R. S. PATHAK J. - The assessee is a partnership firm consisting of three partners, Girdhari Lal, Laxman Prasad and Ram Dulari Devi. For the assessment year 1958-59 the Income-tax Officer took separate assessment proceedings against Girdhari Lal and Ram Dulari Devi in their individual status and included therein the share of each from the profits of the assessee-firm. The share was taken in accordance with the return filed by each partner and a remark was added that the amount would be rectified later under section 35 of the Income-tax Act, 1922, when the correct share was determined in the assessment of the assessee-firm. The share was brought to tax in the assessment of each individual partner. Subsequently, the Income-tax Officer took assessment proceedings against the assessee-firm for the assessment year 1958-59 and made an assessment order against it treating it as an unregistered firm. Before the Appellate Assistant Commissioner the assessee-firm contended that, as the Income-tax Officer had already taxed the share income in the hands of two of the partners, it was not open to him to proceed to assess the profits again in the hands off the assessee-firm. The contention did not find favour with the Appellate Assistant Commissioner. In second appeal, the Income-tax Appellate Tribunal took the view that the Income-tax Officer was entitled to tax the profits in the hands of the assessee-firm and thereafter grant relief to the individual partners who had paid the tax on their separate assessments. Accordingly, the Tribunal dismissed the appeal.
At the instance of the assessee, the Tribunal has referred the following question for the opinion of this court :
'Whether it is legal to make an assessment on an unregistered firm, after some of its partners have already been already been assessed to tax on their share income from the firm ?'
Sri R. L. Gulati, appearing for the revenue, has raised an objection to the general terms in which the question has been framed and has urged that the question as framed does not arise out of the appellate order of the Tribunal and this court, treating it as a question of academic importance, should return the reference unanswered. We are unable to accept the contention of the learned counsel. While it is true that the language in which the question is couched tends to the abstract, it must be remembered that the question has been framed by reference to a set of facts found by the Tribunal in appeal and now set out in the statement of the case. If, as is the case here, it is possible to relate the question to those facts and define the scope of the question by reference to them we must do so and not decline to answer the question. The objection is rejected.
Sri P. N. Pachauri, learned counsel for the assessee, urges that in as much as the Income-tax Officer proceeded at the outset to tax the profits falling to the share of the partners in their individual assessments, it must be inferred that he had opted in favour of taxing the profits in the hands of the assessee. Having exercised that option and charged the profits to tax accordingly, Mr. Pachauri argues, it was not open to the Income-tax Officer to tax these profits in the hands of the assessee.
Section 3 of the Act provides :
'Where any Central Act enacts that income-tax shall be charged for any year at any rate or rates tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every individual. Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or the members of the association individually.'
The provision charges to tax the total income of the previous year of an individual and of the groups mentioned therein. An option is given in respect of charging to tax the total income of a firm and of an association of persons. The income of a firm may be charged to tax either in the hands of the firm or in the hands of its individual partners and in the case of an association of persons either in the hands of the association or in the hands of its individual members. A firm and its partners are treated as mutually distinct and different assessable entities. So also are an association of persons and its individual members. The option has been made available only in respect of a firm or an association of persons. It is not available in respect of other groups specified in the provision. There is a chain of decisions laying down that, it the Income-tax Officer opts in favour of charging the profits in the hands of the individual partners of the former members of the association, it is not open to him to tax the profits again in the hands of the firm or the association of persons. This court held in Joti Prasad Agarwal v. Income-tax Officer, B-Ward, Mathura, that, if the option is exercised in favour or assessing the profits in the hands of the individual members of an association of persons, the profits cannot be brought to tax in the hands of the association as such. And the view taken by the Supreme Court in Commissioner of Income-tax v. Raja Reddy Mallaram can be explained only on the hypothesis that the income of an association of persons can be charged to tax either in the hands of the association or in the hands of its individual members. Shah J., who spoke for the court, observed :
'The unit of assessment in respect of the income earned by the association is either the association or each individual member in respect of his share in the income. This is so when the association is existing and after it is dissolved as well.'
The question fell to be considered by the Supreme Court in Commissioner of Income-tax v. Kanpur Coal Syndicate also, and the law was clearly laid down in the following terms :
'The section (s. 3), therefore, does not in terms confer any power on any particular officer to assess one of the persons described therein, but is only a charging section imposing the levy of tax on the total income of an assessable entity described therein. The section expressly treats an association of persons and the individual members of an association as two distinct and different assessable entities. On the terms of the section the tax can be levied on either of the said two entities according to the provisions of the Act.'
The Supreme Court held that section 3 impliedly gave an option to the assessing authority to assess the total income of either an association individually. The Supreme Court was called upon to consider the point again in Commissioner of Income-tax v. Murlidhar Jhawar and Purna Ginning and Pressing Factory, where the question arose in the case of a partnership firm. Upon the material before it the Supreme Court was satisfied that the Income-tax Officer had opted in favour of charging the tax in the hands of the individual partners instead of in the hands of the firm. In this state of the law it appears to us in the instant case that, having proceeded to tax the profits in the hands of the individual partners, the Income-tax Officer was not entitled to tax the profits again in the hands of the assessee.
It is contended for the revenue that no option has been exercised by the Income-tax Officer in the instant case and that the Income-tax Officer clearly intended to make an assessment of the profits in the hands of the assessee. We are referred to the remark in the assessment orders of the individual partners to the effect that the share of profits assessed would be rectified later under section 35 when the correct share was determined in the assessment of the firm. We are unable to accept the contention. In our opinion, the Income-tax Officer decided to tax the income in the hands of the individual partners according to their respective shares. At the outset he was aware that the three individuals were members of the partnership firm, and that the returns filed by the individual partners set out their share from the profits of the firm. In the assessments of the individual partners the Income-tax Officer brought the share of profits to tax. He expressly stated that the share disclosed in the return of each individual partner was being included in his assessment of the firm he would return to the separate assessments of the individual partners and substitute the share finally determined for the share as returned. The share as returned by the individual partners had been subjected to tax. The share as rectified would now be brought to tax. Emphasis all along was laid upon the separate assessment of the individual partners and it is the income determined in those assessments which was intended to be brought to tax. We are clear in our minds that the Income-tax Officer had decided at the outset to tax the profits of the firm in the hands of the individual partners and not in the hands of the assessee.
We have been referred by the revenue to the decision of the Supreme Court in Income-tax Officer, 'A' Ward, Lucknow v. Bachu Lal Kapoor. In that case, however, when the Income-tax Officer made an assessment originally upon the individual members of the Hindu undivided family had suffered partition and indeed there was an order under section 25A accepting the claim of the family that it had been partitioned. Subsequently, the Income-tax Officer came to know that the family had never suffered partition and that it continued to exist as a separate entity. He initiated proceedings under section 34 of the Act against the Hindu undivided family. The Supreme Court repelled the contention that, as the Income-tax Officer had elected to assess the individuals as separate entities, he had no jurisdiction to assess the same income in the hands of the Hindu undivided family. It observed :
'The exercise of the option to do one or other of the two alternatives open to an officer assumes knowledge on his part of the existence of two alternatives. If the case of the revenue be true, the Income-tax Officer at the time he assessed the individual members of the family had no knowledge that a united joint family existed; he presumably proceeded on the basis that the said family had really ceased to exist under the terms of the compromise decree. This is, therefore, not a case of election between two alternative units of assessment, but an attempt to bring to tax the income of an assessable entity which had escaped assessment.'
In our opinion, the decision in Bachu Lal Kapoors case is wholly distinguishable upon its facts from the case before us.
It is pointed out by the revenue that, if the Income-tax Officer has no jurisdiction to make an assessment of the profits in the hands of the firm after he has assessed those profits in the hands of the individual partners, the provisions of section 35(5) of the Act would be devoid of purpose. We do not find force in this submission. Section 35(5) only enables an Income-tax Officer to rectify a completed assessment of a partner if he finds on the subsequent assessment or reassessment of the firm that the share of the partner in the profits of the firm has not been included in the assessment of the partner or if included is not correct. That is a provision merely for correcting the share of the profit of the partner included in his individual assessment. The provision does not in terms nor by implication envisage a power in the Income-tax Officer to tax the profits in the hands of the individual partners and also in the hands of the firm. The provision relates merely to the assessment of the profits and not to the levy of a charge in respect of them. It is urged that even where the profits are brought to charge in the hands of the individual partners the Income-tax Officer will find it necessary to compute the profits in an assessment of the firm. We are not concerned with that question here. The question before us is whether the Income-tax Officer can charge to tax the profits in the hands of the firm when he has already brought them to charge in the hands of the individual partners. It will be recalled that a submission sought to be based upon section 14(2) of the Act was raised before the Supreme Court in the case of Kanpur Coal Syndicate, the argument being that the Income-tax Officer was bound to charge the profits of the association of persons in the hands of the association and thereafter include the share of the member in his individual assessment. In repelling this contention the Supreme Court observed :
'There is no scope for the argument that under section 3 the assessment shall be only on the association of persons as a unit though after such assessment the share of the income of a member of that association may be added to his other income under section 14(2) of the Act. This construction would make the last words of the section, viz., members of the association individually a surplusage. This argument is also contrary to the express provisions of section 3, which mark out the members of the association individually as a separate entity from the association of persons. Income of every person, whether he is a member of an association or not, is liable to the charge under the head every individual. Section 14(2) (b) only says that if such an individual happens to be a member of an association of persons which has already been assessed, the tax would not be payable in respect of the share of his income again.'
It is next contended that the Income-tax Officer had not exercised any option because there is nothing to show that the returns of all the three partners were before him when he proceeded to take assessment proceedings in respect of them. It may be that the Income-tax Officer should have waited for the returns of all the partners and then decided whether to proceed to charge to tax the profits in the hands of the partners or in the hands of the firm. He proceeded, however, against two of the partners. That he did not wait for the returns of all the partners may reflect upon the wisdom of exercising the option prematurely but cannot detract from the conclusion upon the facts of this case that the option was exercised.
Upon the aforesaid consideration we are of opinion that it was not open to the Income-tax Officer to charge the profits to tax in the hands of the assessee after having charged them to tax in the hands of some of its partners.
We, accordingly, answer the question in the negative, in favour of the assessee and against the revenue. The assessee is entitled to its costs which we assess at Rs. 250. Counsels fee is also assessed at Rs. 250.