SETHURAMAN J. - This reference has been made at the instance of the Commissioner of Income-tax, Madras. The assessee is a firm carrying on business as contractors consisting of three partners, Sachidanandam, Nataraja Gounder and Mosa Gounder. On December 12, 1968, the Income-tax Officer made an assessment for the assessment year 1968-69, in the case of Sachidanandam under section 144 of the Act. In the said order the Income-tax Officer observed as follows :
'On the basis of materials available, I estimate the assessees share income from the firm of Messrs. Blue Mountain Engineering Corporation at Rs. 7,500.'
The same Income-tax Officer had served a notice under section 139(2) on 18th July, 1968, on the assessee-firm. It did not file a return of income in pursuance of the said notice and the Income-tax Officer completed the assessment on January 4, 1969, estimating the income at Rs. 25,000 and showing the status as 'unregistered firm'. The assessee filed an appeal before the Appellate Assistant Commissioner, who dismissed it. There was a further appeal to the Tribunal and in the course of the said appeal it was contended that the assessment made in the case of the assessee-firm could not be sustained as earlier an assessment had been made in the case of one of the partners. The Tribunal, which considered a similar question in an earlier order of its, was of the opinion that the assessment on the unregistered firm could not be sustained. It is this order of the Tribunal dated 22nd August, 1970, that has given rise to the present reference in which the following question has been referred :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessment made in the case of the assessee-firm which has not been granted registration at a stage at which an assessment had been made earlier in respect of income referable to the same source in the hands of one of the partners of the firm was without legal sanction ?'
The learned counsel for the Commissioner contended that whatever might have been the position under the Indian Income-tax Act, 1922, under the Act of 1961, there was no question of any option being exercised by the Income-tax Officer between making an assessment on the partner and on the firm, and that the Income-tax Officer could assess the income in the hands of the right person even though another person might have been assessed on part of the same income. In the submission of the learned counsel for the department, the Act of 1961 contained different sets of provisions, which were not identically worded, so that the decisions rendered under the Act of 1922 could not be applied to the cases arising under the Act of 1961. The learned counsel for the assessee brought to our notice a decision of the Patna High Court in Commissioner of Income-tax v. Pure Nichitpur Colliery Company : 101ITR79(Patna) , in which an identical question arising under the Act of 1961 had been decided, following the earlier decision rendered under the Act of 1922.
The further submission was that when the Income-tax Officer sought to make an assessment on the partners of a firm, he was trying to assess the income of the firm in the hands of the partners and that this would amount to the exercise of an option which precluded him from subsequently taxing the firm as such. In support of the rival submissions, we had the benefit of hearing M/s. J. Jayaraman and A. N. Rangaswami, the learned standing counsel for the department, and also M/s. K. Srinivasan and S. Swaminathan, the learned counsel for the assessee.
The facts given above go to show that, apart from the fact that the Income-tax Officer was aware of the partner, Sachidanandam, having a share in the income of the assessee-firm, he knew also that the income of the firm was liable to be assessed in its hands as is clear from his own conduct in serving a notice earlier on the firm. There is nothing on record to show that the other two partners of the said firm had been assessed to tax. The legality of the assessment on the firm when the partner was earlier assessed on the part of this income is thus in issue.
The Indian Income-tax Act, 1922, provided in section 3 as follows :
'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.'
The question as to whether the Income-tax Officer had an option to assess the firm or the partners individually or to assess the association or its members individually has been the subject of discussion in cases decided by the Supreme Court cited before us. There are also some High Court decisions which have dealt with this aspect more or less directly. Before referring to the High Court decisions, we shall briefly refer to the Supreme Court decisions which form the foundation for the view taken by the High Court on this point.
The earliest of the Supreme Court decision is in relation to an association of persons in Commissioner of Income-tax v. Kanpur Coal Syndicate : 53ITR225(SC) . The Syndicate consisted of persons combined together for the purpose of purchasing coal for supply to customers. For the assessment year 1948-49, the Income-tax Officer levied tax upon the total income in the hands of the association. The association claimed that in the circumstances of the case it should not be assessed to tax as an association of persons, but that the proportion of the income in the hands of each of the members of the association could alone be assessed to tax instead. The Income-tax Officer did not accept this claim nor did not Appellate Assistant Commissioner do so. On further appeal to the Appellate Tribunal it held that though the Income-tax Officer had the power to assess the income of the association of persons as such, or, in the alternative, on the individual members thereof in respect of their proportionate share in the income, it had no power under the Act to direct the Income-tax Officer to exercise his power in one way or the other. On a reference, the Allahabad High Court held that the Appellate Tribunal had power to set aside the Income-tax Officers assessment against the association and to give consequential and ancillary directions to the said officer to assess the individuals. When the matter came on appeal, at the instance of the Commissioner, the Supreme Court agreed with the said decision of the Allahabad High Court. Learned counsel for the revenue contended before the Supreme Court that under the Indian Income-tax Act of 1922, the Income-tax Officer had no option nut to assess the total income of the association of members, though the individuals share in the income might be added to his individual income for the purposes of ascertaining his total income. It was further argued that even if the Income-tax Officer had the option to assess to income-tax the association of persons on its total income or the individual members thereof in respect of their proportionate share of the income, if he had exercised the option in one way or the other, neither the Appellate Assistant Commissioner in appeal nor the Income-tax Appellate Tribunal in further appeal had power to direct the Income-tax Officer to exercise his discretion in a different way. The contention went to the full length of stating that no appeal lay against the assessment on the association on the ground that the Income-tax Officer should have assessed the individual members of the said association. It is this contention that was repelled by the Supreme Court. The Supreme Court held as follows (page 228) :
'...... section 3 impliedly gives an option to an appropriate authority to assess the total income of either the association of persons or the members of such association individually.'
It was further held that the scope of the appellate power was coterminous with that of the Income-tax Officer and that the comprehensive phraseology used in the Act in relation to the appellate powers did not countenance the attempt of the revenue to restrict the powers of the Appellate Assistant Commissioner or of the Appellate Tribunal and that both of them had power to direct the assessing authority to assess the members individually instead of the association of persons as a unit.
It may be seen from the above that the existence of an option to assess either the members or the association was first mooted by the counsel for the department in the case before the Supreme Court cited above. What was decided in that case has been set out by the Supreme Court in a later case reported as M. M. Ipoh v. Commissioner of Income-tax : 67ITR106(SC) as follows :
'In Commissioner of Income-tax v. Kanpur Coal Syndicate : 53ITR225(SC) , it was held by this court that the Appellate Tribunal has ample power under section 33(4) to set aside an assessment made on an association of persons and to direct the Income-tax Officer to assess the members individually or to direct amendment of the assessment already made on the members.'
This case does not appear to us to consider the point that is now in issue before us. The expression underlined above goes to show that it contemplates an earlier assessment on the members. If a direction is to be given in the later assessment, it would follow that, in fact, there is no question of option.
In Commissioner of Income-tax v. Murlidhar Jhawar and Purna Ginning and Pressing Factory : 60ITR95(SC) , the Supreme Court was concerned with the assessment for 1954-55. The Income-tax Officer brought to tax 1/3rd share of Rs. 51,280, computed as profits from the business carried on by the firm in the hands of each of the three partners thereof. The Income-tax Officer thereafter called upon the firm itself to submit a return, and completed the assessment of the firm subsequently on an income of Rs. 80,925. This assessment was confirmed on appeal. But, on further appeal, the Appellate Tribunal held that the Income-tax Officer had the option to assess the individual parties to the joint venture and that he, having exercised that option, it was not open to him thereafter to reassess the same income collectively in the hands of the three parties to the joint venture in the status of an unregistered firm. As the instance of the Commissioner, the matter was taken on reference to the High Court, and the High Court held that the assessment of the unregistered firm was not proper and legal, the partners of the partnership having been assessed in respect of the share income from the said partnership business. The Commissioner of Income-tax appealed to the Supreme Court and the contention taken on his behalf was that the Income-tax Officer making the first assessment of the three parties to the joint venture was not informed that the three parties constituted an unregistered firm and that, therefore, the Income-tax Officer was in law competent to assess the entity which was in truth liable to be assessed to tax and that, in making the earlier order of assessment, the Income-tax Officer could not be deemed to have exercised an option which precluded him from assessing the income in the hands of the unregistered firm. On the materials, their Lordships were unable to accept the plea that the Income-tax Officer was not in possession of information, relying on which, if he desired, he could have assessed the three parties collectively as an unregistered firm and further observed that there was no warrant for the assumption which counsel for the department asked their Lordships to make, that information about the true state of affairs was not with the Income-tax Officer when the first assessment was made by him. In the course of the judgment, their Lordships pointed out at page 98 as follows :
'The three parties were not a registered firm, and they could be assessed to tax collectively as an association of individuals or as an unregistered firm if the relation between them was of partners. When the Income-tax Officer assessed the three parties separately he unquestionably exercised an option knowing that they had entered into a trading transaction in which they were jointly interested. The departmental authorities have not chosen to place before the court the returns made by the three parties, and even the orders of assessment individually made against the three parties by the Income-tax Officer are not before this court. Only the final order of the Income-tax Officer which directs : Add : Joint venture income with Messrs. Purna Ginning and Pressing Factory taken provisionally subject to rectification after the assessment of the joint venture, is incorporated in the order of the Appellate Assistant Commissioner.'
Again at page 99 their Lordships observed as follows :
'In determining the shares of the three parties, he had also to determine the contractual relation which gave rise to the right to a share in the profit. Again the order of the Income-tax Officer clearly indicates that he was cognizant of the fact that the income of the joint venture was taxable collectively, but he though that he could in law in the first instance make an assessment provisionally of the three parties separately and then rectify the assessments later. In so holding the Income-tax Officer may have committed an error of law, but he does not appear to have laboured under an ignorance of facts. A survey of the contentions raised before the departmental authorities, the Tribunal and the High Court makes that inference irresistible.'
The result was that the assessment on the unregistered firm was held to be illegal. In this case, the Supreme Court has referred to certain observations made in Commissioner of Income-tax v. Kanpur Coal Syndicate : 53ITR225(SC) to the effect that section 3 expressly treated an association of persons and the individual members of an association as two distinct and different assessable entities and that on the terms of the section, the tax could be levied on either of the said two entities according to the provisions of the Act. In effect the Supreme Court did not find any difference between the assessment of an association of persons and of the unregistered firm in this behalf. It may be seen that if the provisions of the Act of 1961 could be taken t be similar to those in the Act of 1922, then this decision would squarely govern the case before us.
This decision has been followed by the Allahabad High Court in Girdhari Lal Laxman Prasad v. Commissioner of Income-tax : 70ITR853(All) . A partnership firm consisted of three partners. The Income-tax Officer in making the assessment for 1958-59 took separate proceedings against two of the partners in their individual status and included therein the share of each from the profits of the firm. In making the assessment in accordance with the return filed by the said two partners, there was a remark that the assessment would be rectified later under section 35 of the Indian Income-tax Act, 1922, when the correct share of income was determined in the assessment of the firm. Subsequently, the Income-tax Officer took assessment proceedings against the firm as such and assessed it as an unregistered firm. The legality of this assessment was challenged in reference and the Allahabad High Court, after referring to the Supreme Courts decision mentioned above, held as follows (page 857) :
'In this state of the law it appears to us in the instant case that, having proceeded to tax the profits in the hands of the individual partners, the Income-tax Officer was not entitled to tax the profits again in the hands of the assessee.'
This case was followed by the same court in Hari Om Company v. Commissioner of Income-tax : 71ITR584(All) and India Army and Police Equipment Factory v. Commissioner of Income-tax : 75ITR693(All) . All of them arose under the Act of 1922.
The question as to whether the same legal position applied to the assessment proceedings under the Act of 1961, has come up for consideration in two later Patna decisions. Before proceeding to consider those decisions, we may mention that section 4 of the Income-tax Act of 1961, corresponding to section 3 of the Act of 1922, made a slight change in the phraseology. The provisions of the Act of 1961, run as follows :
'4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-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 or previous years, as the case may be, of every person........' It is unnecessary for our present purpose to set out the rest of the provision. The word 'person' occurring at the close of the said provision has been defined in section 2(31) of the Act which runs as follows :
'person includes -
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporation or not,
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the proceeding sub-clauses.'
The submission of the learned standing counsel for the department was that the new provision has made a change and that the option the existence of which was previously inferred from the following words of section 3 of the Act of 1922, viz., 'of every firm and other association of persons or the partners of the firm or the members of the association individually' being no longer there in section 4, the same legal position did not apply. As pointed out earlier, the submission was that the income-tax department was entitled to reach the income for taxation in the hands of the proper entity and that the assessment on the basis of any mistaken view of the facts on some other person would not stand in the way of the proper person being assessed. The learned standing counsel stated that any safeguard against any attempt to collect the tax twice over on the same income may be indicated so that it may be given effect to. It was also submitted that the Supreme Court had pointed out in Commissioner of Income-tax v. Kanpur Coal Syndicate : 53ITR225(SC) , that appropriate direction could be given to the authority concerned in this behalf.
Parliament, in enacting section 4 in the manner in which it appears in the statute did not apparently mean to make any change in the law as such as is clear from the Notes on Clauses accompanying the Bill. The obvious purpose behind the use of the word 'person' occurring in section 4 of the Act of 1961 was to shorten the provision and to eliminate repetition of the words found in section 2(31). There is no indication to show that Parliament intended to alter the powers of the Income-tax Officer in this behalf when it re-enacted section 4 in a slightly modified form. In fact, that decision of the Supreme Court or of the High Courts noticed above, where the question of option had come in for consideration, were all rendered subsequent to the passing of the Act of 1961, so that any intention to alter the law taking into account those pronouncements could not be attributed to it. However, we have to take into consideration the provision as it appears in the Act, and if the provision as it is in the statute would yield the construction of the option not being available to the Income-tax Officer as was the case under the preceding statute, then the provision will have to be given effect to. The use of the word 'or' occurring in section 3 of the Act of 1922 and the use of the word 'and' in section 2(31), it is urged, show that the question of choice between the two alternative is not available to the Income-tax Officer under the new Act. It is, however, to be remembered that in a definition provision the word 'or' would be out of place. The consequence of using the word 'person' in section 4 is merely to incorporate the words in the definition of 'person' in section 2(31) into section 4. If we read these words into section 4, then the use of the word 'and' would really involve the consequence of the elimination of a choice between the two alternative. Thus there is something to be said in favour of the construction contended for by the revenue. Further, the Income-tax Officer in making the assessment on the basis of a return filed by an individual partners cannot in all cases be taken to make an election of an assessment between the individual and the firm or the association, as the case may be. For instance, a firm may be functioning from, say, Delhi, and the partners may be distributed over the different corners of the country. Whenever any partner submits any return including his share of the firm, the Income-tax Officer cannot exclude the share income from the assessment and if he did so, the amount would escape assessment. Section 147 of the Act is designed to bring to tax income escaping assessment. There are two categories of assessments of escaped income dealt with by that provision. The first category is that of an assessee who either failed to submit a return or failed to disclose fully and truly all material facts necessary for his assessments. In a case where a partner submits a return including what he finds to be his share income, the partner would not come within this category of cases of income escaping assessment by the omission to file a return or to disclose fully and truly all material facts relating to his assessment so that section 147(a) could be applied to him. Clause (b) of section 147 deals with the second category of cases where in spite of the absence of any omission or failure on the part of the assessee to submit a return or to disclose fully and truly all materials facts, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment. In the case given above, the information being available in the return itself furnished by the assessee, there is no question of any information reaching the Income-tax Officer subsequent to the assessment as contemplated by section 147(b). The result will be that there is no machinery for taxing the income in the hands of the partner, in case the Income-tax Officer excluded the part of the amount returned by the assessee. If the Income-tax Officer tried to take the return furnished and taxed the partner, then in the event of this conduct being taken as an exercise of the option available to him, then the firm would not pay the tax on the total of its income. Thus, this construction tends to a situation of possible tax evasion and may lead to some abuse also. There is also a further anomaly, viz., of a person with a five paise share in a firm submitting his return and getting assessed so that the could stall the assessment on the firm as such, at any time thereafter, with the result that the revenue stands to lose the tax due to it. When these anomalies were pointed out to the learned counsel appearing for the assessees, they stated that the only remedy available to the department is to be vigilant and to tax the firm before taxing the partners. We may add here that it is one of the mysteries of the law why the registered firms are kept out of the fray.
The Patna High Court has in Commissioner of Income-tax v. Pure Nichitpur Colliery Company : 101ITR79(Patna) gone into the existence of the option in the context of the Income-tax Act, 1961. After referring to the relevant provisions of the Act of 1961, it was observed at page 85 as follows :
'Reading all these provisions together it would be noticed that the option of the Income-tax Officer under section 183 is either to determine the tax payable by the firm itself on the basis of the total income of the firm under clause (a) or to tax the partners if, in his opinion, the aggregate amount of the tax payable by them if the firm were treated as a registered firm would be greater than the aggregate amount of the tax which would be payable by the partners individually by adding the share income for the purpose of rate only. It would thus be clear that even after the amendment brought about in the 1922 Act in the year 1956, which was incorporated in the 1961 Act, the Income-tax Officer had the option in the case of an unregistered firm either to tax the total income in the hands of the firm, treating it as a separate entity, or to tax the share income in the hands of the partners. He could not do both. Neither the charging section 4 nor any other provision of the 1961 Act empowered him to do so. It was still his option to do one or the other and not both. The law, therefore, laid down by the Supreme Court was still good, the new provisions did not bring about any change in respect of the exercise of the option, and once the option was exercised to tax the share income of the unregistered firm in the hands of the partners then, on computation of the income of the unregistered firm, the assessment of a partner could be rectified under section 155 of the 1961 Act. But it was not open to the Income-tax Officer to change his option and tax the unregistered firm itself.'
This decision completely supports the case of the assessee.
The learned standing counsel, however, brought to our notice another decision of the Patna High Court rendered more or less contemporaneously with the decision just cited within an interval of 3 days, but by a different Division Bench which has taken a contrary view and which in Mahendra Kumar Agrawalla v. Income-tax Officer : 103ITR688(Patna) . In that case one Agrawalla, the owner of a colliery, gifted it to two persons, viz., Manendra Kumar Agrawalla and Yogendra Kumar Agrawalla, equally in 1953. The income from the colliery was assessed for some years in the hands of an 'association of persons'. The two donees were in later years assessed as individuals in pursuance of an order passed by the Inspecting Assistant Commissioner on a representation made by them. The Income-tax Officer sought to take proceeding under section 148 of the Act of 1961 in respect of the assessment years 1960-61 to 1969-70 proposing to assess the income from the colliery in the hands of the 'association of persons'. This led to a writ petition challenging the validity of the notice, and the Patna High Court dismissed the writ petition taking the view that with reference to assessment years 1962-63 onwards, the Act of 1922 was not applicable. It held that in the charging section 4 of the Income-tax Act, 1961, there was no such option or election to choose between the two taxable units given to the Income-tax Officer, as under the 1922 Act, and, as such, the Income-tax Officer was quite competent to initiate the proceedings under section 147 with a view to tax the income of an assessable unit whose in come had escaped assessment. The earlier decision in Commissioner of Income-tax v. Pure Nichitpur Colliery Company : 101ITR79(Patna) was not cited and has not been considered.
In view of the conflict of the decisions of the Patna High Court, we gave our anxious consideration to the matter. The problem cannot be said to be free from difficulty. We have already indicated the aspects which were placed before us and which would in a way justify the view that the provisions of the Act of 1961 have to be considered on their own. However, taking into account the decision in Commissioner of Income-tax v. Pure Nichitpur Colliery Company : 101ITR79(Patna) , which has gone into the provisions in detail, we think it proper to adopt the same view which commended itself to the learned judges, who decided that case, though not without some hesitation.
The learned standing counsel drew our attention to the decision of the Supreme Court in M.M.Ipoh v. Commissioner of Income-tax : 67ITR106(SC) . We consider that the reliance placed on the said case is not apposite. In the said case after the partition in a joint family there was an association of persons consisting of one Meyyappa (1) and M.S.M.M. firm and Chettiappa. The Income-tax Officer sought to assess this association of persons. The contention raised by Meyyappa (1) was that there was no association of persons which could be brought to tax. This contention failed before the income-tax authorities and also before the Tribunal. The matter thereafter came before this court on reference. There were also petitions filed before this court under article 226 of the Constitution praying for a writ of prohibition restraining the Income-tax Officer from enforcing the demand made by him in respect of the tax assessed against the association of persons. In the writ proceedings the contention taken was that the provisions of section 3 of the Act of 1922 in so far as it authorised the Income-tax Officer to proceed against the association or the individual member thereof offended article 14 of the Constitution and they were, therefore, invalid. This contention was negatived by this court. It was also held that there was an association consisting of Meyyappa (1) and M.S.M.M. firm and Chettiappa which was liable to tax. The decisions of this court in writ petition and in the reference were confirmed by the Supreme Court. It is only in the course of finding out whether the discretion vested in the Income-tax Officer to tax the income either in the hands of the association or in the hands of the members individually was arbitrary or not, so as to be hit by article 14, certain observations came to be made. We do not find anything in the said decision which runs counter to the decision of the Supreme Court in Commissioner of Income-tax v. Murlidhar Jhawar and Purna Ginning and Pressing Factory : 60ITR95(SC) , which, as already pointed out, still covers the cases arising under the Act of 1961.
We consider that the question requires to be reframed as the question as placed before us appears to be somewhat confusing. We reframe the question as follows :
'Whether, on the facts and in the circumstances of the case, the assessment made on the assessee-firm as an unregistered firm, after the assessment made earlier in the case of one of the partners thereof was legal ?'
We answer the question as reframed in the negative and against the revenue. The respondent will be entitled to its costs. Counsels fee Rs. 500.