These 11 appeals by the assessee for assessment years 1986-87, 1988-89 to 1997-98 against the orders of the Commissioner (Appeals) involve common points. These appeals were heard together and are being disposed of through this consolidated order for the sake of convenience.
The facts of the case are that one Shri Gurdial Singh was proprietor of Hotel White, Lakkar Bazaar, Shimla since 1946. In 1976, he admitted his two daughters as partners and gave each of them 15 per cent share in the profit and loss of hotel business. With effect from 1-4-1977, this share was enhanced to 25 per cent. The said hotel business continued to be assessed upto 31-3-1981, in the hands of above firm when it was claimed to be dissolved. According to Shri Gurdial Singh, he became sole and absolute owner of the hotel from 1-4-1981 and showed income of above hotel in his returns for all the assessment years under consideration. The income disclosed by Shri Gurdial Singh was assessed in his hands as sole owner of the hotel.
Smt. Parkash Kaur one of the daughters of Shri Gurdial Singh and partner of M/s Hotel White instituted a civil suit No. 224-1 of 1983/34-1 of 1985 on 14-11-1985, asking Shri Gurdial Singh to render accounts of the hotel business to her as a partner. The learned Civil Judge vide his order dated 30-10-1990, decreed the suit for rendition of accounts. It was further held that partnership was not validly dissolved on 31-3-1981, as claimed by Shri Gurdial Singh. The appeal against above decision was dismissed by learned District Judge, Shimla vide his order dated 12-1-1995, in Civil Appeal No. 100-S/13 of 1990.
After taking into account above decisions of Civil Courts, the assessing officer issued notices under section 148 of the Act to assessee registered firm for assessment year 1982-83 onwards. In the reasons recorded while issuing above notices, the assessing officer held that the firm continued to remain in existence after 31-3-1991 and claim of Shri Gurdial Singh that firm was dissolved and he was owner of Hotel White was wrong. No return was filed by the assessee in the status of registered firm.
In response to above notices, returns were filed with objection that proceedings taken under section 147/148 were illegal as income of the hotel already stood assessed and there was no case of "escapement" of income. It was again emphasised that Shri Gurdial Singh was owner and proprietor of hotel. The socalled decrees of Civil Courts were never implemented and given effect to. The assessee also challenged validity of notices.
The assessing officer rejected all the objections raised on behalf of the assessee. He assessed M/s Hotel White in the status of an association of persons. The income already assessed in the hands of Shri Gurdial Singh was taken as that of the assessee in question in all the assessment years except assessment years 1996-97 and 1997-98. In the above two years, the income was enhanced with the following observations : "9. As regards determination of income of the assessee in the absence of books of account the return of income filed by Sh. Gurdial Singh was brought on records and information contained in the same was used. Sh.
Gurdial Singh had declared total income at Rs. 4,51,010 in his return being the income derived from running the Hotel White. After examination of books of accounts produced by the assessee before the then assessing officer under section 143(2) the income was determined at Rs. 4,62,830 vide order under section 143(3) dated 28-12-1999, the same income is taken as the total taxable income of the assessee.
"As regards determination of income of the assessee, in the absence of books of account and relevant documents the return of income filed by Sh. Gurdial Singh as proprietor of M/s Hotel White for the period 1-4-1996 to 15-7- 1996, was taken on records. Similarly, the P&L a/c of the hotel for the period 16-7- 1996 to 31-3-1997, was obtained. The total taxable income in these documents has been worked out as under The scrutiny of P&L a/c for the period 16-7- 1996 to 31-3-1997, reveals that the assessee had shown total lodging receipts of Rs. 2,78,380 whereas for the period 1-4-1996 to 15-7- 1996, the lodging receipts are at Rs. 3,54,275.
There is absolutely no material to justify addition in the above assessment year 1997-98 and income for all practical purposes assessed in hands of Gurdial Singh has been treated as income of the legal entity in question.
The assessee objected to the reassessment, challenged validity of notices issued under section 148 and claimed that income assessed in the hands of Shri Gurdial Singh could not be again assessed in the hands of this concern. The assessee also objected to the status of Association of persons taken by the assessing officer. It was further contended that same income has been twice assessed without giving benefit of tax paid on the same income by Shri Gurdial Singh. The learned Commissioner (Appeals) did not find any substance in the submissions advanced on behalf of the assessee and confirmed the assessments with the following modifications (i) He directed that the status of the assessee was wrongly taken as Association of persons. Instead it should be URF.(ii) The assessing officer should take remedial action in the hands of Shri Gurdial Singh where income has been assessed as returned. This direction was issued under section 151 of the Act in order dated l1-2-2000, disposing appeals for asst. yrs. 1986-87, 1988-89 to 1992-93. In the subsequent order dated 22-2-2003, the second direction was explicitly stated by the learned Commissioner (Appeals) what is implicitly stated above. He directed as under : "2.6 Vide Ground No. 7 it is stated that the assessing officer has not allowed the credit of pre-paid taxes, as income of Hotel White is alerady assessed in the hands of Sh. Gurdial Singh as proprietor and he had paid the taxes. Since there was only a change in status from individual to association of persons as such the credit of pre-paid taxes should have been allowed. As I have held that income of Hotel White is to be assessed in the hands of appellant, the assessing officer is directed to give credit of pre-paid taxes in the case of the appellant. The assessing officer is further directed under the provisions of section 151 of tAe Act to take remedial action in the case of Sh. Gurdial Singh, individual, to avoid double taxation." The revenue has not challenged any portion of above directions.
However, the assessee has brought the issue in appeal and it was vehemently contended that notices issued under section 148 were invalid and reassessment made without jurisdiction. Even otherwise having regard to assessments made in the hands of Shri Gurdial Singh, the same income could not be treated as having escaped assessment and, therefore, reassessed in accordance with law.
On careful consideration of the rival submissions of the parties, I am inclined to cancel all these assessments for reasons alternatively stated and circumstances explained here-in-below.
The assessing officer issued notices under section 148 of the Act for all the assessment years under consideration to the assessee with the following description "M/s Hotel White, Lakkar Bazar, Shimla." He did not specify any status in the notices. In the reasons recorded under section 148(2), the assessing officer recorded that income had escaped assessment in the capacity of "RF" (registered firm). He also recorded in the reasons that Shri Gurdial Singh claimed wrong status of income of Hotel White in his returns. Subsequently, in the assessment order, he took the status of the assessee as an "association of persons in all the assessment years. On appeal, the Commissioner (Appeals) took the status of the assessee as URF.In the above background, the learned counsel for the assessee has contended that notices issued under section 148 of the Act without mentioning the status were illegal and consequently assessments made without jurisdiction. In support of above proposition, the learned counsel for the assessee relied on the decision of Hon'ble Kerala High Court in the case of P.N. Sasikumar & Ors. v. CIT (1988) 170 ITR 80 (Ker) wherein their Lordships have observed as under "It is agreed that the notices did not specify the capacity in which it was issued to Sasikumar. The Appellate Tribunal proceeded only on the basis that the notices were issued only to the individual. It is settled law that the issue of a notice under section 148 of the Income Tax Act is a condition precedent or a matter of jurisdiction to the validity of any reassessment order to be passed under section 147 of the Act. It is also settled law that if no such notice is issued or if the notice issued is invalid or not in accordance with the law or is not served on the proper person in accordance with law, the assessment would be illegal and without jurisdiction. The notice should specify the correct assessment year and should be issued to the particular assessee. Under section 2(31), "person" includes an individual or a Hindu undivided family or company, firm, an association of persons or body of individuals, whether incorporated or not, etc. They are distinct and different assessees. The service of a prescribed notice, on a particular assessee, who is to be assessed, is a condition precedent to the validity of any assessment to be made under section 147 of the Act. It is the very foundation of the jurisdiction of the Income Tax Officer. The above aspect of the matter is succinctly stated in Kanga and Palkhiwala's Law and Practice of Income-tax, Vol. 1, P.910 ...............
We have already held that the issue and service of a notice under section 148 is a condition precedent or a matter of jurisdiction. In that view, before assessing an "association of persons", as enjoined by section 282(2)(c) of the Income Tax Act, the notice should be addressed to the principal officer or a member thereof. Admittedly, it has not been done in this case. That means, there was no notice to the "association of persons" which was assessed to tax. We are of the view that it is case where "no notice" was sent to "the assessee", the "association of persons as enjoined by law. The entire proceedings are, in the circumstances, void and illegal and totally without jurisdiction. Such fundamental infirmity cannot be called a "technical objection" or mere "irregularity" and such vital infirmity cannot be cured or obliterated by relying on section 292B of the Income Tax Act.
It is not a case of a notice issued or served, but which is beset with any mistake, defect or omission. This is a case of "no notice" to "the assessee". As stated by the Calcutta Court in Sunroving Mills (P) Ltd. v. Income Tax Officer (1986) 160 ITR 412 (Cal) at p. 416, S. 292B does not empower the Income Tax Officer to act without jurisdiction. In that case, the Calcutta High Court held that section 292B does not authorise the Income Tax Officer to convert a proceeding under section 147(b) of the Act into a proceeding under section 147(a) and that action cannot be justified by taking recourse to section 292B of the Act. It was not a mere technicality and it is a question of jurisdiction. We are of the view that the said reasoning will apply in this case also. On this basis, we hold that the Tribunal was in error in holding that section 292B is applicable in the instant case and in reversing the orders of the Appellate Assistant Commissioner for these four assessment years." The learned counsel for the assessee has also relied on the decision of Hon'ble Calcutta High Court in the case of Bhagwan Devi Sarogi & Ors.
v. Income Tax Officer & Ors. (1979) 118 ITR 906 (Cal). In the above case notice under section 148 for reassessment was served on Smt. B.D.Sarogi & Ors. without indicating whether the assessee was a firm or an association of persons. The assessee challenged the validity of above notice in writ proceedings and the said notice was cancelled by their Lordships of the Calcutta High Court. After considering the decision of Supreme Court in the case of Y. Narayana Chetty v. ITO (1959) 35 ITR 388 (SC) and other decision of Calcutta High Court in the case of Shyam Sunder Bajaj v. Income Tax Officer & Ors. (1973) 89 ITR 317 (Cal), their Lordships of the Calcutta High Court observed as under : - "As I have already observed in the instant case the notice does not even mention association of persons. On the basis of the aforesaid decisions I must, therefore, hold that the notice in the instant case is invalid and on the basis of the invalid notice the Income Tax Officer does not acquire any jurisdiction to reopen the assessment and to proceed with the reassessment proceeding. The failure to issue a valid notice deprives the Income Tax Officer of the jurisdiction conferred on him under the Act and the proceedings taken by the Income Tax Officer in pursuance of an invalid notice must necessarily be illegal and void, In this view of the matter, I do not consider it necessary to decide the further question whether the sanction given by the Commissioner of Income Tax in the instant case was mechanical or not." As noted earlier, here also the assessing officer did not mention in the notices as to in what status he wanted to assess the assessee which was earlier assessed both as proprietary concern of Shri Gurdial Singh and as registered firm. The assessing officer in assessment order and Commissioner (Appeals) on appeal took the status of association of persons and URF, respectively. The notices without mention of status are held to be illegal. This jurisdictional defect could not be cured in the light of provisions of section 292B of the Act as observed by their Lordships of the Kerala and Calcutta High Courts. The notices are liable to be quashed on this ground.
The other alternative reason flows from the proposition that liability of a partner of a firm is joint and several. In the case of Income Tax Officer & Anr. v. Arunagiri Chettiar (1996) 220 ITR 232 (SC). The assessee had retired from the partnership on 19-4-1963. He settled accounts and took his share of profit in the assessments of the firm for the assessment years 1962-63 and 1963-64. Much later in 1967 and 1968 liabilities under the Income Tax Act were raised. Almost after 9 years of his retirement and on 23-2-1972, the assessing officer sought to recover from him the arrears of tax due from the firm on the ground that he was jointly and severally liable as partner to pay taxes of the firm. The assessee sought to resist the recovery but lost before all Tribunals and Courts right upto the Supreme Court. The proposition of law even otherwise well established is stated by their Lordships as under : "The firm is treated as an entity only for certain purposes. It is not a separate juristic entity distinct from its partners. A firm cannot be equated to a corporate body. Section 25 of the Partnership Act, 1932, excpressly states that every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner. Section 25 does not make a distriction between a continuing partner and an erstwhile partner. Its principle is clear and specific, viz., that every partner is liable for all the acts of the firm done while he is a partner jointly alongwith other partners and also severally. If a continuing partner is liable to pay the tax due from the firm relating to the period when he was a partner of the firm there is no reason in principle to hold that the said liability ceases merely because a partner has ceased to be a partner subsequent to the said period. The absence of a provision corresponding to the proviso to section 46(2) of the Indian Income Tax Act, 1922, in the Income Tax Act, 1961, prior to the introduction of section 188A in the 1961 Act with effect from 1-4-1989, does not make any difference to the position, since the liability of the partners to pay the dues of the firm does not arise by virtue of 0. 21, r. 50, of the CPC, which is attracted by virtue of the said proviso, but on account of the basic nature and character of a partnership firm. Order 21, rule 50 merely reiterates the said basic premise; it does not create a new liability.
Section 188A of the 1961 Act explicitly provides what was implicit hitherto .
The respondent-assessee, a partner of a firm, retired from the firm on 19-4-1963 and for the accounting years relevant to the assessment year 1962-63 and 1963-64, the accounts were duly made-up by the partners and the share of profits due to the respondent paid to him before his retirement, the firm continued with new partners until 1972 when it was dissolved.
The aforesaid proposition is fully applicable in this case Shri Gurdial Singh was admittedly a partner of M/s Hotel White. He was jointly and severally liable for liability of the partnership inclusive of taxes.
The IT department could assess and recover 100 per cent of tax payable by the firm on its income from Sh. Gurdial Singh without any hinderance. Shri Gurdial Singh could not have raised any objection to such assessment and recovery on him/through him. In the above situation, assessment of entire income of Hotel White in the hands of Shri Gurdial Singh 'individual' cannot be treated to be of no consequence. Shri Gurdial Singh was liable under the law to pay taxes on the income of the firm and that income was shown by him in his hands. It is not possible to accept that revenue can forceably-recover taxes of firm from a partner, but the partner cannot voluntarily pay such taxes of the firm. How principles of Civil Laws are applicable under the Income Tax Act in a case of a partner for taxes of firm is well demonstrated in the case of Arungiri Chettiar (supra). Income of "Hotel White" has been duly assessed and taxes recovered. On peculiar facts of the case, it is difficult to hold that income of Hotel White had escaped assessment. The same income earlier assessed in the hands of Shri Gurdial Singh was repeated and assessed in the hands of so-called association of persons/URF. The income cannot be said to have escaped assessment. It is not a case of assessments wrongly made in the hands of a totally stranger having nothing tor do with the income of the hotel. In the capacity of partner of the firm, he had the liability to paytaxes and the same were paid by him, may be under wrong notion that he was proprietor of the concern. Normally taxes payable by URF (assuming that status is correctly taken) are not higher than one payable by an individual and, therefore, inference of payment of taxes at a low rate can also not be possible to be drawn. The revenue authorities did not record any finding to the above effect. A further complication is added on account of directions of the Commissioner (Appeals) (which has attained finality) that credit for pre-paid taxes by Shri Gurdial Singh be given in the hands of this assessee. How credit will be given? On what dates payments would be taken to have been made are also complicated questions. All the same, it is a sheer formality of assessing income of "Hotel White" earlier assessed in the hands of Shri Gurdial Singh now in the status of URF. However, this is not permissible having regard to legal principles stated above.
As far as decrees of Civil Courts are concerned, those related to inter se relationship of partners. The revenue had nothing to do with those decrees. A creditor who has already recovered from Shri Gurdial Singh the amount due from partnership could not be permitted to take the stand that he would now make recovery from the correct legal entity.
The case of the revenue does not stand on a better footing than that of a creditor having regard to peculiar position of a partner in the affairs of the partnership.
For the aforesaid reasons, I hold that reassessment proceedings were illegal and are liable to be cancelled. These are hereby cancelled.