Skip to content


Shapurji Pallonji Vs. Commissioner of Income-tax, Bombay. - Court Judgment

SooperKanoon Citation
SubjectDirect Taxation
CourtMumbai
Decided On
Case Number Income-tax Reference No. 21 of 1943
Reported in[1945]13ITR113(Bom)
AppellantShapurji Pallonji
RespondentCommissioner of Income-tax, Bombay.
Excerpt:
.....effectively, without unnecessary inconvenience to the subject, with out inconsistency in result and without unnecessary duplication of work on the part of the income-tax authorities, it is obvious that the profits of the registered firm should be ascertained as a whole before assessment is made upon the individual partners. 211) :when the firm is registered under the income-tax act and rules what rights under the act accrue from registration and to whom ?' the question as formulated is general in words, but the following sentences clearly show that the chief justice was still dealing with the rights and liabilities of the parties in relation to the assessment of the individual when the firm had remained unassessed......appears to me that under section 26-a persons trading as a firm have a right to apply to get the firm registered. that act in terms does not define the effect of registration or what are the rights of the parties on registration of the firm. for that, one has to took to the different sections of the act. it is clear that under the act a firm can trade without being registered. if unregistered, the firm, as a unit, could be assessed to super-tax. secondly, when assessing the income of the partners individually, they could not get the benefit of section 48 (2), if their individual rate of taxation was lower. if the firm was a registered firm, it was not liable under section 55 to pay super-tax; and as the tax levied on the registered firm is at the maximum rate of income-tax, the partner.....
Judgment:

STONE, C.J. - This is a reference under Section 66 (1) of the Indian Income-tax Act, and the question referred to us is this :

'Whether, on the facts found by the Tribunal in this case, the Income-tax Officer is by reason of the registration under Section 26-A of the instrument of partnership dated November 15, 1937, prevented or estopped from taxing in the hands of the assessee profits representing the share of ten annas and eight pies in full ?'

The applicant and his brother, Mr. P. P. Mistry, were partners in a firm of building contractors under a partnership, dated September 24, 1929. On November 15, 1937, they and the applicants son entered into a deed of that date. As examination of the deed shows that it contained a recital which states

'And whereas from the 15th day of November 1937 the parties of the first and second parts took the party of the third part as a partner in the said business and whereas the parties are desirous of recording by these presents the constitution of the firm.....'

Then there are set out various rights and duties of partners, and finally the shares of the partners in the profits and losses of the business, which shows the applicant as being entitled to 6-2/3 annas share, his brother P. P. Mistry to 5-1/3 annas share, and his son Kaikhushroo to four annas share.

Mr. Setalvad admits that it is not open to him, having regard to the terms of the reference, to say that that document ought never to have been registered at all on the ground that it is not a document constituting a firm, and it is agreed that no such point can be taken before us.

Now, the firm was in fact registered under Section 26-A of the Act, and that section is as follows :-

'(1) Application may be made to the Income-tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purposes of this Act and of any other enactment for the time being in force relating to income-tax or super-tax.'

Rules were framed under sub-section (2) of Section 26-A, which laid down that the application should be made in accordance with rules to be prescribed; and the relevant rule is rule 4 :

'(1) On the production of the original instrument of partnership or on the acceptance by the Income-tax Officer of a certified copy thereof, the Income-tax Officer shall enter in writing at the foot of the instrument or copy, as the case may be, the following certificate :'

The form of the certificate is not unimportant, and it is as follows :-

'This instrument of partnership (or this certified copy of an instrument of partnership) has this day been registered with me, the Income-tax Officer, for ___________ in the province of _________ under clause (14) of Section 2 of the Indian Income-tax Act, 1922. .....'

Although the section provides for registration of the firm, the form of certificate shows that what is registered is the instrument of partnership.

Now, the facts as found by the Appellate Tribunal may be very shortly stated, and they are as follows :

'In view of these consideration, we find that K. S. Mistry was nothing but a name-lender and that the entire profits representing the share of Rs. 0-10-8 belonged, in fact, to S. P. Mistry and were rightly included in his total income by the Income-tax Officer.'

So that, the position is this : that, although the firm or the instrument of partnership has been registered, and although on the fact of the instrument of partnership it appears that the applicants son has a four annas share, the facts as found by the Appellate Tribunal are that he was merely a name-lender and that that four annas share belonged to the applicant.

On March 20, 1940, the Income-tax Officer issued a notice under Section 34 of the Act, which section provides :-

'If for any reason income, profits or gains chargeable to income-tax has escaped assessment in any year or has been assessed at too low a rate, the Income-tax Officer may, at any time within one year of the end of that year serve on the person liable to pay tax on such income, profits and gains,..... a notice.....'

On the facts held by the Tribunal, the only question, which arises, is : Whether the Income-tax Officer can adjust this matter under Section 34 of the Act, or whether he was prevented or estopped from so doing by reason of the registration In other words, the point is : Whether the Crown was bound by the registration under Section 26-A It is to be observed that there is nothing in that section itself, which directs that the matter cannot be reopened, or which prevents any further investigation by the Income-tax Officer with the object of seeing whether any income of the taxpayer has escaped assessment; nor has out attention been drawn to any other section of the Act which expressly so says.

We have been referred to two cases, to which some reference must be made. The first case comes from Sind : Kirpaldas Motandas v. Commissioner of Income-tax. That case was not a fully argued case as the report is of the refusal of a rule. But at p. 207 Mr. Justice Weston says this :

'We have been shown no section in the income-tax Act which lays down that the registration of a firm operates to estop the Income-tax authorities from taxing assessees who actually receive the profits of that firm, and although a question of estoppel may be said to be a point of law, yet, when, as in the case, it is a point of law to which the answer appears so evident, we think we should properly exercise the discretion granted to us under Section 66 (3) of the Income-tax Act, and decline to direct the Commissioner to make to us a reference on this point.'

So it appears that the Court in that case thought this question of estoppel was clear.

The other case, which comes from Calcutta, is Neemchand v. Commissioner of Income-tax, Bengal. There is a passage at p. 211 which, at first sight, would appear to have a relevant bearing on the matter which we have to determine; but, in my judgment, that case is distinguishable, because we are considering the income of an individual, and the wide words on p. 211 can only apply to the facts of that case which had reference to a firms assessment, and I do not think that that case really decides the point which we have to determine.

Sir Jamshedji Kanga on behalf of the assessee has asked us to look at the scheme of the Act as a whole, and in particular he has drawn our attention to Section 14, 23(3) and Section 23 (4).

On the other hand, Mr. Setalvad on behalf of the Crown relies principally upon the two charging sections, which are Sections 3 and 4, and he says that Section 3 makes all the income of the applicant assessable in respect of the relevant year in accordance with the Act, and that that is governing section and that everything else in merely machinery. He points out Section 14 (2) (b) which gives the partner the benefit of not having to pay again, and it is said that that also is in effect a procedural section, since the objective of Section 26-A, as the registration section, is primarily to get a refund for the partner, and secondly, to ensure that the firm is not charged any super-tax. In my judgment, that is the correct view of Section 26-A. It has nothing to do with a charge to tax or with the liability to pay tax. It is a procedural section and cannot affect the liability of a partner to pay the tax charged on him by Section 3 on his total income, which the Appellate Tribunal in this case has found as a fact to include a four annas share, nor is there any other section in the Act which prevents the Crown from causing a correct assessment to be made.

It follows that in my judgment, the judgment of the Appellate Tribunal is correct, and that the reference must be answered accordingly, that is to say, that the Income-tax Officer is not prevented or estopped from taxing in the hands of the assessee profits representing the share of Rs. 0-10-8 in full.

The assessee must pay the costs.

KANIA, J. - In this matter the applicant and his brother had formed a partnership prior to April 1, 1937. In the deed executed on November 15, 1937, it is put on record that the applicants son Kaikhushroo was admitted as a partner in the firm, that is treated as admitted from April 1, 1937. That instrument was presented for registration under Section 26-A and the firm has been registered by the Income-tax Officer. In the course of the assessment of the firm was completed on February 6, 1939. The personal assessment of the applicant was completed on March 4, 1939. The Income-tax Officer, having considered that certain income of the firm had escaped assessment, issued notices under Section 34 of the Act of the firm and all its partners on March 20, 1940. In the original assessment of the firm, the Income-tax Officer had set out the amount which he determined was the income of the firm and assessed it as a registered firm. In that assessment order the names of the three partners with their respective shares as mentioned in the instrument dated November 15, 1937, were separately shown. The assessment was under Section 23 (3) of the Act. At the foot of that order the distributive share of each of the three partners with their respective shares was also set out.

After the notice under Section 34 was issued, investigations took place, and the Income-tax Officer came to the conclusion that a sum of about a lac of rupees had escaped assessment. He, therefore, made a fresh order of assessment on the firm. By that time the Amendment Act of 1939 had come into operation, and, therefore, proceeding as required by Section 23 (5) (a), determined the income of the firm, but passed no order for payment of the tax by the firm. He did not also separately show the distributive share of each partner in that order. He had next to deal with the individual income of the partners. In considering the income of the applicant, he not only increased the amount by including what be considered had escaped from the assessment of the firm, but included also the four annas share put against the name of Kaikhushroo in the original assessment order. The applicant has raised objection to that procedure. His contention is that so long as the registration of the firm stands in the Income-tax Officer record, he has no jurisdiction to go behind the statement of the shares of the three partners in the instrument of November 15, 1937, which was registered with him, and he has no jurisdiction to hold that the income of the applicant in the firm included also the share which stood in the name of his son Kaikhushroo. The question submitted by the Tribunal for the Courts opinion in substance is : Whether by reason of the provisions of the Income-tax Act, the Income-tax Officer is prevented from doing so

The Tribunal has found as a fact that the applicant was the owner of not only the six annas eight pies share, which was put against his name, but also of four annas share put against the name of Kaikhushroo. In the words of the reference : 'K. S. Mistry was merely a name-lender and that the entire profits representing the share of annas 10-8 pies did actually belong to the applicant herein.' The question is : Whether under the circumstances the Income-tax Officer has jurisdiction to include this 10 annas 8 pies share in calculating the total income of the applicant in his personal assessment. The Tribunal did not go into the question in detail, because it considered itself bound by the decision in Kirpaldas Motandas v. Commissioner of Income-tax. In that case one Bhojraj, who was a partner according to the instrument of partnership, had a nine annas share. The Income-tax Officer found that Bhojraj held the share for the benefit of the joint family, and the Income-tax Officer assessed the members of the joint family of their individual interest in this nine annas share, as income which had accrued to them individually. Objection was raised to this on the ground that the firm was registered, and Bhojraj was shown as a partner with a nine annas share. It was, therefore, contended by the members of the joint family that the Income-tax Officer had not authority to go behind that registration and inquire if they had any interest in the nine annas share. The Chief Court of Sind thought this inarguable, because there was nothing in the Act to prevent the Income-tax Officer from assessing the income of an individual who, according to law, is deemed to have earned a particular income. The application for a rule was refused. The contention was raised in that case by an outsider and not a partner whose name was registered by the Income-tax Officer. The point is not therefore decided clearly.

We have been taken through the different provisions of the Income-tax Act to decide the question submitted for out opinion by the Tribunal. On behalf of the assessee it is contended that on an application made under Section 26-A the firm is registered, and it has the right to be assessed as such. Until the Income-tax Officer, under appropriate provisions, cancels the registration, it must be considered that the shares of the partners as mentioned in the instrument of partnership have been accepted by him, and he has no right to proceed on the footing that the income of the individual partners in the firm is different from what could be ascertained on the footing of the shares so mentioned. It is pointed out that Section 23 (5) (a) of the Amendment Act, 1939, provides that the firm should be assessed. This is relied upon to support the contention that so long as the registration stands the certificate is conclusive against the Income-tax authorities. Reference was made to Section 14 (2) (b), where the individual partner is entitled to claim that he shall not be taxed in respect of his share which has already been taxed as a member of a firm. This relief is given to members of a registered firm and also unregistered firm. Sections 48 and 55 were also relied upon in this connection. On behalf of the Commissioner Mr. Setalvad drew out attention to Sections 3 and 4, which are the charging sections, and it was contended that the remaining sections on which the assessee relied were machinery sections and sections which prevented a double taxation.

Looking at the scheme of the Act it appears to me that under Section 26-A persons trading as a firm have a right to apply to get the firm registered. That Act in terms does not define the effect of registration or what are the rights of the parties on registration of the firm. For that, one has to took to the different sections of the Act. It is clear that under the Act a firm can trade without being registered. If unregistered, the firm, as a unit, could be assessed to super-tax. Secondly, when assessing the income of the partners individually, they could not get the benefit of Section 48 (2), if their individual rate of taxation was lower. If the firm was a registered firm, it was not liable under Section 55 to pay super-tax; and as the tax levied on the registered firm is at the maximum rate of income-tax, the partner has the right under Section 48 to claim a refund, if the partners individual assessment was not liable to be taxed at the highest rate of income-tax.

Under Section 3 it is clear that the individual is liable to be assessed for his total income. The only effect of Section 26-A is that the firm becomes a registered firm, and the partners thereof get the benefit of Section 55 and Section 48 (2), if they are applicable to their individual case.

Counsel for the assessee relied on Section 23 (4), which provides a penalty of cancellation of the registration, if the firm does not comply with the notice served by the Income-tax Officer under that sub-section. That, however, does not in any way affect the individual liability of partners. If the registration is cancelled under Section 23 (4), or for any other reason, the firm ceases to get the advantage prescribed by Section 55 and the individual partners lose the benefit of being assessed under the caption 'registered firm.' Apart from that, the cancellation of registration does not appear to inflict any disability on the registered firm or its partners. Therefore, if a firm is registered in pursuance of an application under Section 26-A, there arises no difference in its liability or the liability of the individual partners to be taxed for the total income as determined by the Income-tax Officer under Sections 3 and 4 of the Act. If in considering the individual income of the assessee the Income-tax Officer finds that income appearing in a particular name, which is not the name of the assessee, is in fact, the income of the assessee, he has a right to include the name in the total income of the assessee. I find nothing in the Act to prevent the same consequent following in respect of a share in a partnership put down in a nominees name, irrespective of the question whether the firm is registered or unregistered. The relevant inquiry by the Income-tax Officer always is : whether the share really belongs to the assessee or another person. It may be pointed out that this view does not in any way come in conflict with the contention that the Income-tax Officer must take cognizance of registration of a firm as standing on his record. He assesses the firm as a registered firm; and even under the old Act if he distributed the shares of profit against the names of individual belonged to the assessee when making the assessment of that individual. In my opinion, that is the short answer to the whole argument of the assessee.

Counsel for the assessee relied on Neemchand v. Commissioner of Income-tax, Bengal, and the observations in a case must be read as relating to the facts of that case, and it is, therefore, first necessary to notice the facts and then to notice the observations. In that case the firm was assessed to tax. The partners were also assessed to tax. It was then thought that certain income had escaped assessment, and proceedings under Section 34 were adopted against the firm and the partners. In dealing with the question of re-assessment of the firm under Section 34 it was found that the right of the Income-tax Officer to reassesses was time-barred. The Income-tax Officer thereupon refrained from reassessing the firm, but proceeded with the re-assessment of the individual partners. In doing so he traced the income which had escaped assessment, and included in the individual assessment of the partner the proportionate share which, in his opinion, had escaped assessment. It was contended on behalf of the assessee that this was not permissible, because until the firm was reassessed the Income-tax Officer had no right to include a larger figure in the individual partners assessment. This was also a case of a registered firm. The contention was negatived by the Court Rankin, C.J., (as he then was) observed as follows (p. 210) :-

'To collect the tax effectively, without unnecessary inconvenience to the subject, with out inconsistency in result and without unnecessary duplication of work on the part of the Income-tax authorities, it is obvious that the profits of the registered firm should be ascertained as a whole before assessment is made upon the individual partners. But I can find nothing in the Act to say that the firm is to be assessed first, still less that the assessment on the firm is to operate as a sort of estoppel in favour of the individual partners.... While both firm and individuals are liable to the tax by the plain wording of the Finance Act, the clause [clause (b) of Section 14 (2)] exempts the individual from payment in respect of certain profits as soon as those profits are in the hands of the firm assessed, but it does not exempt him at all in respect of profits which have not been assessed.'

Those observations show that the Court rejected the contention that if the firms assessment a certain amount was not included, the same could not be included in the individual assessment of the partner. A little later the learned Chief Justice started his observations by stating (p. 211) :

'When the firm is registered under the Income-tax Act and Rules what rights under the Act accrue from registration and to whom ?'

The question as formulated is general in words, but the following sentences clearly show that the Chief Justice was still dealing with the rights and liabilities of the parties in relation to the assessment of the individual when the firm had remained unassessed. He next observed (p. 211) :-

'Do they include a right on the part of individual partner to require that all the firms profits shall be assessed upon the firm and that whether they be declared or concealed It is only upon this footing that he can claim a right that no part of the firms profits shall be assessed as his taxable income and it seems to me to be very curious implication to make in this Act.'

The learned Chief Justice then proceeded to state the effect when a firm is registered. He pointed out that (p. 211) :-

'When a firm is registered, the firm, not the individual partners, becomes assessable to income-tax at the maximum rate. The firm and not the partners escapes super-tax.'

It is not possible to contend that those observations lend support to the contention that because the firm is assessed at the maximum rate, the partners, irrespective of their individual income, must be assessed at the maximum rate. It is equally futile to contend that because a registered firm has escaped assessment, the individual, if liable to super-tax, should be exempt from super-tax. In the next sentence the learned Chief Justice said (p. 211) :-

'But the partners as individuals get certain rights while the registration stands and the Income-tax authorities cannot dispute the amount of the individuals share as shown in the document which they have accepted for registration.'

That only means that in making the firms assessment, and showing the distributive share of each partner, the Income-tax Officer should show the amount according to the instrument registered. That, however, is not in respect of that assessment of the individual partner, and does not preclude the Officer from inquiring whether the income shown against the individual partners name is the true income of that partner, or stands in his name as a nominee of another partner or another person. In my opinion, the observations in that case do not support the contentions urged by the assessee, and I agree under the circumstances that the question should be answered in the negative.

It was argued that the provisions of the new Act of 1939 applied to the case and not the provisions of the Act before the Amendment. In fact there is no difference in the result. Section 23 (5) (a) does not provide in terms for the assessment of the partners in their names according to the instrument registered with the Income-tax Officer. It only provides for the assessment of the firm.

Reference answered in the negative.


Save Judgments// Add Notes // Store Search Result sets // Organize Client Files //