Abdul Sattar M. Mokashi Vs. Commissioner of Income-tax - Court Judgment

S. Rajendra Babu, J.

1. These are three references made under section 256(1) of the Income-tax Act, 1961 (hereinafter called the 'Act'), by the Income-tax Appellate Tribunal ('the Tribunal' for short) relating to the assessments of the applicant for three years. The assessments were made for the assessment year 1971-72 on November 11, 1971; for the assessment year 1972-73 on March 31, 1973, and for the assessment year 1973-74 on November 25, 1973, in the status of an individual. The Income-tax Officer got information that the applicant who is carrying on transport business was the real owner of the trucks standing in the names of his two brothers, Ibrahim M. Mokashi (Ibrahim) and Ahmed Sabeer M. Mokashi (Sabeer) and hence the correct income taxable in his hands had escaped on account of not declaring his income truly and correctly. The Income-tax Officer initiated, on that ground, action under section 147(a) of the Act by issue of a notice to the applicant for reassessment in the status of individual. The Income-tax Officer completed the reassessment proceedings holding that trucks bearing Nos. MEL 5389 and MYL 5428 belong to the applicant though apparently they are shown to be owned by his two brothers, Ibrahim and Sabeer. The applicant preferred three appeals against the orders of reassessment for the three years on various grounds. The Appellate Assistant Commissioner of Income-tax held that the applicant and his brothers have together carried on the business by pooling their resources and agreeing to share the profits and the two brothers of the applicant were his employees or benamidars. He also held that they were all joint proprietors of the same business. He rejected the contentions raised in relation to the validity of the action initiated under section 147 of the Act. Having come to the conclusion, the Appellate Assistant Commissioner observed :

'7. ... that the business jointly organised and conducted attracted assessment in their hands as an association of persons. In this view of the matter, the status will be - and is hereby - altered from 'individual to association of persons'. The requirements of law, rules and natural justice in this regard have also been fully and properly complied with as the same eminent and learned representatives have represented all the three cases and are now before me.'

2. Finally, he ordered as follows :

'14. .. The Income-tax Officer is directed to give effect to this order by varying the status as association of persons, assessing the business income and levying the tax directly for all the years concerned upon the association of persons itself and taking the appropriate equal shares in the absence of specification or of evidence to the contrary in the case of the members ...'

3. The applicant appealed to the Tribunal against the order, inter alia, urging the following grounds :

(i) Change of status from that of an individual to that of an association of persons (AOP); and,

(ii) The Income-tax Officer invalidly initiated the proceedings under section 147(a) of the Act amongst certain other grounds.

4. The Tribunal having dismissed the appeal, the applicant sought for a reference and at his instance, the following questions have been referred to us :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the reassessment proceedings under section 147 were validly initiated

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the appellate authorities could convert an order of reassessment made by the Income-tax Officer in respect of an individual assessee pursuant to reassessment proceedings commenced in his case as an individual and consequent upon a return filed by him in his individual capacity into that of a reassessment in the status of an association of persons of which the said individual was a member

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that there existed an association of persons consisting of Sri A. S. M. Mokashi and his two brothers

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that an assessment made in the status of an individual could be converted into that on an association of persons by the Appellate Assistant Commissioner, without giving the concerned persons an opportunity of being heard in respect of such proposed action.'

5. On the first question, the contention raised on behalf of the assessee is that the Income-tax Officer had reopened the assessment (i) on grounds which were non-existent and (ii) that he had not recorded that the applicant had failed to disclose fully and truly all materials necessary for assessment, and hence initiation of action under section 147 of the Act is invalid. It was submitted that there was no warrant for the Income-tax Officer to proceed on the basis that the applicant had admitted before the excise authorities that all the trucks belong to him even though some of them were purchased in his brothers' names.

6. On a perusal of the entire statement of the applicant before the excise authorities, it cannot be said that the Income-tax Officer could not have drawn the inference that the trucks belong to him although some were purchased in his brothers' names. It is clear from the said statement that the applicant had given his savings to his brothers for the purchase of lorries, although it is also stated that, in addition, they had themselves raised finance on their own for the purchase of the lorries; but it cannot be ruled out that the inference drawn by the Income-tax Officer is impossible and that no reasonable man could have drawn such an inference taking an overall view of the matter. Hence, we have to hold that the Income-tax Officer initiated the action under section 147 of the Act on relevant materials. Even a bare perusal of the reasons recorded by the Income-tax Officer before issuing notice under section 148 of the Act will clearly reveal that the Income-tax Officer had recorded that there was no disclosure of the true and correct income of the applicant for the relevant years which has resulted in escapement of the income from the tax net. Therefore, there is no substance in the contention raised on behalf of the applicant and we have to hold that the Tribunal was right in its conclusion on this question. Hence, we answer the first question in the affirmative and against the applicant.

7. The second question relates to the direction given by the Appellate Assistant Commissioner to assess the applicant in the status of an association of persons while disposing of the appeal. It was submitted on behalf of the applicant that for the assessment years 1971-72 to 1973-74 in the proceedings for original assessment, the applicant was treated as an individual and the initiation of proceedings under section 147 of the Act by issue of notice under section 148 of the Act and the completion of the reassessment proceedings also treated the applicant as an individual and not as representing the association of persons; and when the question of status was not at all the subject-matter of dispute before the Appellate Assistant Commissioner, he could not have directed assessment of the applicant as representing an association of persons. In reply, learned counsel for the Revenue submitted that the powers of the Appellate Assistant Commissioner in disposing of an appeal are co-extensive with that of the Income-tax Officer and that under the scheme of the Act, it was permissible for the Income-tax Officer to alter the status in the course of the assessment proceedings and that the status could be a subject-matter of an appeal under section 246 and that hence the Appellate Assistant Commissioner had powers to give directions as was done in these cases, which the Income-tax Officer is bound to implement after following the due procedure. He further submitted that in the 1922 Act, if a return is filed in one status, the same could not be altered by the Income-tax Officer and treating the status different from the one returned, although he had powers to take any other action under other provisions such as calling upon the assessee to file a return in the correct status and on his failure to do so, to proceed in accordance with law for ex parte assessment. The present scheme is that if the Income-tax Officer is not satisfied with the status as shown in the return, it was permissible for him to serve a notice under section 143(2) or 139(2) of the Act and complete the proceeding in a different status.

8. However, under section 143(1) of the Act, if an assessment had been completed in a wrong status, it was permissible for the Income-tax Officer to set it right by resorting to procedure under section 143(2) of the Act. Inasmuch as the status also could be the subject-matter of appeal, the Appellate Assistant Commissioner could deal with this aspect of the matter and since his powers are co-extensive with that of the Income-tax Officer, what could have been done by him, the appellate authority also could do, that is, to assess the applicant in the correct status.

9. These contentions cannot be dealt with except by reference to section 252 of the Act. A reading of the same will disclose that in disposing of an appeal, the Appellate Assistant Commissioner has powers coterminous or co-extensive with that of the Income-tax Officer and he can traverse the whole range of the assessment order as held by the Supreme Court in CIT v. McMillan & Co. : [1958]33ITR182(SC) ; CIT v. Shapoorji Pallonji Mistry : [1962]44ITR891(SC) ; CIT v. Kanpur Coal Syndicate : [1964]53ITR225(SC) and CIT v. Rai Bahadur Hardutroy Motilal Chamaria : [1967]66ITR443(SC) . Therefore, in view of the clear statement of the law made in these decisions, the Appellate Assistant Commissioner can do what the Income-tax Officer can do and can also direct him to do what he has failed to do. It may, however, be noted that however wide the appellate powers of the Appellate Assistant Commissioner may be, they are subject to certain limitations.

10. The scope of section 147 of the Act is that it is permissible for the Revenue, if the assessment had taken place in the wrong hands resulting in escapement of income from the tax net, to bring the same to tax by initiating proceedings against that person. If a notice is issued to an assessee as an individual when the correct status is that of an association of persons any reassessment proceedings completed on the association of persons will be invalid in view of the law enunciated in CIT v. K. Adinarayana Murthy : [1967]65ITR607(SC) . The law enunciated in this case still holds good for reassessment proceeding because the foundation for reopening an assessment is the issue of a notice under section 148 of the Act to the assessee concerned. Section 147 deals with two situations where income chargeable to tax has escaped assessment as a result of (i) the assessee not filing return at all or (ii) the previous assessment is based on a return which does not disclose true and correct income. Where assessment has been done in wrong hands, it would be a case of the assessee not filing a return in the correct status and will fall within the first category. In the first situation, what the Income-tax Officer does is to assess for the first time; while in the second situation, the Income-tax Officer reopens and reassesses in place of the assessment already made. Hence, the notice that could be issued as required under section 148(1) of the Act and the reasons that could be recorded as required under section 148(2) of the Act, in the two cases will be entirely different and will have a bearing upon the status of the assessee in respect of whom the assessment is sought to be reopened. Hence, we are clear in our mind that if a notice under section 148 is issued to a wrong person, reassessment cannot be completed by merely changing the status to that of the correct person. Whatever may be the situation in relation to the original assessment, in the case of reassessment, the principle laid down in K. Adinarayana Murthy's case : [1967]65ITR607(SC) still holds good and the contention to the contrary, viz., to depend upon the scheme of the Act in relation to the powers of the Income-tax Officer to change the status in certain cases of original assessment would be wholly irrelevant and misleading. Thus, the Income-tax Officer has no jurisdiction to change the status of an assessee in reassessment proceedings. The result is that what the Income-tax Officer could not validly do, the Appellate Assistant Commissioner also cannot do it in an appeal. Hence, the Appellate Assistant Commissioner in the instant case, has no jurisdiction to direct the Income-tax Officer to bring to tax in the hands of the applicant in the status of an association of persons instead of an individual.

11. We will now approach the problem on hand from a different angle. The applicant who was the appellant before the Appellate Assistant Commissioner was only an individual and the question of his status was never in doubt, and at all stages including the stage of original assessment, the stage of notice under section 148 of the Act and completion of proceedings under section 147 of the Act, he was treated as an individual. Never before any of the authorities was he treated in the status of an association of persons at all, much less before the Appellate Assistant Commissioner. In that background, it has to be seen whether the Appellate Assistant Commissioner can give a finding and direction as to in whose hands the income in question could be assessed and brought to tax. This aspect has been in a way dealt with by the Supreme Court in Rajinder Nath v. CIT : [1979]120ITR14(SC) . Pathak J. (as his Lordship then was), speaking for the court, held that 'finding and direction' in section 153(3) of the Act were limited in meaning and scope. In that context, it was observed that a finding given in an appeal, revision or reference arising out of an assessment must be a finding necessary for the disposal of the particular case, that is to say, in respect of a particular assessee and for a particular year. To be a necessary finding, it must be directly involved in the disposal of the case. The Supreme Court further illustrated the matter thus : It is possible that in order to give a direction in respect of A, a finding in respect of B may be called for; where the facts show that the income could belong to A or B or/and to no one else; a finding that it belongs to B or does not belong to B would be determinative of the issue as to whether it could be taxed as A's income. A finding in respect of B is initially involved as a step in the process of reaching the ultimate finding in respect of A; if, however, A's liability could be directly arrived at without necessitating a finding in respect of B, then a finding in respect of B was an incidental finding and it was not a finding necessary for the disposal of the case pertaining to A. In the case on hand, the Appellate Assistant Commissioner has reached the conclusion that the transport business was not that of the applicant alone, but incidentally found the same to be that of an association of persons. Hence, to give a finding that it was the income of the association of persons and to bring to tax the income in its hands is not a finding or direction necessary for the disposal of the case, in view of the categorical and clear ratio of the decision of the Supreme Court referred to above, and more so, when the Appellate Assistant Commissioner was not dealing with a case of an association of persons at all and which was not before him in any manner. Having realised that the association of persons was not there before him in any manner, the Appellate Assistant Commissioner adopted a very strange reasoning, viz., that rules of natural justice were complied with by reason of representation of the same counsel in respect of the three individuals (who constituted the association of persons), though in their individual status. Such a course is too naive to merit acceptance. Therefore, the only conclusion we have to draw on the second question is that the Tribunal was wrong in holding that the appellate authority could convert an order of reassessment made by the Income-tax Officer in respect of the individual pursuant to reassessment proceedings commenced as such to that of an association of persons. Hence, we answer the second question in the negative and in favour of the assessee.

12. So far as the third question is concerned, the Appellate Assistant Commissioner and the Tribunal have thoroughly examined the facts of the case and come to the conclusion that there existed an association of persons consisting of the applicant and his two brothers. The approach of the Appellate Assistant Commissioner and the Tribunal cannot be said to be wrong in any manner and hence we agree with the finding of the Tribunal on this question. Hence, we answer the third question in the affirmative and against the applicant.

13. The fourth question is in relation to the direction of the Appellate Assistant Commissioner that an assessment made in the status of an individual could be converted into that on an association of persons without hearing the association of persons and in the absence of the association of persons. The manner in which the Appellate Assistant Commissioner has approached this aspect of the matter has already been adverted to by us while dealing with the second question. The Appellate Assistant Commissioner took the view that rules of natural justice were complied with by representation of the same counsel in respect of the three individuals who constituted the association of persons. The order of the Appellate Assistant Commissioner does not disclose that any indication was given to learned counsel or in any other manner the association of persons was made known that the status of the applicant would be changed to that of an association of persons and assessment of the income made in its hands. It is clear from the manner in which the proceeding had gone on before the Appellate Assistant Commissioner that the association of persons had no opportunity of being heard. In this context, reliance was placed by learned counsel for the Revenue on the decision in the case of P. Vasudeva Setty v. CIT : [1967]65ITR172(KAR) to contend that in making an assessment in respect of one person, assessment could also be made in respect of another person. In that case, what was considered and held was that the assessment made is in respect of an association of persons or a firm or a body of individuals and if the Appellate Assistant Commissioner sets aside or gives direction in respect of its income, the income of the persons or members of a firm or an association or the body of individuals would also get altered and directions could be given in that respect. Therefore, we are of the view that the said decision has no application to the facts of the case at all. Hence, we hold that the Appellate Assistant Commissioner could not have converted the status of the applicant to that of association of persons without giving an opportunity of being heard to all the concerned persons on that matter. Our answer, in the result, to the fourth question is in the negative and in favour of the applicant.