1. The appeals in the present case are preferred by the revenue. Appeal in IT Appeal No. 1679 (Mad.) of 1982 relates to the case of Shri C.V.Mohanasundaram and the appeal in IT Appeal No. 1590 (Mad.) of 1982 relates to Shri K.S. Veerannah Chettiar. The common feature in both these cases is that these two persons were partners with equal share in a firm, Veeco Chemicals Corpn. For the assessment year 1979-80, which is the assessment year now under consideration in each of these cases in the returns of income filed by the respective assessccs, the share income from Veeco Chemicals Corpn., hereinafter referred as the 'the firm' was shown at Rs. 75,542, Eventually, a substantial addition came to be made and the share income adopted in the case of each of the assessees, in the assessments made on 8-4-1982 which was in pursuance of instructions given by the IAC, Coimbatore, on the basis of the draft orders submitted to him in each case dated 6-3-1982, came to Rs. 1,96,799. Thus, the share income assessed from the firm in the case of each of the assessccs exceeded the share income returned by over Rs. 1,00,000. There were certain other minor differences. But if the difference in the share income assessed from the firm is excluded, the remaining amount of difference was far below Rs. 1.00.000.
2. The return of income in each case was filed on 30-10-1979. Under the provisions of Section 153(l)(a)(iii) of the Income-tax Act, 1961 ('the Act') if no reference had been made to the IAC under the provisions of Section 144B of the Act, the assessment in each case should have been completed by 31-3-1982. The assessments were completed only on 8-4-1982 and would be within the period of limitation only if in terms of Explanation l(iv) to Section 153 the period commencing from the date on which she ITO forwarded the draft order in terms of Section 144B(1) to the assessee and ending with the date on which the ITO received directions from the IAC under Section 144B(4) is excluded. In the present cases, the draft order was forwarded to the assessee on 6-3-1982 and the IAC's directions under Section 144B were received on 31-3-1982 and, thus, were the provisions of Explanation 1(iv) to Section 153 to apply, the assessments made on 8-4-1982 in both the cases would be within the period of limitation.
3. The assessees in each case contested that a reference under Section 144B to the IAC by the ITO was not warranted in law since the difference in income exceeded Rs. 1,00,000 only, on account of the difference in share income adopted from the firm. It was sought to be contended before the first appellate authority that the provisions of Section 144B became applicable only where the ITO proposed a variation exceeding Rs. 1,00,000, but the provisions would have no application where the difference between the income assessed and the income returned arose consequent to the application of statutory provisions governing the apportionment, of income in the case of a registered firm amongst its partners. This plea found favour with the Commissioner (Appeals). In the course of his order (substantially similar in both cases) dated 1-9-1982, he observed as under: Shortly stated, the variation in the income returned by a partner in a firm, consequential to the completion of the firm's assessment is not one which is within the ITO's powers of proposal or decision; the statute decrees the variation and the ITO complies with the decree. The variation does not originate from any proposal of the ITO but results from the application of a mandatory provision of law. 'Propose' means 'to put forward for consideration', 'to intend' and quite obviously what the ITO is legally bound to do, cannot be something which he can put forward for consideration or intend doing for the matter is outside the scope of either consideration or intention on his part.
The Commissioner (Appeals), therefore, held that the reference under Section 144B(1) by the ITO to the IAC was not warranted and, therefore, the benefit of extended period of limitation was not available and the assessments as made were barred by limitation. He, therefore, cancelled each of the assessments.
4. The revenue is aggrieved. According to the grounds taken in appeal, since there was a variation between the returned income and the assessed income by more than Rs. 1 lakh, the revenue contended that it was mandatory for the ITO to forward a draft assessment order under Section 144B to the IAC and, therefore, the extended period of limitation was available and the assessments as made were within time.
When the matter came up for hearing in the first instance before the Madras 'C Bench, the Members constituting the Bench by an order dated 16-3-1983 made a reference to the President since in their view a decision of the Tribunal relied upon on behalf of the assessee in Satya Narain v. ITO [IT Appeal No. 742 (Chd.) of 1979, dated 21-10-1981] since reported in  9 Taxman 26 (Chd.), would merit an elaborate examination since the issue involved was one of general importance. The President has, accordingly, constituted this special bench.
5. The learned departmental representative initiated his arguments with reference to the language of the provisions of Section 144B(1) which reads as under: Notwithstanding anything contained in this Act, wherein an assessment to be made under Sub-section (3) of Section 143, the Income-tax Officer proposes to make any variation in the income or loss returned which is prejudicial to the assessee and the amount of such variation exceeds the amount fixed by the Board under Sub-section (6), the Income-tax Officer shall, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the assessee.
He stated that whenever an assessment was to be made having recourse to the provisions of Section 143(3) of the Act then, the requirements of Section 144B were categoric, namely, that if any variation in the income or loss returned was to be effected which was prejudicial to the assessee and the amount of such variation exceeded Rs. 1,00,000 then, a draft order has to be prepared and forwarded by the ITO to the IAC for his approval. With reference to the scope of the expression 'income or loss returned', he stated that in the case of Hindustan General Industries Ltd. v. ITO  2 1TD 343 (Delhi), the President, as, Third Member, had stated that having regard to the ratio of the judgment of the Supreme Court in the case of Mansukhlal & Bros. v. CIT  73 ITR 546, there could not be any doubt that the expression income or loss returned' meant nothing more than the income or loss disclosed in the return. With reference to the same decision, he proceeded to contend that any variation to the income returned, whether it be agreed upon or not if it exceeded the statutory amount fixed, could be made by the ITO only after making a reference to the IAC by sending a draft assessment order. He also stated that it was the total amount of variation which was relevant and there was no question of any break up into different components, i.e., some components which may have been agreed upon by the assessee and some which may not have been agreed, or some in respect of which there was no dispute or some with some controversy. In further support, he relied upon the decision of the Calcutta High Court in the case of New India Investment Corpn. Ltd. v. ITO  143 ITR 909. He submitted that the provisions of Section 144B were provisions which were wholly beneficial to the assessee and such was the view expressed by the Special Bench of the Tribunal in Bela Singh Pabla v. ITO  1 ITD 370 (Delhi). According to the learned departmental representative, merely because income was allocated with reference to the assessed total income of a registered firm, it did not preclude the assessee-partner from seeking for deductions from such income in his personal assessment. He supported his contention by referring to the decision in CIT v. Smt. P. Janaki Bai  87 ITR 645 where it was held by the Andhra Pradesh High Court that the provisions of Section 67(3) of the Act were not exhaustive and deductions under Sections 30 to 37 of the Act as admissible had to be allowed from the share income apportioned as relating to a particular partner. In that particular case, depreciation was held to be admissible on a hotel building owned by the assessee-partner but used by the firm of which he was a partner. He stated that share income was income from 'business' and expenditure necessary for earning such income was an admissible deduction from the share income and in this regard reference was made to the decision in CIT' v. Ramnik Lal Kothari  54 ITR 232 (Pat.). Other cases where deductions were held to be permissible from allocated share income were those of the Rajasthan High Court in CIT v. Jabarmal Dugar  84 ITR 158, where salary of an accountant was held to be admissible, as also the decision of the Patna High Court in CIT v. Atma Ram Modi 71 ITR 199. In the aforesaid background, the learned departmental representative submitted that conclusions of the Commissioner (Appeals) which were to the effect that the ITO had to do nothing more than to lift the allocated share income and place it in the assessment of the partner could not be sustained. He stated that the distinction drawn by the Commissioner that the word 'propose' used in Section 144B(1) would exclude cases where the ITO was legally bound to do only a particular act as enjoined by the statute and his discretion stood excluded, was untenable. According to the learned departmental representative, for whatever reason a variation was being made, if the variation to the income returned exceeded the statutory limit, the provisions of Section 144B would be straightaway attracted.
6. The learned Counsel for the assessee urged that the provisions of Section 144B were not to be read in isolation. He stated that the provisions had to be read in the context of the scheme of making the assessments as envisaged under the Act. Strong reliance was placed on the reasoning which commended itself to the Division Bench of the Tribunal in the case of Satya Narain (supra). He emphasised that when an assessment is made on a firm, the ITO under the provisions of Section 158 of the Act has to apportion the income of the firm among the partners and to notify it. According to Section 247 of the Act, he stated that the apportionment so made is final and cannot be challenged by the partners in their individual assessments. Section 155(1) of the Act, he stated, empowered the ITO to amend the assessment order in the case of a partner on the completion of the assessment or reassessment of the firm and a combined reading of the provisions, according to him, showed that as long as the assessment of the firm had not been completed, the ITO had to adopt only the share of the partner as declared. Such share included in the assessment could be amended on receipt of intimation of the correct allocated share income. Reliance was placed also on the provisions of Section 182(1)(ii) of the Act, which provided that notwithstanding anything contained in Sections 143 and 144 after assessing the total income of the registered firm the share of each partner in the income of the firm shall be included in his total income and assessed to tax, accordingly. If the assessment of a partner was made prior to completion of the assessment of the firm, he stated that only the share income as returned could be included and it had to be rectified having recourse to the provisions of Section 155 on completion of the assessment of the firm. According to the learned Counsel, no change in the share income of the partner as returned, by making an estimate, could be made till the assessment of the firm was completed and the provisions of Section 182 became applicable. In this regard he stated that the legal position was succinctly set out in the commentary on Income-tax Law by Chaturvedi and Pithisaria, Vol. 3, 2nd edition as under: Assessment of registered firm and its partners.--After the taxable income of a registered firm has been ascertained and computed in the normal manner the procedure laid down in Section 182 is followed.
The income-tax payable by the firm itself is determined and a demand is made from the firm of the tax due. The share of the firm's taxable income apportioned, to each partner in accordance with the provisions of Section 67, is then taken to his respective assessment as an individual. His such share of firm's taxable income is added to the partner's other income and the amount of tax to be levied on such total income is then assessed and demand for tax thereon is made from him. If, however, there is loss in the registered firm, the partner is entitled to set it off against his other income or to get it carried forward and set off in accordance with the provisions of Section 75.
7. In reply, the departmental representative emphasised that making a reference to the IAC where there was a variation of share income exceeding Rs. 1,00,000 was not an exercise in futility and if a claim for deduction was omitted to be made earlier, such a claim could be made in reply to the draft assessment order because proceedings under Section 144B were part and parcel of the assessment proceedings.
Reference in this regard was made to the decisions in Fifth ITO v. Sri Bhuvanendra College Trust  4 ITD 291 (Bang.) and ITO v. G.N.Agarwal  1 ITD 77 (Nag.) Finally, the learned departmental representative submitted that purely as an alternate contention, there was a decision of the Punjab High Court in the case of S.Sewa Singh Gill v. CIT  46 ITR 152 which was rendered at the time when provisions similar to Section 144B were not in existence and which stated that a draft assessment order was an assessment order and if the provisions of Section 144B were held to be not applicable in the present case then, the date of the draft assessment order, i.e., 6-3-1982 would have to be construed as the date of the assessment order and, therefore, was within limitation.
8. We have considered the rival submissions. Subsequent to the stage where the return of income is filed, the provisions relating to the assessment come into play. Section 143(1) permits the making of an assessment subject to certain prescribed adjustments being made if the ITO is satisfied that an assessment could be made without requiring the presence of the assessee, or production of evidence in support of the return. The prescribed adjustments have been set out in Section 143(1)(b) The adjustments permitted do not include any change being made to the share incomes from a firm as returned. Therefore, in a case where in the return filed a particular figure of share income is given then, even if the allocated share income on completion of the assessment of the firm is available, it is not open to the ITO to substitute the allocated share income in the place of returned share income if he is proceeding to finalise the assessment under Section 143(1) In such a case, the ITO has necessarily to have recourse to the provisions of Section 143(3) for making the assessment. Section 144B(1) at the cost of repetition, reads as under: Notwithstanding anything contained in this Act. where, in an assessment to be made under Sub-section (3) of Section 143, the Income-tax Officer proposes to make any variation in the income or loss returned which is prejudicial to the assessec and the amount of such variation exceeds the amount fixed by the Board under Sub-section (6), the Income-tax Officer shall, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the assessee.
The question that arises is when the assessment is to be made under Section 143(3) where the allocated share income is to be substituted in the place of the returned income and the difference between the allocated income and the returned income exceeds Rs. 1,00,000 whether areference under Section 144B has' necessarily to be made to the IAC.Section 144B prescribes the procedure to be adopted where there is such a difference 'notwithstanding anything contained in the Act'.
Therefore, the overriding requirements of this section have to be given effect to. As far as the amount of variation is concerned, the decision of the Calcutta High Court in the case of New India Investment Corpn.
Ltd. (supra) and the decision of the President (as Third Member) of this Tribunal in the case of Hindustan General Industries Ltd. (supra) are authority for the view that it is the overall variation which is to be taken into consideration and the same cannot be broken into segments or under different heads. Thus, where the difference between the allocated share income and the returned income exceeds Rs. 1,00,000, on a plain reading of Section 144B(1), a reference to the IAC would be called for. We have taken due note of the fact that such a reference would arise only where the variation in the income or loss is prejudicial to the assessee. It is well known that under the provisions of Section 264 of the Act the Commissioner cannot pass an order in revision which is prejudicial to the assessee. As to the scope of the term 'order prejudicial to the assessee', we have the observations of the Privy Council in the case of CIT v. Tribune Trust  16 ITR 214 which are as under: . . . But having heard argument upon it and considered the conflicting decisions in the Courts of India they have come to a clear conclusion which they think it right to express. It appears to them that an order made by the Commissioner under Section 33 can only be said to be prejudicial to the assessee when he is, as a result of it, in a different and worse position than that in which he was placed by the order under review . ...
These observations were referred to by the Kerala High Court in K.C.Luckose v. ITO  92 ITR 450 wherein with reference to the provisions of Section 264, it was observed as under: The power of the Commissioner under the above provision is wide. It is subject only to one limitation, viz., that the order should not be prejudicial to the assessee. Subject to this limitation, the Commissioner can correct any error appearing in the order of the subordinate authority. An order can be prejudicial to an assessee only if its net result is detrimental to him. Supposing there are two errors in an order sought to be revised, one in favour of the assessee and another against him; and the assessee raises in revision only the error against him. When a revision against an order of a subordinate authority is filed, the Commissioner is seized of the whole case; and he is entitled to correct the errors therein, and pass an order which should have been passed by the subordinate authority, subject to the aforesaid limitation. In the instant case, the net result of the order of the Commissioner is in favour of the petitioner. There is authority for the above position in the decision of the Privy Council in CIT v. Tribune Trust  16 ITR 214. Dealing with Section 33 of the Indian Income-tax Act, 1922, which contains the same provision as Section 264(1) of the present Act, the Privy Council stated that an order under Section 33 of the Act can be said to be prejudicial to the assessee, only, when he is, as a result of it, in a different or worse position than that in which he was placed by the order . . . .
A Division Bench of the Kerala High Court, in affirming the aforesaid decision referring to the decision of the Privy Council in the case of Tribune Trust (supra) observed as under in the case of K.C. Luckose v.ITO  105 ITR 418: 'The decision interprets the term 'prejudicial to the assessee'.
Going by this interpretation, it is plain that the incidence and operation of the tax on the assessee after the order passed on revision, do not certainly leave him in a worse position than what he was in, prior to the revision. Therefore, it cannot be said that the order passed by the Commissioner was 'prejudicial to the assessee' within the meaning of Section 264 of the Act . ...
It is, therefore, clear that whenever a variation is made in income or loss which results in the assessee being adversely affected as far as the incidence or operation of tax is concerned, the order of the assessment itself will be prejudicial to the assessee. As far as the provisions of Section 144B are concerned, where the variation in income or loss exceeds the statutory amount and is prejudicial to the assessee, the matter has to be referred to the IAC by the ITO. This would mean that any adverse variation in the income or loss returned to the detriment of the assessee alone is sufficient to make such variation prejudicial within the meaning of Section 144B and one does not have to go to the final outcome of the order itself in terms of ultimate tax effect to determine whether the ingredients of Section 144B(1) for making a reference are satisfied.
9. It is settled law that an assessment can be made on a partner even if no assessment is made on the firm itself in the status of an unregistered firm. Authority for this proposition is the decision of the Supreme Court in the case of CIT v. Murlidhar Jhawar & Puma Ginning & Pressing Factory [19661 60 ITR 95. The Madhya Pradesh High Court in the case of Kalekhan Mohd. Hanif v. CIT  86 ITR 196 has stated that an. assessment could be made on a registered firm even after all the partners have been assessed on their share of income from the firm.
These decisions and as also the decision of the Allahabad High Court in the case of L. Satish Chand v. ITO  75 ITR 623 lead to the inference that an assessment of a partner need not necessarily await completion of the assessment of the firm and, therefore, we are unable to agree with the learned counsel for the assessees that in order to make an assessment of a partner varying the share income as returned, the ITO necessarily has to await the completion of the assessment of the firm and the corning into application of the provisions of Section 10. There may be a case where an ITO notices in the books of account maintained by the firm, a cash credit in the account of a partner. He may consider such cash credit independently in the hands of the partner and may come to the conclusion that the partner has not satisfactorily explained the source thereof, and the amount is taxable as income from undisclosed sources in the hands of the partner. Such action could lead to a variation in the income returned by the partner even if he has only returned share income.
11. Even where the assessment of a firm is completed and an allocation of share income made, such allocated income as far as the partner is concerned need not necessarily be the amount which is includible in his individual assessment. The partner could well urge that some part of the income as allocated to him had been diverted by overriding title and he should be assessed only on the net income--See in this regard the decision of the Bombay High Court in Ratilal B. Daftari v. CIT  36 ITR 18. There could also be cases as contended by the learned departmental representative wherefrom the allocated share income deductions have to be allowed for expenses incurred by the assessee for earning the share income, or deductions have to be allowed by way of the statutory allowances such as depreciation allowance, etc., for assets belonging to the assessee used in the business of the firm.
Therefore, it becomes necessary, more often than not, for an ITO to adjudicate upon claims of an assessee-partner that the allocated income is not to be straightaway assessed is his hands, but modifications are to be made.
12. The provisions of Section 144B come into play prior to the stage when an assessment is to be made on the partner. The provisions of Section 155, which authorises amendments of share incomes already adopted, comes into play only in respect of 'completed assessment of a partner in a firm'. Both the provisions, therefore, operate at two distinct points of time.
13. The aforesaid discussion goes to show that there is no bar to the assessment of a partner being processed simultaneously with the assessment of the firm in which he is a partner. Where the ITO has prepared a draft assessment order in the case of a firm and tentatively comes to the conclusion that an addition is to be made in the case of the firm which would result in partner's income being modified by increasing the same by Rs. 1,00,000 or more, it would be in order for the ITO to prepare a draft assessment order in the case of the partner also for submission to the IAC. That is all that has happened in the present group of cases and the ITO had submitted a draft assessment order in the case of the firm to the IAC on 18-2-1982. Thereafter, on finding with reference to the tentative conclusions in the draft assessment order that there would be variation in the share income of each partner by over R$. 1,00,000, the ITO drew up a draft assessment order in the case of each of the assessee-partners proposing such variation and such draft assessment order was dated 6-3-1982. The proposals made by the ITO in the draft assessment order were bona fide arrived at and on the basis of enquiries and investigations which he made in the usual course of the assessment proceedings. The reference to the IAC in the circumstances were strictly in compliance with, and as required by the provisions of Section 144B(1). Therefore, the extended time limit under Explanation 1(iv) to Section 153 was available for completion of the assessments and the assessments so completed in each of the cases on 8-4-1982 were within the time. We, therefore, would set aside the order passed by the Commissioner (Appeals) in each of the cases and would restore the assessments as made by the ITO since such assessments were made within the period of limitation.
14. In the view that we have taken, it is not necessary to deal with the final alternate contention so ably urged by the learned departmental representative based on certain observations in the judgment of the Punjab High Court in S. Sewa Singh Gill's case (supra).