K.K. Usha, J.
1. These references are at the instance of the partners of the assessee-firm, Pambra Coffee Plantations, Pambra, from the order passed by the Commissioner of Agricultural Income-tax, dated March 17, 1986, invoking powers under Section 34 of the Agricultural Income-tax Act, 1950. The relevant assessment year is 1978-79. The accounting period is from July 1, 1976, to June 30, 1977. The following are the questions of law referred for decision of this court :
'(1) Whether, on the facts and in the circumstances of the case, it is correct for the Commissioner to direct the assessing authority to pass fresh assessment order on the petitioner relating to the assessment year 1978--79 taking note of the extent of petitioner's interest in the firm as per the provisions of deed of partnership dated March 28,1978, when actually during the relevant accounting period the extent of his interest in the firm is in terms of the provisions in the deed of partnership dated December 18, 1974 ?
(ii) Whether the Commissioner was correct in setting aside the order of assessment on the firm without issuance of notice under Section 34 to the firm Whether notice under Section 34 issued to the partners of the firm is sufficient compliance of the Act, so far as notice to the firm is concerned ?
(iii) Whether the view taken by the Commissioner that reconstitution of the firm is only a change in the constitution and hence Section 28(1) of the Act is attracted for the assessment is correct ?
(iv) Is it correct to hold that the constitution of the firm as available at the time of assessment alone is relevant and it clearly provides for assessment of the firm as it exists at the time of assessment in respect of the income received or receivable by it prior to the reconstitution ?
(v) Is it correct to hold that the purport of Section 28(1) is to raise liability against the firm as it exists at the time of assessment and that the erstwhile partners of the firm are to be approached for recovery only if recovery is not possible from the existing firm ?'
The relevant facts are as follows : Pambra Coffee Plantations, Pambra, was assessed under the Agricultural Income-tax Act, 1950, for the assessment year 1978-79, relevant to the accounting period from July 1, 1976 to June 30, 1977, by order dated April 25, 1980, issued by the Inspecting Assistant Commissioner (Spl.) Kozhikode, fixing the assessable income at Rs. 36,49,071. The assessee-firm was originally constituted as per a partnership deed dated December 18, 1974, with 20 partners. On March 28, 1978, there was a reconstitution of the firm and thereafter it had only 10 partners. As per the assessment order dated April 25, 1980, the status of the assessee was considered as a registered firm having 20 partners. On that basis, the share income due to each partner was separately assessed. On examining the assessment records, the Commissioner of Agricultural Income-tax, Trivandrum, took the view that the assessment made on the firm as originally constituted on December 18, 1974, was without adverting to the reconstitution effected on March 28, 1978, and, therefore, the assessment was not in order. As per the provisions contained under Section 28(1) of the Agricultural Income-tax Act, 1950, the assessment should be made on the firm as constituted on March 28, 1978, and the income apportioned according to the extent of the interest of the partners of the newly constituted firm. The Commissioner thereupon initiated proceedings under Section 34 to set right the alleged mistake and notices were served on all the partners of the firm including the legal representative of a deceased partner. All of them filed their objections and they were heard by the Commissioner. According to the partners of the firm, they cannot be made liable to pay tax on any income, which they have not received during the accounting year. Therefore, the apportionment made in the original assessment order dated April 25, 1980, was correct. The contention raised by the partners was not accepted by the Commissioner. He took the view that in incorporating the provisions contained under Section 28(1), the legislative intention was to raise liability against the firm as it exists at the time of assessment and that the erstwhile partners of the firm are to be approached for recovery only if the recovery is not possible from the existing firm. He, therefore, set aside the assessment order dated April 25, 1980, and remitted back the case to the assessing authority for fresh disposal according to law, apportioning the income based on the extent of interest of the partners of the firm as reconstituted as per the partnership deed executed on March 28, 1978. It is the above finding that is under challenge before this court.
2. The provisions of Section 28 of the Agricultural Income-tax Act, 1950, which require an interpretation read as follows :
'(1) Where at the time of making an assessment under Section 18, it is found that a change has occurred in the constitution of a firm or that a firm has been newly constituted, the assessment shall be made on the firm as constituted at the time of making the assessment.
If the agricultural income-tax cannot be recovered from the firm as so constituted, such tax shall be recoverable from the persons who were members of the firm during the previous year.
(2) Where a person carrying on any business in the course of which agricultural income is received has been succeeded in such capacity by another person, such person and such other person shall each be assessed in respect of his actual share of the agricultural income of the previous year :
Provided that when the person succeeded in the business cannot be found, the assessment of the agricultural income of the year in which the succession took place, up to the date of succession, and for the year preceding that year shall be made on the person succeeding him in like manner and to the same amount as it would have been made on the person succeeded or when the tax in respect of the assessment made for either of such years assessed on the person succeeded cannot be recovered from him, it shall be payable by and recoverable from the person succeeding, and such person shall be entitled to recover from the person succeeded the amount of any tax so paid.'
Since the above section refers to assessment proceedings under Section 18, it is necessary to quote Section 18 also, which reads as follows :
'(1) If the Agricultural Income-tax Officer is satisfied that a return made under Section 17 is correct and complete, he shall, by order in writing, assess the total agricultural income of the assessee and determine the sum payable by him on the basis of such return.
(2) If the Agricultural Income-tax Officer is not satisfied without requiring the presence of the person who made the return or the production of evidence that the return is correct and complete, he shall serve on the person who made the return a notice requiring him on the date specified therein, either to attend the office of the Agricultural Income-tax Officer or to produce or to cause to be produced, any evidence on which such person may rely in support of the return.
(3) On the day specified in the notice under Sub-section (2) or as soon afterwards as may be the Agricultural Income-tax Officer, after considering such evidence as such person may produce and such other evidence as that officer may require on specified points, assess the total agricultural income of the assessee and determine the sum payable by him on the basis of such assessment.
(4) If any person fails to make a return under Sub-section (2) of Section 17, or fails to comply with all theoterms of a notice issued under Sub-section (4) of that section or under Sub-section (2) of this section, the Agricultural Income-tax Officer shall make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment, and in the case of a firm may refuse to register it or may cancel its registration, if it is already registered.
(5) Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the firm has been assessed under Sub-section (1), Sub-section (3) or Sub-section (4), as the case may be -
(a) in the case of a registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed, and the sum payable by him on the basis of such assessment shall be determined :
Provided that, if such share of any partner is a loss, it shall be set off against his other income or carried forward and set off in accordance with the provisions of Section 12 :
Provided further that, when any of such partners is a person not resident in the State, his share of the income, profits and gains of the firm shall be assessed on the firm at the rates which would be applicable if it were assessed on him personally; and the sum so determined as payable shall be paid the firm ; and
(b) in the case of an unregistered firm, the Agricultural Income-tax Officer may, instead of determining the sum payable by the firm itself, proceed in the manner laid down in Clause (a) as applicable to a registered firm, if, in his opinion, the aggregate amount of the tax including supertax, if any, payable by the partners under such procedure would be greater than the aggregate amount which would be payable by the firm and the partners individually if the firm were assessed as an unregistered firm.
(6) When in the course of the assessment of the total agricultural income of the assessee it is found that a loss has been sustained which he is entitled to have set off under Section 12, the Agricultural Income-tax Officer shall notify to the assessee by order in writing the amount of the loss as computed by him.'
As mentioned earlier, the partnership which was formed under a deed dated December 18, 1974, had 20 partners. The number of the partners was reduced to 10 when the partnership was reconstituted on March 28, 1978. It is not disputed before us that the change in the number of partners in the firm would amount to only a reconstitution of the firm so as to attract Section 28(1) of the Agricultural Income-tax Act, 1950, and that the provisions under Section 26 of the Act, which deals with the procedure of assessment in the case of discontinued business of a firm had no application in this case. It is true that a reading of Section 28(1) would make it clear that in the case of reconstitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment under Section 18. To that extent, there is no dispute between the parties. The dispute arises in the matter of apportioning the tax liability, namely, whether it should be between those who were partners at the time of making the assessment or between the partners who had obtained their share of income during the previous year relevant for the assessment year. While the Revenue contends that the wording of Section 28 does not justify a reversion back to the partners in the firm as it stood before the constitution, according to the assessee, if a different view is taken, it will go against, the provisions of Section 18(5)(a) and also the charging section, namely, Section 3, where it is provided that agricultural income-tax at the rate or rates specified in the Schedule to the Act shall be charged for each financial year in accordance with and subject to the provisions of the Act, on the total agricultural income of the previous year of every person. Therefore, according to the assessee, the present partners cannot be made liable to pay tax on any income, which the partners had not received during the previous year.
3. Before we proceed to analyse Section 28(1), it is necessary to examine the provisions contained under Section 18, which deals with the procedure for assessment of agricultural income. Sub-section (1) of Section 18 provides for passing of the assessment order on the basis of the return submitted by the assessee under Section 17. Sub-section (2) empowers the Agricultural Income-tax Officer to require the presence of the assessee or production of evidence in support of the return filed. Sub-section (3) deals with the manner in which the assessment has to be made after considering the evidence produced by the assessee. The provisions under Sub-section (4) enable the Agricultural Income-tax Officer to make the assessment to the best of his judgment. Sub-section (5) provides for assessment of a firm, when the assessee is a firm and the total income of the firm has to be assessed under Sub-section (1), Sub-section (3) or Sub-section (4), as the case may be. Clause (a) of Sub-section (5) deals with registered firms. It provides that if the total income of the firm has been assessed, the sum payable by the firm itself shall not be determined. But the total income of each partner of the firm including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined.
4. The above would show that when the assessee is a firm, even though the assessment is made on the firm, the liability to pay tax is apportioned between the partners on the basis of their income of the previous year. In the case of unregistered firms, a different procedure is prescribed under Clause (b) of Sub-section (5) of Section 18. In the present case, the assessee is a registered firm. Therefore, the provisions that are to be applied are as contained under Clause (a) of Sub-section (5) of Section 18. The provisions are clear when there is no, change in the constitution. But in the case of reconstitution of the firm, Section 28(1) has to be applied and going by the wording of that section, it cannot be disputed that the provision is for making the assessment on the firm as constituted at the time of making the assessment. But it can be seen that Section 28(1) refers to an assessment under Section 18 and it is the assessment as per Section 18 that has to be made on the newly constituted firm at the time of making the assessment. Since the assessment proceedings under Section 18 are contemplated even under Section 28(1), it has to be taken that the provisions contained under Clause (a) of Sub-section (5) of Section 18 are also to be satisfied while making assessment as per Section 28(1). If that be so, even if the assessing authority has to make the assessment on the firm as constituted at the time of making the assessment, it cannot impose tax liability on the firm itself or on the partners of the reconstituted firm on the income, profits and gains, which they had not received during the previous year. While computing the tax liability of the partners, it is clear from Clause (a) that, such liability of the partner of the firm is on the income of the previous year. If the income received by 20 partners during the previous year, relevant for the assessment year is to be distributed among 10 partners of the reconstituted firm, they will be in effect compelled to pay tax on income, profits and gains, which they have not received during the previous year. The second clause of Sub-section (1) of Section 28 has to be given interpretation without doing violence to the provisions contained under the charging section as well as under Clause (a) of Sub-section (5) of Section 18. If that be so, we are of the view that even if the assessment has to be made on the firm as constituted at the time of making the assessment, the recovery can be made only from the persons, who were members of the firm during the previous year. In cases where as a result of reconstitution the existing members continued in the firm along with new members, it will be possible to recover the agricultural income-tax from the firm as reconstituted, since by applying Clause (a) of Sub-section (5) of Section 18, all the partners who had income, profits and gains in the previous year would be there continuing in the partnership and the tax can be recovered from them. But in cases where there is a reduction in the number and change in the person of the partners, as a result of the reconstitution, then tax cannot be recovered from the firm as so constituted and therefore the authorities shall proceed against persons who were members of the firm during the previous year. Even in cases, where as a result of the reconstitution, the share of the partners had changed even though they continued to be partners, recovery can be made from such partners on the basis of their income of the previous year and not on the basis of their share in the reconstituted firm.
5. In this context, it is relevant to refer to the provisions contained under the Indian Income-tax Act, 1922, regarding the assessment when there is a change in the constitution of the firm. The relevant portion of Section 26 reads as follows :
'Where, at the time of making an assessment under Section 23, it is found that a change has occurred in the constitution of a firm or that a firm has been newly constituted, the assessment shall be made on the firm as constituted at the time of making the assessment :
Provided that the income, profits and gains of the previous year shall, for the purpose of inclusion in the total incomes of the partners, be apportioned between the partners who in such previous year were entitled to receive the same :
Provided further that when the tax assessed upon a partner cannot be recovered from him it shall be recovered from the firm as constituted at the time of making the assessment.
(2) Where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person, such person and such other person shall, subject to the provisions of Sub-section (4) of Section 25, each be assessed in respect of his actual share, if any, of the income, profits and gains of the previous year :
Provided that, when the person succeeded in the business, profession or vocation cannot be found, the assessment of the profits of the year in which the succession took place up to the date of succession, and for the year preceding that year shall be made on the person succeeding him in like manner and to the same amount as it would have been made on the person succeeded or when the tax in respect of the assessment made for either of such years assessed on the person succeeded cannot be recovered from him, it shall be payable by and recoverable from the person succeeding, and such person shall be entitled to recover from the person succeeded the amount of any tax so paid.'
Under the Income-tax Act, 1961, the relevant provision is Section 187. This court had occasion to consider the distinction between cases falling under Section 187. dealing with assessment in the case of change in constitution of the firm and Section 188 which deals with the situation of succession of one firm, by another firm in Excel Productions v. CTT : [1971]80ITR356(Ker) . In the above case, the assessee, a registered partnership firm, was originally registered with five partners. Subsequently, there was a reconstitution of the firm by taking four minors also as partners. Therefore, there was a change in the shares of the original partners. A Bench of this court took the view that such change in the constitution came under Clause (a) of Sub-section (2) of Section 187. and not under Section 188. It was then observed that the assessment is to be made on the firm as constituted at the time of making the assessment, namely, the firm as reconstituted. This court took the view that since it is an assessment under Section 187., there can be only one assessment even if the change in the constitution of the firm was within the previous year relevant for the assessment year unlike in the case of Section 188. But at the same time, it has further observed that in working out the shares of the loss or the profits of the several partners, the two periods may have to be separately considered. This would also make it clear that even when the reconstituted firm is to be assessed, the liability to pay tax on the partners can be only on the basis of the income received by them during the previous year.
6. The Commissioner has observed that since the procedure prescribed under Section 187. of the Income-tax Act for recovery of the tax limited to the partners who have received income in the previous year is absent in Section 28(1), such a provision cannot be read into Section 28(1). We cannot agree with the above view. As mentioned earlier, since the entire procedure of assessment under Section 18 is also incorporated in Section 28(1) no partner can be made liable to pay tax in respect of an income, which he has not received in the previous year in view of the provisions contained under Clause (a) of Sub-section (5) of Section 18. We, therefore, answer question No. 1 in the negative against the Revenue and in favour of the assessee. We decline to answer question No. 2 as unnecessary. Question No. 3 is answered in the affirmative, in favour of the Revenue and against the assessee. In the light of the answer given to question No. 1, we decline to answer questions Nos. 4 and 5.
7. A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Commissioner of Agricultural Income-tax, Thiruvananthapuram.