BRIJLAL GUPTA J. - This is a reference under section 66(1) of the Income-tax Act. The question which has been referred for the opinion of the court is :
'Whether it was legal to determine the applicants share income from the firm of Paras Nath Oil Mills in the assessment proceedings relating to the applicant and to add it to the applicants income without raising a separate assessment on the firm of Paras Nath Oil Mills ?'
The assessee is a Hindu Undivided family. It was assessed for the assessment year 1953-54 but without the inclusion in that assessment of it share income from firm known as Paras Nath Oil Mills. In the course of the assessment of the subsequent year the Income-tax Officer came into possession of information that the assessee had started business in partnership under the name and style of Paras Nath Oil Mills in the accounting year relating to the assessment year 1953-54 and had realized a portion of its income from its share of the income of the partnership business. Accordingly, proceedings were taken against the assessee under section 34 of the Income-tax Act and the share income of the assessee from the firm was included in its assessment.
The assessee went up in appeal and on the question of inclusion of its share income from the firm the Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. The assessee then went up in further appeal to the Income-tax Appellate Tribunal, and before the Tribunal and by leave of the Tribunal, a new ground was urged by it. The ground was that, without an assessment having first been made on the firm, the assessees share on income from the firm could not be included in its assessment. No authority was cited by counsel is support of the contention and the Tribunal took the view that, as there was no bar to the adoption of the course which had been adopted by the income-tax authorities for the inclusion of the income from the firm without an assessment against the firm having been made, the inclusion of the income in the assessment of the assessee was not bad. In due course on application by the assessee for reference of the question to this court the Tribunal has stated the case on the question.
Learned counsel for the assessee conceded that there is no express provision in the Act which prohibits assessment of the share of a partner in the income of a firm before an assessment is made against the firm itself. Learned counsel also brought to our notice a decision of the Bombay High Court in J.C. Thakkar v. Commissioner of Income-tax, which, as conceded by learned counsel, was against the contention which he was making in this reference. It was laid down in this case that :
'The assessment of a partner of an unregistered firm on his share income of the profits in the firm is not illegal on the ground that the unregistered firm of which he is a partner has not been first assessed to tax.'
It has been found in this case that the income of the first was less than the minimum assessable income. Accordingly, no assessment could be made against it. It has also been found that the firm was an unregistered firm. In the circumstances there is nothing in this case to distinguish it from the case with which the Bombay High Court had to deal.
Learned counsel has invited our attention to several provisions of the Act, and on the basis of those provisions of the he has urged that it would not have been the intention of the Legislature that the share of a partner in the income of the firm could be included and assessed in his hands prior to the assessment of the firm itself. He referred to the provision in section 3 but it is not understood what support he could derive from it. That section is the charging section under the Act and refers to a firm and the partners of the firms alternative chargeable entities. No priority or preference in favour of the firm or partner is mentioned in that section. There is nothing in it to suggest that unless the firm has been taxed first a partner of it cannot be taxed in respect of his share in the income from the firm.
Learned counsel next referred to the provisions of section 23(5) of the Income-tax Act and urged that they indicate the at first the total income of a registered firm has to be computed and then the tax in the case of a registered firm was to be largely assessed in the hands of the firm itself or if the Income-tax Officer was of the opinion that it was not advantageous to the Revenue to tax the income in the hands of the firm, then on the partners. This provision also does not indicate what is to happen where, without assessment being levied on the firm, the income of the partner in sought to be assessed in the assessment of the partner. Sub-section (5) of section 23 has nothing to do with the assessment of an individual. A partner does not cease to be an individual. Section 23 is the general machinery section for computation of income and for bringing that income to charge. There is nothing in the various sub-section of section 23 to exclude the operation of that machinery in the case of an individual who may also happen to be a partner until the income which such individual derives from the firm has first been assessed in the hands of the firm. Section 23(5) only lays down how an assessment against a firm is to be made and when such an assessment is made what happens in the course of that assessment to the share in the income of the partners and the liability of the partners in respect of their share income.
Section 44 of the Act may be considered to be supplemental to section 23(5); it provides for the assessment of firms, the business of which may have become discontinued and which may have become dissolved. It also does not throw and light on the question, what is to happen where a firm is not assessed first and a partner is assessed in respect of his share income from the firm.
Learned counsel next referred to the provision in section 30 of the Income-tax Act. That provision relates to appeals against assessment and other orders. He relied on the second proviso to sub-section (1) of section 30 and argued that a question relating to the total income or loss of the firm or the apportionment thereof between the several partners can be raised only in an appeal against an assessment made against the firm. These matters cannot be challenged in an appeal by a partner in his individual assessment in which his share in the income from the firm might have been included. It does not appear to be necessary for the purposes of this case to decide whether the meaning of the second proviso to section 30 is as it is stated to be by learned counsel. But even if it is assumed that it is not open to a partner in his individual assessment to challenge the computation of the total income or the loss of the firm or apportionment of the income between the several partners, he is not deprived of that right altogether. If and when the assessment against the firm comes to be made, the right of appeal would accrue to him and, if any error has been made in the matter of the computation of the total income of the firm, or of its apportionment in his own individual assessment, the same can be set right in appeal and consequential relief can be obtained by the partner under section 35(5). Thus a partner is not wholly without remedy. Another answer to the argument based on the ground of hardship or inconvenience it that he himself as a partner and agent of all the other partners can, as soon as the first step is taken to assess him, file or have filed a return of the income of the firm itself, so that an assessment against the firm is made side by side with his own assessment and upon assessment against the firm being thus made simultaneously with his own assessment, he may, if necessary file appeals both against his own assessment under the substantive provision in section 30 and against the assessment of the firm under the second proviso to section 30(1).
Learned counsel also invited our attention to the provisions of section 14 and 16. Section 14 provides for certain exemptions of a general nature and it specifically provides for some relief to a partner where an assessment has been levied against the firm also. We are of the view that on the basis of this provision no argument can be advanced that an assessment of an individual partner is incompetent in respect of his income from the firm without assessment having first been made on the firm itself. All that this section does is to give some relief against tax have been levied both against the firm and against the partner. Where no assessment has been levied against the firm at all there is no question of any double taxation or of any relief against doubt taxation. Section 14 does not say anything about the priority or precedence in which an assessment is to be made against partner and the firm of which he is a partner.
Section 16 provides for the inclusion in the total income of a partner of the portion exempted under section 14. The inclusion, however, is only for the purpose of determination of the rate at which tax is payable by him; if the firm has not been assessed there is no question of exclusion of any income under section 14 and accordingly no question of inclusion of any income under section 16. This provision also, therefore cannot help learned counsel in his argument in the case. If no assessment has been lived against the firm section 16 simply does not come into play.
Learned counsel also referred to the allowances and deductions which is permissible under section 10 in the case of an assessment being made against a firm. He urged that if an assessment was not made on the firm the right to the allowances and deductions under section 10 would be lost and prejudice would consequently be caused to the partner should has to bear the burden of taxation the portion of him income from the firm. This argument also appears to be misconceived. As stated above the partners have only themselves to blame if assessment is not made on the firm either prior to the assessment being made on themselves or subsequent to such assessment. The partners can always get an assessment made against the firm. If an assessment is made against the firm allowances and deductions to which the firm may be found entitled can always secured. The total income of the firm would be determined only after such allowances and deductions have been made. Consequent upon the computation of the total income of the firm after excluding the allowances and deductions from that total, effect can be given to the amount determined in the assessment of the firm proportionately in the assessments of the partners. As already stated these assessment can be rectified under section 39(6).
Thus, it is clear that the sections referred to by learned counsel in his arguments do not support the conclusion which he wishes to be drawn from the provisions of these sections. On the other hand the language used in section 35(5) seems to indicate quite clearly that under the Act it is possible to asses a partners share in the income of the firm before assessing the firm itself. It lays down that if the assessment of a partner has been completed, and a certain amount as his share in the income of the firm is included in that assessment, if modifications of that amount becomes necessary by reason of the assessment of the firm, such modification can be made as if the modification amounted to a rectification under section 35. Apart from this, as already stated above and as admitted by learned counsel himself, there is not express provision or prohibition that before an assessment is made against a firm the income of a partner from the firm cannot be assessed in his own individual assessment.
For the reasons stated above the answer to the question referred to this court should be in the affirmative and against the assessee. The reference should be returned to the Tribunal with the above answer. The department should get its costs of the reference which we fix at Rs. 200.
Question answered in the affirmative.