1. This appeal arises from the order dated 7th October, 1988 passed by Shri V.K. Misra, Commissioner of Income-tax (Appeals), Meerut. The question to be decided here is what is the extent or range of the material which the Assessing Officer can consider for the purpose of taking decision in accordance with Section 183(b) of the Income-tax Act, 1961. Section 183 as it stood at the relevant time was as under : (a) may determine the tax payable by the firm itself on the basis of the total income of the firm; or (b) if, in his opinion, the aggregate amount of the tax payable by the firm if it were assessed as a registered firm and the tax payable by the partners individually if the firm were so assessed would be greater than the aggregate amount of the tax payable by the firm under clause (a) and the tax which would be payable by the partners individually, may proceed to make the assessment under Sub-section (1) of Section 182 as if the firm were a registered firm; and, where the procedure specified in this clause is applied to any unregistered firm, the provisions of Sub-sections (2), (3) and (4) of Section 182 shall apply thereto as they apply in relation to a registered firm.
The section is intended to protect the interest of the revenue. The precise point of the controversy is whether the Assessing Officer, for the purpose of taking decision, can also take into consideration the material of the subsequent assessment years. The assessee says 'no' whereas the Assessing Officer says 'yes'. The relevant facts in connection with the controversy are as follows.
2. The assessee is a partnership firm with 3 partners having equal shares. For the purpose of accounts the previous year ended on 31 st March, 1985. In the return filed the assessee declared loss of Rs. 3,33,700. The Assessing Officer found that the firm had not filed Form No. 12 in respect of the continuation of registration to the firm for the purpose of division among the partners. He further found that in subsequent two assessment years namely, assessment years 1986-87 and 1987-88 the income declared was Rs. 11 lakhs plus and 8 lakhs plus respectively. He, therefore, formed the opinion that the firm had not filed Form No. 12 with a purpose to get the loss determined and carry the same forward so as to adjust against the profits of the next year.
Probably he thought that the loss determined could be carried forward only in the hands of unregistered firm (URF) (here it may be stated that the decision of the Supreme Court in the case of Garden Silk Weaving Factory v. CIT  189 ITR 512, 56 Taxman 4K. came to be pronounced subsequently in the year 1991). It was also found that the 3 partners did not have any other source of income. The Assessing Officer, therefore, activated Section 183(b) of the Act and opined that in the interest of Revenue it was necessary to grant registration to the partnership firm for this year. Accordingly after determining the loss he allocated the loss among the partners according to the provisions of Section 67 of the Act. For the purpose of such decision he relied upon the decision of the Supreme Court in the case of Sarupchand Hukamchand and Co. v. Union of India  37 ITR 81. In appeal filed by the assessee it was contended that the decision of the Supreme Court relied upon by the Assessing Officer was in fact in favour of the assessee. Besides the Assessing Officer exceeded his jurisdiction in taking into consideration the material in the form of returns of income filed for subsequent assessment years because the Assessing Officer, as per the law as also the decision of the Supreme Court, had to form the opinion only on the basis of facts and material confined to the assessment year under consideration. It was further stated by the assessee that if the Assessing Officer were to remain confined to the material for assessment year 1985-86, then there being no other income in the hands of the individual partners, the tax effect was nil, since there was loss and therefore, the revenue would not benefit in either way and therefore, the Assessing Officer should have adopted the status as URF. The Commissioner (Appeals) did not deal with the decision of the Supreme Court relied upon by the Assessing Officer as also by the assessee but accepted the contention of the assessee that Assessing Officer was guided by irrelevant consideration in the form of returns for subsequent assessment years. Accordingly he directed the Assessing Officer to assess the firm in the status of URF.3. At the time of hearing the learned Departmental Representative relied upon the order passed by the Assessing Officer. Mr. Aggarwal supported the appellate order and reiterated that the principle laid down by the Supreme Court in the case of Sarupchand Hukamchand and Co.
(supra) fully governed the controversy. He further stated that in view of the decision in the case of Garden Silk Weaving Factory (supra) the controversy was only academic.
4. On going through the decision rendered by the Supreme Court in the case of Sarupchand Hukamchand and Co. (supra) we find that the controversy was slightly different, though certain observations made are useful of application to the facts and the controversy in this case.
In this case what happened was that in assessment years 1940-41, 1941-42 and 1942-43, the assessee's application for registration of the firm under Section 26A of the Income-tax Act, 1922 was rejected and therefore, the firm had to be taken admittedly as URF. In assessment year 1940-41 the assessee had declared loss i,n the return but the same was converted into positive income on assessment. For subsequent two years the assessee had declared substantial income. On assessment, the Assessing Officer found that for assessment year 1940-41, if the registration was granted to the partnership firm under Section 23(5)(b) of the Act [pari materia with Section 183(b) of the Act of 1961], then the revenue realised would be higher because the loss returned was converted into positive income. He, therefore, granted registration to the firm. Against the variation in the loss declared which was converted into assessed income, the assessee had preferred an appeal whereby the assessee's claim for loss was accepted. The Appellant Assistant Commissioner being the first appellate authority issued direction as under : the Income-tax Officer is direc ted to modify the assessments accordingly.
The Assessing Officer modified the assessments so as to accept the loss but did not pass any order so as to revise his decision taken on the basis of Section 23(5)(b) of the Act. The assessee moved various authorities as also High Court on number of occasions for appropriate direction to the Assessing Officer to withdraw the applicability of Section 23(5)(b) of the Act, but. in vain. Ultimately the Supreme Court accepted the claim of the assessee and held the view that: (i) when the AAC found that the assessee had incurred loss, the earlier decision of the Assessing Officer to act under Section 23(5)(b) of the Act automatically fell through; (ii) the power of the AAC to amend any assessment: of the partners was implicit in the order which he passed for modifying the assessment; and (iii} the Assessing Officer was under a duty to determine once again whether in the altered circumstances he would apply Section 23(5) (b).
4.1 From the above it is quite clear that nothing is clearly held by the Supreme Court that position in the subsequent assessments had to be ignored for the purpose of decision in accordance with Section 183(b) of the Act. This was so because this point was not argued at all. But the facts being identical, it can safely and reasonably be inferred as is canvassed by Mr. Aggarwal. Therefore, in our opinion the Assessing Officer could not take into consideration the returns of subsequent two assessment years.
4.2 Moreover now that decision of the Supreme Court is available in the case of Garden Silk Weaving Factory (supra) where it was held that the loss of the registered partnership firm is required to be carried forward in the assessment of the firm to the extent the amount of loss is not set off in the assessment of individual partners, the controversy becomes academic. The learned Departmental Representative could not controvert the contention raised by Mr. Aggarwal to this effect and on going through the decision we find that the contention raised is correct. Besides considering the language of the section it is quite clear to our mind that provisions of Section 183(b) of the Act would have no application in the case where loss is determined in the assessment of the firm.