1. This appeal is by the assessee relating to the assessment year 1976-77. The assessee is an individual. For the previous year relevant to the assessment year 1976-77 the return under Section 139(1) of the Income-tax Act, 1961 ('the Act'), was filed on 5-7-1976 declaring an income of Rs. 48,620. Inter alia, the assessee claimed payment of Rs. 57,196 as payment in view of the agreement entered into between the assessee, his wife and son on 22-10-1968. According to the assessee, in view of the said agreement the said income never reached the assessee and before the income was earned it stood diverted and as such, the sum of Rs. 57,196 could not be the income of the assessee in the year of account.
2. The ITO completed the assessment after accepting the contention of the assessee. Consequently, the assessment was completed on 21-3-1979 on a total income of Rs. 66,955.
3. Subsequently, the Commissioner after going through the records was of the opinion that a sum of Rs. 57,196, which was not added by the ITO in the assessment order was really the income of the assessee in the year of account. According to him, the assessment order passed by the ITO was erroneous and was also prejudicial to the interests of the revenue. So he issued show-cause notice to the assessee under Section 263 of the Act. Before the learned Commissioner, on behalf of the assessee, it was contended that in view of partial partition dated 22-10-1968 which was enteredi into between the assessee, his wife and son, each party got one-third share in the business assets which originally belonged to the HUF. There was also an agreement between the parties on 22-10-1968 and according to this agreement, there would be overriding title of the wife and son of the assessee, in respect of profits which may be earned in the business, which was to be conducted by the assessee either in his individual capacity or in partnership. It was further contended that the payment made to the wife and son of the assessee was not an application of income.
4. The learned Commissioner, after considering the contention of the assessee and the material on record was of the view that the business carried on by the assessee was nothing but a joint venture by the assessee, his wife and son and a such, this is a case of diversion of profit and not payment by overriding title. He further held that the payment of Rs. 57,196 was not a business expenditure. Thus, the learned Commissioner came to the conclusion that the sum of Rs. 57,196 paid to wife and son of the assessee was really income of the assessee and the same was to be taxed in his hands. Consequently, the learned Commissioner directed the ITO to include this amount in the total income of the assessee in respect of the assessment year 1976-77.
5. Being aggrieved with the order of the Commissioner, the assessee is in appeal before the Tribunal. The first contention of the learned counsel for the appellant was that against the assessment order on certain points an appeal was preferred by the assessee. It was decided by the learned AAC on 12-12-1979. The learned Commissioner started proceedings under Section 263 after the decision given by the learned AAC in appeal. So according to the learned counsel, the assessment order merged with the order of the learned AAC and as such the learned Commissioner has no jurisdiction to start the proceedings under Section 263. In support of this argument, reliance was placed on the decision of the Calcutta High Court in the case of Jeewanlal (1929) Ltd. v. AMI.CIT [1977] 108 ITR 407, J.K. Synthetics Ltd. v. Addl. CIT [1976] 105 ITR 344 (All.) and the Full Bench decision of the Tribunal dated 27-7-1981 in the case of Dwarkadas & Co. (P.) Ltd. v. ITO [1982] 1 ITD 303 (Bom.).
6. On behalf of the revenue it was contended that the learned Commissioner has full jurisdiction to start the proceedings under Section 263. According to the learned departmental representative application of the doctrine of merger depends on the nature of the appellate or revisional order in each case. If the original order passed by the ITO was the subject-matter of appeal before the AAC and the AAC having passed the order thereafter, that was the only effective order and the original order will merge in that order. But if an appeal was not preferred on a particular point decided by the ITO and the learned AAC did not decide that matter, the original order on that point will not merge in the appellate order and the Commissioner under Section 263 would be fully justified to start proceedings on such point which was not appealed against and no finding was given by the learned AAC. In the present case the ITO did not add a sum of Rs. 57,196 in the total income of the assesses. As such, the assessee was not aggrieved and he could not appeal against the order of the ITO. Thus, it was contended that on the point at issue there could be no decision of the appellate authority and as such on the point at issue the order of the ITO will never merge with the order of the AAC. Reliance was placed on the ratio of decision in the case of Karsandas Bhagwandas Patel v. G.V.Shah, ITO [1975] 98 ITR 255 (Guj.).
7. We have considered the rival submissions and perused the entire material on record.
8. it is common ground that the ITO did not make addition of a sum of Rs. 57,196 in the total income of the assessee. Under the circumstances, the assessee was not aggrieved on this point. As such he could not possibly file appeal before the AAC. It means that a sum of Rs. 57,196 was not subject-matter of appeal before the learned AAC. We may point out that under Section 263, the Commissioner can revise the order passed by the ITO only if it is erroneous and it is prejudicial to the interest of the revenue. The powers of the Commissioner under Section 263 are very wide. Under Section 263, the Commissioner may call for and examine the records of any proceedings under this Act and if he considers that any order passed therein by the ITO is erroneous in so far as it is prejudicial to the interest of the revenue he may, after giving assessee an opportunity of being heard, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment or cancel the assessment and direct fresh assessment.
9. If we consider the entire facts and the circumstances of the case, it would be clear that the assessment order not making addition of Rs. 57,196 would never merge in the order of the AAC because the asses see was never aggrieved with the point in issue and as such he could not file appeal before the learned AAC.10. There could be no doubt that the decision of the AAC in respect of the items which form the subject-matter of the appeal would supersede the decision of the ITO qua these items, irrespective of whether the decision of the AAC is one of affirmation or modification or revisionary. It is now well settled law that if an assessee does not choose to file an appeal, the order of the assessment becomes final, subject to any power of revision which the Commissioner may have under Section 263. In the decision in the case of Karsandas (supra), the Gujarat High Court clearly held that the order of the assessment made by the ITO does not merge wholly in the order made by the AAC. It is only that part of the order of the assessment which came for decision and was reviewed by the AAC and examined, irrespective of whether affirmed, modified or reversed. In the said decision the High Court ultimately held that the legal position may, therefore, be summarised by stating that even after an appeal from order of the assessment is decided by the AAC, the mistake in that part of the assessment which was not the subject-matter of the review of the AAC and was left untouched by him can be rectified by the ITO under Section 154 of the Act. This principle of law now is given statutory effect by Sub-section (1A) introduced by way of amendment in Section 154 by the Direct Taxes Amendment Act, 1964. Section 154(1) provides as under : (a) the Income-tax Officer may amend any order of assessment or of refund or any other order passed by him ; (b) the Appellate Assistant Commissioner or the Commissioner (Appeals) may amend any order passed by him under Section 250 or Section 271; (c) the Commissioner may amend any order passed by him in revision under Section 263 or Section 264.
Sub-section (1A) was introduced by way of amendment, in Section 154 of the Act by the Direct Taxes Amendment Act. The Sub-section provides : Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in Sub-section (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under that Sub-section in relation to any matter other than the matter which has been so considered and decided.
Under this Sub-section, in relation to any matter which has been so considered and decided as discussed above, even after an appeal from an order has been preferred and decided, a mistake in that part of the order which was not a subject-matter of the appeal and was left untouched by the appellate authority, can be rectified by the authorities which pass that order. This principle is now given statutory effect by Sub-section (1A) which was inserted in 1964. Action under this section can be taken more than once to rectify different mistakes. The rectification may result in the reversal of the entire order. So in view of the decision in the case of Karsandas {supra), read with Sub-section (1A) of Section 154 referred to above, there was no merger in the order of the AAC regarding the addition of Rs. 57,196.
The other decisions relied on by the assessee cannot be followed in view of the direct decision of the Gujarat High Court. We may also point out that in those decisions Sub-section (1A) of Section 154 was also not considered.
11. Looking to the aforesaid facts we are of the view that there was no merger regarding the addition of sum of Rs. 57,196 after the appeal was preferred before the learned AAC. As a matter of fact this was not the subject-matter of the appeal before the learned AAC and as such, he could not decide this point. Thus, we are unable to agree with the contention of the learned counsel for the assessee that the learned Commissioner has no jurisdiction to pass order under Section 263.
12. The other contention of the appellant was that Shri Jevatraj Balchand Hiran is the husband of Smt. Chhotibai and Gyanchand Jevatraj is son of Jevatraj Balchand Hiran. They constituted a HUF. Out of the assets of the HUF, they have made a partial partition on 22-10-1968 in respect of certain assets. The business assets of the family were divided among the three members. According to the partial partition, all the three members have equal right, title and interest in the cloth shop running in the name of Jevatraj Balchand Hiran along with creditors, debtors, stock, finished goods, dead stock, etc. So all the three members will have equal right, title and interestin the said business and as such one-third share in the said business belongs to the first party, viz., Shri Jevatraj Balchand Hiran. Similarly one-third share in the said business belongs to the wife of the party of the first part and remaining one-third share belongs to the third party, viz., son of the party of the first part. The other details of the division of the assets were detailed in the partition deed dated 22-10-1968 which was registered on 4-12-1968. After the partition, an agreement dated 10-12-1968 was entered into between the said three members. Since Shri Gyanchand Jevatraj Hiran was minor, natural father and guardian signed the agreement on his behalf. In the said agreement it was provided that the business in question shall be carried on by the party of the first part, viz., Shri Jevatraj Balchand Hiran. He may conduct the business in his individual capacity or in any manner in which he may think proper. It was also agreed that the said business was subject to charge of one-third and one-third on the parties of second and third part of the profits of the said business conducted by the party of the first part (sic). It was also agreed with that before the party of the first part was entitled to have profits from the business, the parties of the second and third parts shall be entitled to their share as a result of their said charge. Thus, it was agreed that the party of the first part shall be conducting the business subject to discharging the charge of the parties of the second and third part. It was also agreed that if for any reasons whatsoever, the party of the first part suffers a loss in conducting the business, the parties of the second and third part will in such situation treat the charge on the profit as waived and the business loss has to be suffered by the party of the first part alone. According to the learned counsel for the assessee, on the basis of this agreement the sum of Rs. 57,196 stood diverted before it reached the hands of the assessee because of the overriding title on the profits of the business conducted by the assessee. Thus, the learned Commissioner was wrong in holding that really the sum of Rs. 57,196 was income of the assessee in the year of account. Reliance was placed on the ratio of decision in the case of Charandas Haridas v. CIT [1960] 39 ITR 202 (SC) and Seth Motilal Manekchand v. CIT [1957J 31 ITR 735 (Bom.).
13. On behalf of the revenue, it was contended that the business in question was run by the assessee on behalf of himself, his wife and son. So the entire income earned in the business was to be assessed in the hands of the assessee. The learned departmental representative mainly relied on the ratio of decision of the Gujarat High Co rt in the case of CIT v. Mahendrasingh Mohansingh [1980] 123 ITR 938 (copy of which has been filed at the time of argument). Thus, according to the learned departmental representative, whether one was authorised to work on behalf of the other, it was only an arrangement of sharing profits (sic). Thus, the learned departmental ^representative submitted that the finding of the learned Commissioner is correct.
14. In our considered opinion, the contention of the assessee must be accepted. The authorities below never said that the partial partition and the agreement was not genuine. Under the circumstances, we will have to proceed on the basis of the partition deed and the agreement in question.
15. At this stage we may point out that there are three different branches of law on this point. There is the law of partnership which takes no account of the HUF. There is also the Hindu law, which permits a partition of the family and also partial partition binding upon the family. There is then the income-tax law under which particular income may be treated as income of the HUF or as income of the separated members enjoying as per shares of partition. The Hindu law might have no effect upon the position of the partner, insofar as the law of partnership was concerned, but it has full effect upon the family insofar as the Hindu law is concerned. Just as the fact of a karta becoming a partner does not introduce the members of the HUF into the partnership, the division of the family does not change the position of the partner, vis-a-vis, the other partner or partners. The income-tax law before the partition took note, factually, of the position of the karta and assessed him not as partner but as representing the HUF. In doing so, the income-tax law looks not to the provisions of the Partnership Act, but to the provisions of the Hindu law. When once the family has disrupted, the position under the partnership continued as before, but the position under the Hindu law changed. There is then no HUF as a unit of assessment in point of fact and the income which accrued cannot be said to be that of a HUF. There is nothing in the Indian income-tax law or the law of partnership which prevented the members of joint Hindu family from dividing any asset. Such division must, of course, be effective so as to bind the members, but Hindu law does not further require that the property must in every case be partitioned by metes and bounds, if separate enjoyment can otherwise be secured according to the shares of the members. For an asset of this kind, there was no other mode of partition open to the parties if they wished to retain the property and yet hold it not jointly but in severalty and the law does not contem-plate that a person should do the impossible. Indeed, the result would have been the same, even if the dividing members had said in so many words that they had partitioned the assets, because insofar as the firms were concerned the step would have been wholly inconsequential.
16. From the aforesaid disuussion, it is clear that the family took the fullest measure possible for dividing the joint interest into separate interests in respect of the business assets. There is no suggestion before the Commissioner, or even before the Tribunal, that the division in question was a mere pretence. There is also no suggestion that the agreement in question entered into between the members of the family was a sham transaction. In the absence of such suggestion or any finding, both the documents of partial partition and the agreement were fully effective between the members of the family and there was actually no HUF in respect of business in question which was divided amongst the three members of the family.
17. From the agreement in question it is clear that the business was to be run by the assessee either in partnership or in individual capacity.
In the year of account the business was carried on by the assessee in his individual capacity. The agreement provides as under : Whereas we three of us have made a partition of the Hindu Undivided Family business in the name of Balchand Jevatraj Hiran on Kartik Sudi 1st of Sam vat Year 2025, Tuesday 22-10-1968 and one-third share of the said business has been allotted to Jevatraj Balchand, one-third to Chhotibai, the wife of Hiran Jevatraj Balchand and one-third to the minor Gyanchand. However, as one-third share in the business belongs to the parties of the second part and one-third of the share belongs to the party of the third part, i.e., two-thirds share belonging to the parties of the second and third parts, it is agreed that the net profit in the said business shall be subject to the charge of the said share and that the party of the first part shall have to pay the profit in respect of the said share as to extent of the said profit there will be a charge on the said business of the parties of the second and third parts. Subject to such charge, the party of the first part shall conduct the said business and this agreement is accepted today on 22-10-1968, the terms of which are as under : 1. Jevatraj Balchand shall conduct the said business along with creditors, debtors, stock, etc., but the said business shall be conducted subject to the charge of one-third share on the profit of each of the party of the second and third parts.
2. The said business shall be conducted by the party of the first part on his own responsibility either individually or in partnership or in such manner as he thinks fit, but the said business is subject to the charge of one-third, one-third of the parties of the second and third parts on the profits of the said business conducted by the party of the first part (sic). Before the party of the first part is entitled to have his profits from the business, the parties of the second and third parts shall be entitled to their share as a result of the said charge. Accordingly, the party of the first part shall be conducting the business subject to discharging the charge of the parties of the second and third parts on the profits, The parties of the second and third parts shall be entitled to exercise their rights in respect of the said shares from the party of the first part according to law.
In view of these clauses of the agreement, the parties of the second and third parts shall be lawfully entitled to implement their rights and recover the said amount of the profit from the party of the first part. Clause (4) of the agreement provides as under : If for any reason whatsover the party of the first part suffers a loss in the conduct of the business and because such loss arises as a result of his working independently, the parties of the second and third parts will in such an event treat their one-third charge on the profit as waived and the business loss has to be suffered by the party of the first part alone.
If we consider the said agreement in its entirety, it would be clear that the net profit earned in the business shall be borne by the three parties, viz., the assessee, his wife and his son, the parties of the second and third parts to the agreement. So the income which shall come in the hands of the assessee is only one-third of the entire net income earned from the business. According to the agreement, two-thirds of the income from the said business stood diverted before it reached the hands of the assessee. In view of the agreement in question, the sum of Rs. 57,196 never became the income of the assessee and as such it could not be included in his hands.
18. On behalf of the revenue no material worth the name was brought to our notice, that the income of Rs. 57,196 was really application of income. The decision relied on by the department is not applicable on the fact of the present case. In that case in view of the agreement entered into between the parties, the assessee would continue as partner in the firm for himself and as representative of his wife and sons. In the present case, it was not the case of the parties of the second and third parts that the assessee would carry on the business on their behalf also. On the other hand, in the present case the business was to be carried on by the assessee himself either in the capacity of individual or in partnership with others. In the said case, there was no provision in the agreement that the loss shall be borne by the assessee who was conducting the business. In the present case, it was clearly provided that the parties of second and third parts shall not dear the loss if incurred in the conduct of the business and such loss if any shall be borne by the assessee himself. As a matter of fact, on the facts of that case, it was held that the assessee was representing the other persons and he was carrying on the business for himself and also on behalf of the other persons. No such facts are existing in the present case. So the decision relied on by the learned departmental representative is of no help to the department.
19. For the reasons discussed above, we are of the view that the ITO while completing the assessment in the year under consideration was quite correct in not including the income of Rs. 57,196 in the hands of the assessee. The said order was neither erroneous nor prejudicial to the interests of the revenue. So the learned Commissioner was not correct in holding that the income of Rs. 57,196 was to be included in the hands of the assessee.
20. The other contention of the learned counsel for the assessee was that the learned Commissioner was wrong in holding that the business in question was carried on by the assessee as AOP. According to him, the business was carried on by the assessee himself and not by the parties of second and third parts. Under the circumstances, it is quite wrong to say that the business was carried on by the AOPs, Reliance was also placed on the ratio of the decision in the case of T. Periaswamy Gounder v. Agrl. ITO [1982] 134 ITR 155 (Mad.). The learned departmental representative was not able to support the order of the learned Commissioner on this point. In our opinion the contention of the assessee is quite correct. In view of the discussions made above, the business was carried on by the assessee himself. There is no evidence on record that really the business was carried on by the AOPs.
Looking to the facts of the case and evidence on record and also the decision in the case of T. Periaswamy (supra), the learned Commissioner was quite wrong in holding that the business was carried on by the AOPs.
21. For the reasons discussed above, we are of the view that the order of the learned Commissioner is not correct and os such, should be cancelled. Accordingly, it is cancelled.