1. The Income-tax Appellate Tribunal, Bombay Bench 'A', has referred the following question for our decision:
'Whether, on the facts and in the circumstances of the case, the assessments on the firm made after all the partners had been assessed first on the share income from the firm, were valid ?'
2. Messrs. Kale Khan Mohd. Hanifa firm registered under the provisions of the Income-tax Act, carries on business of manufacturing bidis in this State. For the years 1958-59 and 1959-60 the assessment of the firm was taken up by the Income-tax Officer. When the matter was ultimately taken in appeal to the Income-tax Appellate Tribunal, a new ground was raised before it that inasmuch as the partners of the firm were individuallyassessed and inasmuch as the Income-tax Officer had exercised his discretion in assessing the partners in their individual capacity, the Income-tax Officer had lost jurisdiction to assess the partnership subsequently. This question was allowed to be raised by the Income-tax Appellate Tribunal before it for the first time, as it was a question of law. The contention, however, was negatived by the Tribunal, but it made this reference as a question of law arose out of its decisions in the two appeals. As a common question is involved in both the appeals, a joint reference has been made.
3. The answer to the question referred depends on the interpretation of a few sections of the Income-tax Act, 1922. The relevant portions thereof are extracted below :
'3. Charge of income-tax.--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.
23. Assessment.--(1) .......
(5) Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the firm has been assessed under Sub-section (1), Sub-section (3) or Sub-section (4), as the case may be,--
(a) in the case of a registered firm,--
(i) the income-tax payable by the firm itself shall be determined; and
(ii) the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined :. . . .
(b) in the case of an unregistered firm, the Income-tax Officer may, instead of determining the sum payable by the firm itself, proceed to assess the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, and determine the tax payable by each partner on the basis of such assessment, if, in the Income-tax Officer's opinion, the aggregate amount of the tax including super-tax, if any, payable by the partners under such procedure would be greater than the aggregate amount which would be payable by the firm and the partners individually, if separately assessed; and where the procedure specified in this clause is applied to any unregistered firm, the proviso to Clause (a) of this sub-section shall apply thereto as they apply in the case of a registered firm.
(6) Whenever the Income-tax Officer makes a determination in accordance with the provisions of Sub-section (5), he shall notify to the firm by an order in writing the amount of the total income on which the determination has been based and the apportionment thereof between the several partners.
35. Rectification of mistake.--(1) .......
(5) Where in respect of any completed assessment of a partner in a firm it is found on the assessment or reassessment of the firm or on any reduction or enhancement made in the income of the firm under Section 31, Section 33, Section 33A, Section 33B, Section 66 or Section 66A that the share of the partner in the profit or loss of the firm has not been included in the assessment of the partner or, if included, is not correct, the inclusion of the share in the assessment or the correction thereof, as the case may be, shall be deemed to be a rectification of a mistake apparent from the record within the meaning of this section, and the provisions of Sub-section (1) shall apply thereto accordingly, the period of four years referred to in that sub-section being computed from the date of the final order passed in the case of the firm ... .'
4. The argument advanced on behalf of the assessees is that under Section 3 of the Income-tax Act, 1922, both the firm and the individualpartners are designated as 'assessees'. The department has, therefore,the choice to assess the firm as such or to assess the income of the firm inthe hands of the partners. Once the department makes its choice ofassessing the income in the hands of the partners, it cannot proceed toassess the firm as such and, having assessed the firm, resort to Section 35(5) of the Act to rectify the assessments of the individual partners. Insupport, a number of cases were cited before the Tribunal as well as beforeus. We may, however, refer to only one case which contains all the arguments that can be advanced on behalf of the assessees. That case isGirdhari Lal Laxman Prasad v. Commissioner of Income-tax,  70 I.T.R. 853 (All.). In that case,relying on its previous decision as also three cases of the Supreme Court,it was held by the Allahabad High Court that Section 3 of the Act impliedly gave an option to the assessing authority to assess the total income ofeither an association of persons or the members of such association individually, or the firm or its partners; but once the option was exercised bythe department of either assessing the association or the firm, or thepartners or the members individually, it is not open to it to assess theother entity also. It must be noted that in the Allahabad case as also theSupreme Court cases, including Commissioner of Income-tax v. MurlidharJhawar and Purna Ginning and Pressing Factory,  601.T.R. 95;  3 S.C.R. 219 (S.C.)referred to in that decision, the assessment of a registered firm was not involved. Those were thecases of associations of individuals or unregistered firms. Naturally, noreference has been made in those cases to Sub-sections (5) and (6) of Section 23 of the Income-tax Act. From Sub-section (5) of Section 23 of theAct it is clear that in the case of a registered firm the income-tax payableby the firm is required to be determined and the total income of eachpartner of the firm, including therein his share of its income, profits andgains of the previous year, is assessed and the sum payable by him on thebasis of such assessment is determined. Thus, under Sub-section (5)of Section 23 as it stood after its amendment in 1956, the income-taxpayable by the registered firm itself and the tax payable by theindividual partners of the registered firm on their share in the incomefrom the firm as also on their other income is required to be determined.This clearly shows that the two entities, namely, the registered firm, andthe individual partners, are expected to be separately assessed and the taxliability of the two entities is required to be determined. Clause (b) of Sub-section (5) of Section 23 of the Act, on the other hand, makes it clear thatin the case of an unregistered firm the Income-tax Officer has a choice thatinstead of determining the sum payable by the firm itself, he may proceedto assess the total income of each partner of the firm, including therein hisshare of its income, profits and gains from the firm of the previous year.It would thus be clear that if Section 3 is read with Section 23, Sub-section (5), in the case of a registered firm both the firm as well as the individual partners are assessable entities, while in the case of an unregisteredfirm either the firm or the individual partners can be assessed. Naturally,in the case of an unregistered firm only the department is required to makea choice as to which entity should be proceeded against. This choice isnot required to be made by the department in the case of a registeredfirm and its partners. The decisions cited before us, including the Allahabad decision, which has also relied on the Supreme Court decisions, cannotbe of any assistance to the assessees in this case because in those casesthe question of registered firms which was specifically dealt with underSub-section (5) of Section 23 was not involved. In Jain Brothers v. Unionof India,  77 I.T.R. 107 (S.C.) their Lordships of the Supreme Court distinguished their decision in Commissioner of Income-tax v. Murlidhar Jhawar & Purna Ginningand Pressing Factory on the ground that it related to assessment of an unregistered firm. It was said that the provisions which came up for consideration in Commissioner of Income-tax v. Murlidhar Jhawar & PurnaGinning of Pressing Factory had no parallel to those made in respect of aregistered firm by an express amendment of Section 23(5) by the FinanceAct of 1956. It was pointed out by their Lordships that before theamendment of Section 23(5) the character of the firm as a separate entitywas well established, but the firm itself did not pay any tax and the assessment was made on individual partners in accordance with the provisions of that section. After 1956 the firm did not cease to be an assessee; on the contrary, it was recognised as a separate entity and was subjected to tax as such. From those observations of their Lordships of the Supreme Court in Jain Brothers case, and also for the reasons given by us above, viz., that in the case of a registered firm and its partners there is no provision for the Income-tax Officer making any choice of proceeding either against one entity or the other, the conclusion is inevitable that the assessment of the individual partners does not preclude the Income-tax Officer from taking up the assessment of the firm as well.
5. The legislature was aware that the assessment of the partners may take place before the assessment of the firm and in that case the share of the partners in the profits of the firm may not be correctly determined. Sub-section (5) of Section 35 was, therefore, inserted by way of amendment which enables the Income-tax Officer to rectify the assessment of the individual partners on the basis of the assessment made in the case of the registered firm In our opinion, therefore, after the 1956 amendment there was no scope for holding that the assessment of the individual partners precluded the assessment of the registered firm. Accordingly, we answer the reference to the effect that on the facts and in the circumstances of the case, the assessments on the firm made after all the partners had been assessed first on the share income from the firm, were valid. The respondent shall get costs of this reference. Counsel's fee is fixed at Rs. 100.