account of L. Gujarmal Gupta of Mogha there are credits amounting to Rs. 15,000 which shall be reported to the Income-tax Officer, Ferozepur, for consideration in the present assessment of Sri Gujarmal Gupta, All the deposits in various names have been explained. The assessee's share from the registered firm, M/s. Nanak Chand Agarwal, Panagarh, as reported by the Income-tax Officer, Burdwan, amounts to Rs. 33,217, which shall be taxed in the assessee's hands.
The assessee has claimed Rs. 6,549 as interest paid on loans for Panagarh contract and Rs. 1,620 for expenses of travelling ; the total claim of the assessee thus is Rs. 8,169 which is in order and is allowed against the share income of Rs. 33,217. Deducting this, assessee's income from Panagarh contract remains at Rs, 25,048.'
26. In appeal relating to 1947-48, Murarilal for the first time raised the plea that there were four other persons with him in this business, and only his two annas share should be assessed in his hands and not the entire amount. The AAC repelled this submission by holding :
'In aid of this contention he has referred me to entries in his books making allocation of this income amongst the respective alleged partners. He has also stated that one of these shareholders has suffered tax on the amount of his share.
I do not think all this would establish the factum of partnership. The assessee was alone shown as partner in Panagarh business. I called upon the appellant to produce any partnership deed evidencing the evolution of partnership consisting of himself along with four others. No such deed was made available. The proper course for the appellant was to file a separate return of this business if it was owned by a firm as stated by him and seek registration with a view to suffer tax on the proportionate share of respective partners. This he failed to do. The contention is, accordingly, overruled.'
27. The partnership deed which, in fact, was in existence was not produced. No return of income was filed in the name of the partnership firm. No application for registration was made. All these documents were suppressed.
28. Long before the assessment order of Murarilal for 1947-48, which was passed on 25th February, 1952, Amar Nath, one of the partners, addressed a letter dated 18th August, 1951. He enclosed three forms of application for registration under Section 26A in respect of the sub-partnership, and he asked the other partners to sign all the three forms and send them to Devi Chand. But yet no attempt was made by Murarilal to even take the plea before the ITO that there was in existence a sub-partnership, much less to file a return on its behalf or an application for its registration.
29. For the assessment year 1948-49, Murarilal similarly claimed payment of interest on loan accounts, which were allowed. For the assessment year 1949-50, he made a similar claim and the same was allowed. Before the ITO, he filed an affidavit that interest was paid on sums invested in the Panagarh contract. The ITO observed that full details of the persons to whom interest was paid had been furnished. In the circumstances the amount claimed as interest was allowed. There was not even a whisper either for the year 1948-49, or for the year 1949-50, that there was a sub-partnership. Murarilal allowed his individual assessment to be completed after including the ten annas share income.
30. Subsequently, when the recovery was pressed, Murarilal squealed. He produced accounts of the sub-partnership as well as the instrument of sub-partnership. Then the ITO came to know the real facts. It was held that five persons constituted the sub-partnership. They together owned the ten annas share in the Panagarh firm. On this finding, it was apparent that the ten annas share income was assessed in wrong hands, and it was liable to be assessed in the hands of the sub-partnership firm. The Tribunal has observed that since this income had wrongly been included in the assessment of another assessee (namely, Murarilal, individual), it would be open to the latter to take proper steps to get it excluded from his assessment. They further observed that they had no doubt that the department would not try to realise tax from two different assessees in respect of the same income.
31. It has to be kept in mind that the reassessment proceedings were undertaken by the ITO for the assessment year 1949-50 only. The plea that there was a sub-partnership was faintly taken by Murarilal in the appeal for the assessment year 1947-48. Even, thereafter, he did not raise any such objection in the subsequent years, including 1949-50, So far as the assessment year 1949-50 is concerned, there was not even a breath of whisper by any one including Murarilal that there was any one else sharing the ten annas income from the Panagarh business along with Murarilal as a partner. It cannot hence be said that the existence of the sub-partnership was brought to the notice of the ITO or that the ITO had knowledge of it for the year 1949-50. In this case, there was a complete suppression of this fact. There was hence no occasion for the ITO to change his opinion. The settled principle of law that action under Section 34(l)(a) cannot be taken on change of opinion when the primary facts were within the knowledge of the ITO, hence, has no application. The authorities relied on by Mr. Raja Ram Agarwal for the assessee are hence not worth discussing ; (a) CIT v. Murlidhar Jhawar and Puma Ginning and Pressing Factory : 60ITR95(SC) , (b) CJT v. Hemchandra Km : 77ITR1(SC) , (c) no v. Nawab Mir Barkat Ali Khan Bahadur : 97ITR239(SC) , (d) ITO v. Lakhmani Mewal Das : 103ITR437(SC) . The case which is applicable on the facts is ITO v. Bachu Lal Kapoor : 60ITR74(SC) . In that case, the fact of the existence of the joint family was kept back from the knowledge of the ITO. The Supreme Court held that it would be a clear case of family income escaping assessment, and in such a case it could not be said that the ITO had elected to assess the members with the knowledge that the joint family existed. The same is the situation here. The ITO had no knowledge of the existence of the sub-partnership. He, hence, could not and did not, in fact, make any election to assess the individual partners and not the partners collectively as an unregistered firm. The question of exercising an option to assess either the partners collectively or individually arises only when the ITO has knowledge of the existence of the sub-partnership. The principle that the revenue cannot assess the same income twice, once in the hands of the individual partners, and again in the hands of them collectively as an unregistered firm, hence, has no application.
32. The remaining two questions on the quantum side are, therefore, decided against the assessee.
33. In respect of the levy of penalty, the position is that on 21st December, 1946, the ITO, Dehra Dun, made the following report to the Commissioner, requesting him to accord sanction to issue notice under Section 34 :
'Shri Amar Nath Gupta and other four partners derived income from share in M/s. Nanak Chand Agarwal, Panagrah, and constituted a sub-partnership. This sub-partnership did not file a return under Section 22( 1) although the income was much above the taxable limit. The income of this partnership for the previous year relevant for the assessment year 1949-50 is estimated to be more than Rs. 1,00,000. This income has escaped assessment in the hands of the firm. Action under Section 34 is necessary to assess the same. Sanction to issue notice under Section 34 may kindly be accorded.'
34. The Commissioner issued sanction, Thereafter, on 9th January, 1957, the ITO issued a notice under Section 34(1)(a) to the various partners stating that he had reason to believe that income assessable to income-tax for the year ending 31st March, 1950, had escaped assessment.
35. In spite of service of the notice, the firm did not file any return or produce its account books, though they were regularly maintained.
36. It was argued that the ITO had no material in his possession to believe that a sub-partnership existed.
37. Murarilal has confessed and had produced the partnership deed. The statement of Murarilal, coupled with the partnership deed, was material relevant to the formation of the belief that a sub-partnership existed.
38. In the result, all the questions referred to us in the three references are answered in favour of the department and against the assessee.
39. The department will be entitled to costs, which are assessed at Rs. 200 in each case.