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Commissioner of Income Tax, New Delhi Vs. Balkishann Bhatia - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberIncome Tax Reference Appeal No. 6 of 1968
Judge
Reported inILR1972Delhi226; [1972]86ITR452(Delhi)
ActsIncome Tax Act, 1961 - Sections 154
AppellantCommissioner of Income Tax, New Delhi
RespondentBalkishann Bhatia
Advocates: G.C. Sharma,; V. Klimaria,; Randhir Chawla,;
Cases ReferredMysore v. M.M. Thimmaiah
Excerpt:
.....the assessed not an active partner and levying of special surcharge (for unearned income) on his share income from some of the firms is legal.; the assessed was a partner of many firms and was originally assessed on his share income from some of the firms subject to rectification of the assessment on finalisation of the assessments of the respective firms. subsequently the income tax officer, on being informed of the correct share income on the completion of assessments of some out-station firms, passed an order under section 154 and 155 of the act, and while enhancing the share income of the assessed, also levie special surcharge:; that the income tax officer had no jurisdiction to treat the income of the assessed as unearned income, for in the original assessment the share income of..........assessment was completed before the new act came into force. in the original assessment the share income of the assessed from some of the firms in which he was a partner was taken provisionally at the figures disclosed in the return subject to rectification of the assessment on the finalisation of the assessment of the respective firms. penal interest was also charged in the original assessment for short payment of advance tax under section 18a (2) of the old act. subsequently the income tax officer received information from various income tax officers assessing the out station firms, in which the assessed was a partner, about the correct share income on the completion of the assessments of the respective out station firms. revision of the assessment thereforee became necessary in.....
Judgment:

Hardayal Hardy, C.J.

(1) This judgment will dispose of 13 Income-tax references, viz I.T.R.Nos. 1,4 to 10 and 16 to 20 of 1968 in which a common question of law has been raised by the Income-tax Appellate Tribunal under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as the new Act). The applicant is the Commissioner of Income Tax while the respondent who will hereafter be referred to as the assessed is a partner in as many as 15-16 firms. Two of these firms carry on business at Delhi while the other firms carry on business outside Delhi on various places such as Amritsar, Kanpur, Kashgargh, Bombay, Nagpur and Calcutta and other places. The various references relate to different out of station firms.

(2) Originally the Commissioner had applied to the Tribunal to refer lo the High Court two questions of law arising out of the Tribunal's order dated 20.3.1965 in I.T.R.No. 3253 of 1964-65. The questions read as follows:-

(1)'Whether on the facts and in the circumstances of the case. the Tribunal was right in holding that the Income-tax Officer's order of rectification under Section 154/155 of the Income- tax Act, 1961, in so far as it imposed the special surcharge on the assessed's income from share in the income of his various firms was illegal. '(ii) Whether on the facts and in the circumstances of the case. the Tribunal was right in holding that the Income-tax Officer's enhancement of the penal interest under Section 18A(6) of the Income-tax Act, 1922, by resorting to the provisions of Section 154/155 of the Income-tax Act, 1961 without giving a specific notice to the assessed in this respect was illegal.'

(3) When the statement of case was being prepared, the assessed brought it to the notice of the Tribunal that the question regarding levy of special surcharge was concluded by a finding of fact and no question of law arose from the order of the Tribunal. But as regards the question of levy of extra penal interest the assessed agreed that the question of law did arise but it should not be referred to in view of the decision of the Supreme Court in M. Chochalingam and M. Meyyan v. Commissioner of Income-tax : [1963]48ITR34(SC) , where the Supreme Court having held that the levy of penal interest without sending any notice to the assessed was a clear breach of the principles of natural justice and as such illegal.

(4) In that view of the matter the following question alone was referred to the High Court for opinion:-

'WHETHERon the facts and in the circumstances of the case, the Tribunal was right in holding that the Income- tax Officer's order of rectification under Section 154/155 of the Income-tax Act, 1961 in so far as it imposed the special surcharge on the asessee's income from share in the income of his various firms was illegal.'

(5) The statement of case has been prepared with reference to the assessment year 1958-59 and the relevant previous year is the .Diwali-Samvat year ending in October-November 1957. The original assessment for 1958-59 assessment year was made by the Income-tax Officer under Section 23(3) of the Indian Income-tax Act, 1922 (hereinafter referred to as the old Act). The assessment was concluded before April 1962 before the new Act came into force. It was however not made clear whether the original assessment was completed on 30.6.1959 as mentioned by the Income-tax Officer in his order under Section 154 of the new Act or on 31-3-1960 as mentioned by the Appellate Assistant Commissioner. But the exact date of completion is not material, as it is a common ground that the origianal assessment was completed before the new Act came into force. in the original assessment the share income of the assessed from some of the firms in which he was a partner was taken provisionally at the figures disclosed in the return subject to rectification of the assessment on the finalisation of the assessment of the respective firms. Penal interest was also charged in the original assessment for short payment of advance tax under Section 18A (2) of the old Act. Subsequently the Income tax Officer received information from various Income tax Officers assessing the out station firms, in which the assessed was a partner, about the correct share income on the completion of the assessments of the respective out station firms. Revision of the assessment thereforee became necessary in order to increase the assessed's share from these firms to the correct figures reported by the respective Income-tax Officers. The Income-tax Officer had first issued a notice under Section 35 of the old Act on 17-2-1962 which was served on the assessed on 19-12-1962. A second notice was later issued on 15-4-1963 and this was under Section 155 of the new Act, as in the meantime the new Act had come into force. The assessed sent a reply to the notice dated 15-4-1963 by his letter dated 23-4-1963. It was stated in the reply that the assessed agreed to the substitution of the reported share income from the various firms in place of the figures taken provisionally in the original assessment but he objected to the levy of special surcharge on his share income from the firms and stated that he was actively engaged in the conduct of the business of the firms, not only in those carrying on business in Delhi but also in those firms carrying on business outside Delhi. The Income-tax Officer overruled the objection of the assessed and passed an order under Section 154/155 of the new Act not only enhancing the share income but also levying special surcharge in respect of the assessed's share from all the firms except those at Kanpur and Delhi. The Income-tax Officer went a step further. While giving effect to his order under Section 154/155 of the new Act. he not only levied extra tax as a result of the increase in the assessed income revised under Section 154/155, but he also levied penal interest which was in excess of the penal interest levied in the original assessment. This order was made by the Income-tax Officer on 23.5.1963.

(6) Being aggrieved by the order of the Income-tax Officer the assessed filed an appeal before the Appellate Assistant Commissioner and contended that the Income tax Officer was wrong in holding that the assessed was not actively engaged in the conduct of the business of the out-station firm in which he was a partner. It was pointed out before the Appellate Assistant Commissioner that the assessed had produced evidence before the Income-tax Officer to show that the assessed had incurred expenses for visiting diffierent places where the out-station firms were carrying on bussiness. Daily reports received from out station farms were also produced to establish that the assessed was actively engaged in the conduct of the business of those firms. It was further pointed out that throughout in the past the assessed was allowed earned income relief under Section 2(6AA) of the old Act read with Section 15A of the old Act in respect of his share income from out-station firms which clearly indicated a finding by the Incom-tax Officer that the assessed was actively engaged in the conduct of the business of the out-station firms. It was also pointed out that the question of earned income relief was considered by the Income-tax Officer assessing the Kanpur firm and though he had refused to allow the earned income relief in respect of his share income from Kanpur firm in connection with 1957-58 assessment year. the Appellate Assistant Commissioner on appeal had allowed earned income relief after going through the voluminous correspondence and after having satisfied himself that all the partners of the Kanpur firm including the assessed were actively engaged in the conduct of the business of that firm. It was claimed that this finding of the Appellate Assistant Commissioner in connection with the appeal of the Kanpur firm, applied equally to the cases of the other partnership firms operating at other stations. In any case, it was contended that the question of levy of special surchage could not be the subject matter of rectification under Section 154/155 of the new Act, as this point could be decided only after prolonged investigation and after hearing the agruments of the assessed. The contention found favor with the Appellate Assistant Commissioner and it was held that the question whether special surcharge was livable in respect of the share income of the assessed in the various out-station firms, could be decided only after going into the particular facts of each case, as to whether or not the assessed was actively engaged in the conduct of the business of the firm. In the opinion of the Appellate Assistant Commissioner, this could not be said to be a mistake apparent from the records which could be rectified under Section 154/155 of the new Act. The Appellate Assistant Commissioner relied on a decision of the Supreme Court in the Case of Income-tax Officer V Circle Madras and another v. S. K. Habibullah : [1962]44ITR809(SC) and observed that a mistake which becomes apparent only from the records of the firms is not a mistake from the records as far as the assessment of the partners is concerned. The Appellate Assistant Commissioner thereforee held that in the circumstances of the case. the Income-tax Officer was not entitled to rectify this mistake under Section 154/155 of the new Act. The other ground taken up by the assessed in appeal before the Appellate Assistant Commissioner was against the imposition of penal interest under Section 18A(6) of the old Act. Penal interest was levied as there was short-fall in the advance amount actually paid by the assessed under Section 18A(2) compared to what the assessed was required to pay under Section 18A(1) of the old Act. The Appellate Assistant Commissioner was of the opinion that extra penal interest was livable as the assessed income increased after rectification order under Section 154 of the new Act was passed but the levy of extra penal interest under Section 154/155 was illegal because the assessed was not given any specific notice on this point in any of the notices issued to him. He thereforee held that the levy of extra penal interest under S. 154/155 was illegal. The order of the Income-tax Officer under Section 154/155 of the new Act was thereforee concelled by the Appellate Assistant Commissioner.

(7) Against the decision of the Appellate Assistant Commissioner, the Income-tax Officer went in appeal before the Income-tax Appellate Tribunal and contended that the order of the Appellate Assistant Commissioner cancelling the Income-tax Officer's order of rectification was erroneous. The contention urged on behalf of the Revenue was that in the original assessment order, special surcharge was not levied and that earned income relief was allowed to the assessed in the past in respect of his share income from various out-station firms on which special surcharge had since been levied by the Income-tax Officer in his order of rectification under Section 154/155. Before making that order the Income-tax Officer made inquiries at least in respect of one firm at Calcutta and he was informed by the Income-tax Officer assessing the Calcutta firm that the assessed was residing in Delhi and was not actively engaged in the conduct of the Calcutta firm. This information was conveyed in a letter dated 17-5-1963 written by the Income-tax Officer. Calcutta to the Income-tax Officer, Delhi.

(8) On a perusal of the letter the Tribunal found that the Income-tax Officer Calcutta was not certain as to whether the partners residing in Delhi were actively engaged in the conduct of the business of the Calcutta firm or not. The Tribunal also found that the assessment on the Calcutta firm was completed on 13.6.1959 for 1958-59 assessment year and the report which the Income-tax Officer had sent to the Income-tax Officer Delhi was in May 1963. i.e. nearly four years after the completion of the assessment of the Calcutta firm. In the circumstances, the Tribunal held that the presumption of the Income-tax Officer, Calcutta was not based on any finding of fact in the assessment order of the Calcutta firm completed in 1959. The Tribunal thereforee did not attach any importance to the presumption made by the Calcutta Income-tax Officer on which Revenue was relying. In any case, the Tribunal was of the opinion that this was not a mistake which was apparent from records and thereforee could not be rectified under Section 35 of the old Act or Section 154/155 of the new Act as it involved, investigation into fresh facts and the point was a debatable one.

(9) As regards the additional penal interest levied in the rectification order under Section 154/155 of the new Act the Tribunal held that levy of additional interest was illegal because the assessed wa.s not given any specific notice on this point.

(10) It is in these circumstances that the two questions were formulated by the Commissioner of Income-tax and as we have said before the question of levy of penal interest having been concluded by a decision of the Supreme Court it is only one of the two questions that has been referred to this Court.

(11) On behalf of the R.evenue the contention urged by Shri G.C. Sharma is that though the rectification order made by the Income-tax Officer on 23.5.1963 purports to have been made under Section 154/155 of the new Act, the provision of law actually applicable to the case is the one contained in Section 155(l)(a) of the new Act. The question of any error for rectifying any mistake apparent from the records under Section 154 thereforee does not arise. Section 155(1) has special reerence to the case of a partner in a firm and it is laid down in clause (1) of Section 155 that where in respect of any completed assessment of a partner in a firm it is found on the assessment or re-assessnient of the firm that the share of the partner in the income of the firm has not been included in the assessment of the partner or, if included is not correct, the Income-tax Officer may amend the order of assessment of the partner with a view to the inclusion of the share in the assessment or the correction thereof, as the case may be. The provisions of S. 154 are however applicable 'so far as they may be', and the period of four years specified in sub-section (7) of that section is reckoned from the date of the final order passed in the case of the firm. It may be noticed that under sub-section (7) of Section 154 save as otherwise provided in Section 155 or sub-section 186, no amendment under Section 154 shall be made after the expiry of four years from the date of the order sought to be amended. So, the only limitation on the power of the Income-tax Officer to amend the order of assessment of the partner is to the extent laid down in sub-section (7) of Section 154. The remaining provisions of Section 154 can apply to the order of amendment, 'so far as they may be.'

(12) But assuming that were so, still that would not confer any jurisdiction on the Income-lax Officer to treat the income of the assessed as un-earned income. In the original assessment the share income of the assessed from out-station firms in which he was a partner, though taxed provisionally at the figure disclosed in the return, was shown as earned income but in the order made by the Income-tax Officer on 23.5.1963 the Income-tax Officer came to the conclusion on the basis of a letter received by him from the Income-tax Officer Calcutta on 17.5.1963 that the assessed was not actively engaged in the conduct of the business of the Calcutta firm. His share income was thereforee enhanced. A similar situtaion had arisen in a case decided by Mysore High Court in Commissioner of Income-lax, Mysore v. M.M. Thimmaiah : [1968]67ITR180(KAR) where the question of law was in the following term:-

'WHETHERon the facts and in the circumstances of the case the Tribunal was right in holding that the Income-tax Officer. while passing the order under Section 155 of the Act, was not justified in treating the share income of profit from the partnership firm as un-earned.'

(13) It was held that it may be that the Income-tax Officer erred in treating that portion of the income as earned income. The mistake committed by him may be apparent from the record but such mistakes cannot be rectified under Section 155. That Section deals with amendment of assessment of a partner or a member of a firm or association under circumstances mentioned therein. It has nothing to do with mistakes apparent or otherwise. The question was thereforee answered to the effect that the Income-tax Officer was not justified in treating the income in question as un-earned. The same considerations apply in the present case. We do not agree with the Tribunal in holding that the letter dated 17.5.1963 was belated inasmuch as the assessment on the Calcutta firm was completed on 13.6.1959 for 1958-59 assessment year and the report which the Income-tax Officer Calcutta sent to the Income-tax Officer, Delhi was in May 1963 i.e. to say nearly four years after the completion of the assessment of the Calcutta firm, for it was open to the Income-tax Officer, Culcutta to send that intimation within a period of four years which is the normal period for making the necessary order of amendment. The letter dated 17.5.1963 was thereforee before the expiry of the period of foury ears. If however there was nothing in the order of assessment of Calcutta firm made on 13.6.1959 to raise such a presumption the Tribunal was perhaps right in holding that no such presumption could arise. The income-tax Officer in the present case, however did not base his finding entirely on that presumption for he said, 'apart from this communication, I.T.O. assessing the partners is also competent to arrive at a proper conclusion as to whether a particular partner was actively engaged or not.' Nevertheless, in the present case, there was evidence before the Appellate Assistant Commissioner to show that the assessed had incurred expenses for visiting different places where the out-station firms were carrying on their business. Daily reports received from out-station firms also established that the assessed was actively engaged in the conduct of the business of those firms. There was also evidence to show that throughout in the past, the assessed was allowed earned income relief under Section 2(6AA) read with Section 15 of the old Act in respect of his share income from the out-station firms which clearly indicated a finding by the Income-tax Officer that the assessed was actually engaged in the conduct of the business of the out-station firms. In the case of Kanpur firm the question of earned income relief was considered by the Income-tax Officer and though he refused to allow earned income relief to the assessed in respect of the share income from the Kanpur firm in connection with the 1957-58 assessment year, the Appellate Assistant Commissioner on appeal allowed earned income relief after going through voluminous correspondence and after satisfying himself that all the partners of the Kanpur firm including the assessed were actively engaged in the conduct of the business of that firm. The Tribunal no doubt largely based itself on the presumption arising under the letter dated 17.5.1963 received from the Income-tax Officer. Calcutta and held that the presumption did not arise. It also held that in any event, this was not a mistake which was apparent from records but the Tribunal did not up-set the order of the Appellate Assistant Commissioner and in away actually affirmed the same, by observing that it was conceded by the departmental representative that earned income relief was allowed to the assessed in the past in respect of his share income from the various out-station firms.

(14) In this view of the matter, the question referred to us is answered in favor of the assessed and against the Revenue, but there will be no order as to costs.


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