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Onkar Nath Vs. Commissioner of Income-tax, Lucknow. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberMiscellaneous Case No. 93 of 1963
Reported in[1967]64ITR347(All)
AppellantOnkar Nath
RespondentCommissioner of Income-tax, Lucknow.
Excerpt:
- - the said earlier order of the appellate assistant commissioner in respect of the other partner was taken, on appeal, by the department, to the income-tax appellate tribunal which had endorsed the view taken by the appellate assistant commissioner and held that the proceedings initiated against the partners beyond the period of limitation by invoking the aid of the second proviso to section 34(3) were contrary to law and void, notwithstanding the earlier decision of the tribunal which the appellate assistant commissioner had followed. all the three questions referred clearly indicate that the questions to be answered depended wholly upon the validity of the direction given by the appellate assistant commissioner directing the income-tax officer to assess the partners, even when the..........the fact that the deposits stood in the capital account of the individual partners.the firm appealed against the order of the income-tax officer, and the appellate assistant commissioner by his order dated 31st march, 1954, deleted the sum of rs. 6,151 in the account of the assessee on the ground that it appeared on the firs day of the accounting period, of the commencement of business by the mill, and as such it could not be treated as the income of that year of the firm 'onkar nath raj narain' from an undisclosed source. in this connection the appellate assistant commissioner observed :'i do not think that the income-tax officer had any material from which a conclusion could be arrived at that a credit of rs. 12,454 was the profit made in the period october 1, 1943, to.....
Judgment:

MANCHANDA J. - This is a case stated under section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as the Act). The questions referred are :

'(1) Whether the finding of the Appellate Assistant Commissioner in Appeal No. 39/248/E that the sum or Rs. 6,151 was the income of the assessee has been rightly as a finding within the meaning of the second proviso to section 34(3) of the Income-tax Act ?

(2) Whether the assessment against the assessee made to give effect to the finding and the direction contained in the order of the Appellate Assistant Commissioner in Appeal No. 39/248/E is valid at law ?

(3) Whether the assessment against the assessee has been made within time by virtue of the second proviso to sub-section (3) of section 34 ?' (underlining ours)

The material facts are these : The relevant year of assessment is the assessment year 1944-45, the accounting year being S. Y. 2002, commencing on 8th November, 1942, and ending on 28th of October, 1943. The assessee in Onkar Nath, an individual. He was a partner in the partnership firm of M/s Onkar Nath Raj Narain of Agra. This firm was duly registered under section 26A of the Act. The firm also owned and worked a mill know a 'Prem Dal Mills' (hereinafter referred to as the mills). The accounts of the latter were separately maintained. There were various cash deposits aggregating Rs. 12,454 in the accounts of the different partners. The deposits were all on the 1st October, 1943. They included a deposit of Rs. 6,151 in the name of the assessee. The entire sum of Rs. 12,454 including the cash credit of Rs. 6,151 in the account of the assessee was treated by the Income-tax Officer as the income of the partnership firm of 'Onkar Nath Raj Narain' from an undisclosed source in the assessment year 1945-46 which is a year subsequent to the relevant assessment year for purposes of this reference, notwithstanding the fact that the deposits stood in the capital account of the individual partners.

The firm appealed against the order of the Income-tax Officer, and the Appellate Assistant Commissioner by his order dated 31st March, 1954, deleted the sum of Rs. 6,151 in the account of the assessee on the ground that it appeared on the firs day of the accounting period, of the commencement of business by the mill, and as such it could not be treated as the income of that year of the firm 'Onkar Nath Raj Narain' from an undisclosed source. In this connection the Appellate Assistant Commissioner observed :

'I do not think that the Income-tax Officer had any material from which a conclusion could be arrived at that a credit of Rs. 12,454 was the profit made in the period October 1, 1943, to October 15, 1944. I am, therefore, of opinion that the addition of Rs. 12,454 as secret profits relating to the period from October 1, 1943, to October 15, 1944, was not justified in the circumstances of the case.'

Thereupon, proceedings under section 34 read with section 23(3) of the Act were taken against the firm for the relevant assessment year 1944-45 by the Income-tax Officer to bring to assessment the said sum of Rs. 12,454, being the deposit found credited in the accounts of the four partners on the 1st October, 1943. Even at that stage no attempt was made by the Income-tax Officer to assess the individual in whose name the deposits stood credited in the books of account of the mill. The Income-tax Officer would appear to have persisted in making a protective assessment against the individual partners. Against that order the firm again appealed to the Appellate Assistant Commissioner on the ground that the proceedings taken under section 34 for the relevant assessment year 1944-45 were barred by limitation and there was no direction of the Appellate Assistant Commissioner which could have removed the bar of limitation under the second proviso to section 34(3) of the Act. This contention was upheld and the appeal of the firm was allowed. But this time the Appellate Assistant Commissioner issued the following direction :

'I hold that this sum of Rs. 12,454 must be brought into assessment in the hands of the partners and that it could not be brought in the hands of the firm for assessment purposes in the circumstances noted above. The Income-tax Officer will please take action under proviso 2 of section 34(3) against the partners ' (underlining ours).

This order was passed on the 9th of October, 1957. The period of limitation had long since expired for taking any further action under section 34 against any one of the partners and, therefore, unless such a direction was issued no action could have been taken by the Income-tax Officer.

Pursuant to the direction so given, the Income-tax Officer took action under section 34 against the individual partners to show cause why the respective deposits in their capital account should not be brought to assessment as escaped income for the relevant year of assessment. This time the partners took the objection that the proceedings were barred by time and the direction issued by the Appellate Assistant Commissioner was beyond his jurisdiction. The notice issued is not on the record nut it is clear from a reading of the assessment order that action was taken by the Income-tax Officer under proviso 2 to section 34(3). There is no indication as to whether the provisions of section 34(1) (a) or (b) were applied by the Income-tax Officer. There is also no indication that, if action was taken under section 34(1) (a), whether the necessary prior statutory sanction of the Commissioner of Income-tax taken before the proceedings were initiated. The opening paragraph of the assessment order reads :

'Action under proviso 2 to section 34(3) has been taken in this case as a result of order dated October 9, 1957, of the learned Appellate Assistant Commissioner, Agra, made in the case of M/s. Onkar Nath Raj Narain for the assessment year 1944-45..... It is on the above clear direction of the Appellate Assistant Commissioner that action under section 34(3), proviso 2, has been taken in the case of L. Onkar Nath, partner, to consider deposits or Rs. 6,151 made by him in the firm of M/s. Onkar Nath Raj Narain on October 1, 1943.'

The objection of the assessee regarding the bar of limitation was disposed of by the Income-tax Officer in these words :

'Regarding the legality or otherwise of the action under section 34 it may be stated that action under section 34 has been taken in view of the clear directions of the Appellate Assistant Commissioner in his order dated October 9, 1957. No time limit is prescribed under proviso 2 to sub-section (3) of section 34 to an assessment or reassessment made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under sections 31, 33, etc...... Action under the 2nd proviso of section 34(3) thus is fully justified in the circumstances of the case.'

It may be noticed here that, though action is said to have been taken under section 34, without specifying whether it was under sub-section (1) (a), (b) or section 34(3) of the Act, it is clear form the opening paragraph that action was purported to have been taken only under the second proviso to section 34(3) of the Act. It seems that the Income-tax Officer considered that no action Appellate Assistant Commissioner, as such a direction is in itself sufficient to empower reassessment. As the Income-tax Officer considered that the sum of Rs. 6,151 had not been proved by the assessee to be his income from any known source, it was added as income from an undisclosed source.

On appeal, the Appellate Assistant Commissioner set aside the assessment made upon the assessee on the ground that the direction given by the predecessor Appellate Assistant Commissioner was beyond his jurisdiction and the second proviso to section 34(3) could not therefore have removed the bar of limitation. No detailed order was passed in the case of the assessee by the Appellate Assistant Commissioner as this point had already been decided by him in the case of one of the other three partners of the firm of Onkar Nath Raj Narain. The said earlier order of the Appellate Assistant Commissioner in respect of the other partner was taken, on appeal, by the department, to the Income-tax Appellate Tribunal which had endorsed the view taken by the Appellate Assistant Commissioner and held that the proceedings initiated against the partners beyond the period of limitation by invoking the aid of the second proviso to section 34(3) were contrary to law and void, notwithstanding the earlier decision of the Tribunal which the Appellate Assistant Commissioner had followed. The department again went up in appeal to the Tribunal. This time another Bench heard the appeal and allowed it purporting to follow the decision of this court in Pt. Hazari Lal v. Income-tax Officer, Dist. II (ii), Kanpur, where it was held that 'any person' in the second proviso to section 34(3) would cover that class of persons who were intimately connected with and interested in the proceedings taken against an assessee and whose assessments under the Act are affected by the orders passed in those proceedings. In other words, the direction given by the Appellate Assistant Commissioner to assess the partners in respect of the cash credits was held to be a direction which was within the jurisdiction of the Appellate Assistant Commissioner. Hence, this reference at the instance of the assessee.

At the outset, it is necessary to draw attention to the three questions which have been referred and in particular the portions underlined. All the three questions referred clearly indicate that the questions to be answered depended wholly upon the validity of the direction given by the Appellate Assistant Commissioner directing the Income-tax Officer to assess the partners, even when the period of limitation had long before expired. If the finding or direction given by the Appellate Assistant Commissioner was one which was beyond his jurisdiction then, manifestly, the subsequent proceeding taken under section 34 could not, be saved by the second proviso to section 34(3) of the Act. Even the third question specifically limits the ambit thereof to the second proviso to sub-section (3) of section 34. Therefore, in substance, the only question which has to be considered is as to the scope of the powers of the Appellate Assistant Commissioner and the authority of this court in Pt. Hazari Lals case. The legislature has taken great pains to set out the powers of the Appellate Assistant Commissioner. They are much wider than those enjoyed by appellate courts under the Civil Procedure Code. The Appellate Assistant Commissioner has even the power to enhance the assessment but that is hedged in with the condition that no such enhancement shall be made unless the appellant has had a reasonable opportunity of showing cause against such enhancement. Under sub-section (3) of section 31 'the Appellate Assistant Commissioner may -.....

(a) confirm, reduce, enhance or annual the assessment, or

(b) set aside the assessment and direct the Income-tax Officer to make a fresh assessment.....

or, in the case of an order cancelling the registration of a firm under sub-section (4) of section 23 or refusing to register a firm under sub-section (4) of section 23 or section 26A or to make a fresh assessment under section 27,

(c) confirm such order, or cancel it and direct the Income-tax Officer to register the firm or to make a fresh assessment, as the case may be,

or, in the case of an order under sub-section (2) of section 25 or sub-section (1) of section 23A, or sub-section (2) of section 26 or section 48, 49 or 49F,

(d) confirm, cancel or vary such order, or, in the case of an order under sub-section (1) of section 25A,

(e) confirm such order or cancel it.....

(4) Where as the result of an appeal any change is made in the assessment of a firm or association of persons or a new assessment of a firm or association of persons is ordered to be made, the Appellate Assistant Commissioner may authorise the Income-tax Officer to amend accordingly any assessment made on any partner of the firm or any member of the association.'

A close reading of these provisions of section 31 shows that the legislature has made provision for almost every possible order that the Appellate Assistant Commissioner can pass when deciding an appeal. Sub-section (4) of section 31 is not an independent provision. It merely provides for certain consequential orders or directions which can be made by the Appellate Assistant Commissioner when he decides an appeal against the firm. If there is a change made in the assessment of the firm, the Appellate Assistant Commissioner is given the power to authorise the Income-tax Officer to amend accordingly any assessment made on any partner of the firm. The power to direct amendment does not mean the issuing of directions to reopen the assessment of a partner on any matter other than what directly arises as a result of any change which may have been made in the assessment order by the Appellate Assistant Commissioner. Whatever the change, it may be reduction in the assessment or enhancement thereof, the Appellate Assistant Commissioner has the jurisdiction to direct the Income-tax Officer to make the necessary amendment in the assessment of the partner. If a certain sum which was added as income form an undisclosed source in the assessment of the firm is directed to be deleted by the Appellate Assistant Commissioner then he has the right to direct amendment of the assessment made upon a partner to the extent of the change made in the assessment of the firm. The assessment of a partner can be directed to be correspondingly amended. Sub-section (4) does not by any stretch of imagination give the Appellate Assistant Commissioner the power to give directions that a certain sum which was deleted from the assessment of the firm should be assessed in the hands of a partner as his individual income. It is only directions which fall within the four corners of section 31 that can be issued by the Appellate Assistant Commissioner and not all and sundry directions which he may be disposed to give. A direction such as directing the Income-tax Officer to assess the partners is not a direction which can be said to be consequential or incidental to the assessment made on the firm. Such a direction concerns as wholly different assessable entity and can hardly be described as a mere direction whereas it is in fact a substantive order directing reassessment proceedings to be taken against a different assessee. Such directions cannot possibly be treated as an order directing the amendment of the partners assessment as a result of the change made in the assessment of the firm.

The question that next arises is whether the decision of this court in Pt. Hazari Lals case which was specifically approved by the Supreme Court in Income-tax Officer, A-Ward, Sitapur v. Murlidhar Bhagwan Das, has been properly read by the Tribunal as going to the extent of laying down that a cash credit in the name of a partner in the capital account of the firm when deleted from the assessment of the later can be directed to be assessed in the hands of a partner. The facts in the Supreme Court case in Murlidhar Bhagwan Das were that the assessee was assessed to income-tax under section 23(4) of the Act for the assessment year 1949-50 on the ground that a certain interest income of Rs. 88,737 was brought to tax for the assessment year 1949-50. The assessee appealed and the Appellate Assistant Commissioner held that the income was received in the previous accounting year and directed that the amount should be deleted from the assessment for the year ending 1949-50, and should be include in the assessment year 1948-49. Pursuant to the direction given by the Appellate Assistant Commissioner, the Income-tax Officer initiated reassessment proceedings under section 34(1) of the Act in respect of the assessment year 1948-49 and served a notice on the assessee on December 5, 1957. The question was whether the second proviso to section 34(3) applied to every notice which was served beyond the time prescribed by section 34(1). Subba Rao J., as he then was, speaking for the majority, held that the direction given by the Appellate Assistant Commissioner was beyond his jurisdiction as the finding or direction must be one which was necessary for the disposal of the appeal in respect of the year of assessment in question. Further, that the expression 'any person' in the second proviso to section 34(3) referred to one who would be liable to be assessed for the whole or a part of the income that went into the assessment of the year under appeal or revision. It is noteworthy that no attempt in that case was made to save the notice issued under section 34, albeit, under the directions of the Appellate Assistant Commissioner, from the bar of limitation on the ground that the law had been amended in 1959, by adding sub-section (4) to section 34 of the Act which saved notices issued under section 34(1) (a) of the principal Act from being challenged merely on the ground of limitation. Be that as it may, Murlidhar Bhagwan Dass case, though it directly had no concern with the question as to whether a direction could be given in the case of 'any person' by the Appellate Assistant Commissioner, as the question there only was as to whether a direction, in the case of the 'same assessee', when disposing of a appeal for a particular assessment year, could be given that the impugned sum be assessed in the earlier assessment year. The Supreme Court, however, as an argument was raised, went on to decide as to the ambit of those words. The department had contended that the words 'any person' in the second proviso to section 34(3) were very wide and they would include all and sundry. The Supreme Court repelled this by holding :

'The expression any person in its widest connotation may take in any person, whether connected or not with the assessee, whose income for any year has escaped assessment; but this construction cannot be accepted, for the said expression is necessarily circumscribed by the scope of the subject-matter of the appeal or revision, as the case may be. That is to say, that person must be one who would be liable to be assessed for the whole or a part of the income that went into the assessment of the year under appeal or revision. If so construed, we must turn to section 31 to ascertain who is that person that than the appealing assessee who can be liable to be assessed for the income of the said assessment year. A combined reading of section 30(1) and section 31(3) of the Act indicates the cases where persons other than the appealing assessees might be affected by orders passed by the Appellate Commissioner. Modification or setting aside of assessment made on a firm, joint Hindu family, association of persons, for a particular year may affect the assessment for the said year on a partner or partners of the firm, member or members of the Hindu undivided family or the individual, as the case may be. In such cases though the latter are not do nominee parties to the appeal, their assessments depend upon the assessments on the former. The said instances are only illustrative. It is not necessary to pursue the matter further. We would, therefore, hold that the expression 'any person' in the setting in which it appears must be confined to a person intimately connected in the aforesaid sense with the assessments of the year under appeal.'

The decision of this court in Pt. Hazari Lals case, as already observed was approved. In Pt. Hazari Lals case, Bhargava J., as he then was, speaking for the Bench, repelled the argument of the department that the use of the expression 'any person was intended to enlarge the scope, observing :

'As we have indicated above, the very fact that findings are recorded or directions are made in exercise of the appellate power or the power which arises in proceedings which have been subject to an appellate decision indicates that the findings and directions must be of the nature which an appellate court can record or make and, consequently, the directions must be limited to the nature indicated in section 31 and the findings must be limited to those facts which are necessary for the purpose of giving such directions. If this aspect is kept in view, the purpose of the use of the expression any person also becomes clear. It is true that in a judicial or quasi-judicial proceedings, the orders that are passed normally govern a person who is a party to those proceedings, but sometimes the law that is applicable is of such a nature that it might become necessary to give effect to the orders passed even against a person who may not himself directly be a party but who, it may be presumed, has had a sufficient opportunity of being represented in the proceedings through the actual party. Some of the examples, which appear from the pose conferred on the Appellate Assistant Commissioner of Income-tax to pass orders under section 31(3) of the Income-tax Act may, in this connection, be mentioned. Under clause (c) of sub-section (3) of section 31, a case can arise where the Appellate Assistant Commissioner of Income-tax interferes with an order cancelling the registration of a firm under sub-section (4) of section 23 or refusing to register a firm under sub-section (4) of that section. If the registration has been refused or cancelled by the Income-tax Officer, the Appellate Assistant Commissioner of Income-tax may allow the appeal and direct registration of the firm. The result of that order would be that the income of the firm, whose registration was cancelled or refused, which must have been assessed to tax in the hands of the firm itself, will subsequently, on the appeal being allowed, have to be assessed to tax in accordance with sub-section (3) of section 23 of the Income-tax Act in the hands of the partners. Thus, as a result of the decision in the appeal against an order under section 23(4) of the Income-tax Act in which the assessee-appellant would only be a firm, the effect of the appellate order would have to be given by assessing tax on the share of each partner in the income of the firm in the assessment proceeding of that partner. Such partners would only be covered by the expression any person as they cannot be held to be assessees in the particular appeal which had to be filed by the firm against the order passed in its assessment proceedings under section 23(4) of the Income- tax Act. Another similar case may be where an Income-tax Officer passes an order under section 23A for the assessment of a company, deeming certain dividends to have been declared, though they were not actually declared. Subsequently, on appeal, the amount declared as deemed to have been distributed as dividends might be reduced by the Appellate Assistant Commissioner of Income-tax under clause (a) of sub-section (3) of section 31. In the meantime, there is the possibility that the shareholders might have been assessed to tax by including in their incomes dividends deemed to have been received by them being the dividends declared as deemed to have been distributed under section 23A. Naturally, it would be necessary to grant to the shareholders the appropriate relief when the order under section 23A is subsequently varied by the Appellate Assistant Commissioner of Income-tax in appeal.... Two other cases, which appear to be very similar, are case where the appeals before the Appellate Assistant Commissioner of Income-tax are against orders under section 25A or section 26(2) of the Income-tax Act, i.e., cases where the point under considerations is the separation of a Hindu undivided family or the succession of a business. In such cases also, the parties actually in appeal may not subsequently be liable to the tax and the tax may become due, as a result of the appellate decision, from others or vice versa. In the case of a Hindu undivided family, the tax assessed on a Hindu undivided family may become payable by the individual separate members, or the tax found due from the individual members as a result of the appeal may be payable by the Hindu undivided family. Similarly, in the case of an order under section 26(2), the tax found due from a predecessor may later in appeal be found to be payable by the successor or vice versa. These appear to us to be cases where the Appellate Assistant Commissioner of Income-tax is competent to record findings in an appeal by one assessee affecting persons other than that assessee.'

It is pertinent to observe that the illustrations given are all within the scope of the provisions of section 31(3) and the amendment in such cases can be carried out under section 31(4) by the Appellate Assistant Commissioner issuing such directions. It is, however, not possible to conceive of an illustration where income does not belong to a partnership or a Hindu undivided family and was recorded in the name of the individual partner or separated member of the family and treated as such by the partnership or the family and yet the Income-tax Officer had persisted in treating such income as that of the partnership firm or the family and subsequently when the appeal of the firm or the family was allowed a direction was given that it should be assessed in the hands of the partner or the individual member of the family. The illustrations given in Pt. Hazari Lals case all clearly indicate that the direction must be the direct result of some finding which was necessary to be given in the appeal itself by the Appellate Assistant Commissioner. The only question before the Appellate Assistant Commissioner in the appeal by the firm was as to whether the impugned income was its income, and nothing beyond that. He could either have sustained the addition made by the Income-tax Officer or directed the deletion thereof. That was the subject-matter of the appeal and beyond that the Appellate Assistant Commissioner could not have travelled. It is not the function of the Appellate Assistant Commissioner or for that matter of any appellate court to come to the rescue of an erring or recalcitrant party, who has allowed the period of limitation to run out, to give some directions which might enable such party to overcome the statute of limitation which has been described as a statute of repose. The directions must be such a could be given within the very wide powers given under section 31 of the Act and not beyond them. The Income-tax Officer, as already observed, need not have persisted in including the deposits which clearly stood in the individual names of each of the partners in the assessment of the firm or at least he could have taken the elementary precaution of making protective assessments both against the firm and the individual partners. He did nothing of the sort and persisted in assessing the cash credits again and again in the hands of the firm, and then when the Appellate Assistant Commissioner came to the conclusion that the Income-tax Officer was entirely wrong in the view that he had taken, allowed the appeal of the firm and deleted the said amount from its assessment, he had no jurisdiction to issue a direction under the provisions of section 31(3) read with sub-section (4) of the Act that the sums deleted be assessed in the hands of the partners in their individual assessments.

It only remains to be noticed that the learned counsel for the department attempted to argue that even if no such direction could have been given by Appellate Assistant Commissioner and the action taken by the Income-tax Officer pursuant thereto, nevertheless the limitation would be saved by the provisions of Act 1 of 1959. No such question was raised at any time before the income-tax authorities or the Tribunal, and the questions referred are not couched in terms of sufficient amplitude to cover any such enquiry on the basis of the amended law. In fact, as already observed, the questions are extremely narrow and relate specifically and directly only to the second proviso to section 34(3) of Act. In any case, the question of the applications of the amendment effected by Act 1 of 1959 would certainly require investigation of some facts. In these circumstances, we are not called upon to express any opinion on the applicability of the amendment effected by Act 1 of 1959.

For the reasons given above, we would answer the questions in favour of the assessee. The department will pay the costs of the assessee, which we assess at Rs. 350. Counsels fee is also assessed at Rs. 350.

Question answered in favour of the assessee.


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