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PETITIONER: RAJINDER NATH ETC.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, DELHI

DATE OF JUDGMENT13/08/1979

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. BHAGWATI, P.N.

CITATION:  1979 AIR 1933            1979 SCR  (1) 272  1979 SCC  (4) 282  CITATOR INFO :  R          1980 SC 656  (8)  D          1984 SC 993  (19)

ACT:      Income-Tax  Act   1961  (43   of  1961)-S.  153(3)(ii)- Applicability   of-"finding"    and   "direction"-Difference between-Observation that  Income Tax  Officer, "is  free  to take action" not a ’direction’.

HEADNOTE:      A Hindu  undivided  family  consisting  of  the  father (Karta) and  his three  sons carried  on business.  Land was acquired in the name of the Karta and the price was paid out of the  books of  the family, and a building was constructed on the  land. Another  building was  constructed on  another plot of land.      On a  partial partition  of the  above Hindu  undivided family its  business was  taken over  by a  partnership firm consisting of  the Karta and the two elder sons and the firm debited a  certain sum  of money  in the building account of the firm  for the  assessment year 1955-56 and a similar sum in respect  of the  other property  for the  assessment year 1956-57.      The appellants  (assessees) who  were  members  of  the partnership firm, filed separate returns in their individual status for the assessment years 1955-56 and 1956-57 claiming that the  two properties belonged to the four members of the family in  their individual capacity. The Income Tax Officer however  regarded   the  properties   as  belonging  to  the partnership firm,  and in  the assessment proceedings of the firm for  the said years, estimated the cost of construction at a  higher figure,  than  the  cost  disclosed,  and  made additions accordingly to the returned income of the firm.      Allowing  the  appeals  of  the  partnership  firm  the Appellate  Assistant   Commissioner  deleted  the  additions holding that  as the  money was  advanced by  the  firm  and debited to  the account  of each  co-owner, the  partnership firm was  not the  owner of  the properties and therefore it could not be said to have earned any concealed income.      The Income Tax Officer then initiated proceedings under s. 147(a)  of the  I.T.  Act  1961  against  the  individual assessees for  the assessment  years 1955-56 and 1956-57 and

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the additions on account of concealed income originally made in the  assessments of  the partnership  firm  were  divided between the  assessees  and  included  in  their  individual assessment, rejecting  the plea  of the assessees that there was no  case for  invoking the  said section,  as  they  had already disclosed  that they  had invested in the properties when filing their original individual returns.      On appeal  the Appellate  Assistant Commissioner though agreeing that  there was  no default  on  the  part  of  the assessees to  warrant proceedings under s. 147(a) and though ordinarily the  assessments would  be barred  by limitation, maintained the  assessments on the ground that s. 153(3)(ii) of the Act applied. 273      The Income  Tax Appellate Tribunal though rejecting the contention that  the  assessees  were  not  covered  by  the expression "any  person" in  s. 153(3)(ii), pointed out that the provision  could not  be availed  of by  the Income  Tax Officer as there was neither any "finding" nor a "direction" on the earlier order of the Appellate Assistant Commissioner in consequence  of which,  or to  give effect  to which, the impugned assessment could be said to have been made and that no opportunity  had been  afforded to the assessees of being heard as  was required  by Explanation 3 to s. 153(3) before that earlier  order was  made. It  held that  the  Appellate Assistant Commissioner  had no  jurisdiction to  convert the assessments made  by the  Income Tax Officer under s. 147(a) to "assessments passed under s. 153(3)(ii)".      The High  Court on  Reference by  the Tribunal observed that the  finding that  the properties did not belong to the partnership firm and therefore the excess amount of the cost of construction  could not  be  regarded  as  the  concealed income of  the firm,  was necessary  for the disposal of the appeals filed  by the  firm and  as a  corollary it was held that  the   buildings  belonged   to  the   co-owners.  This necessitated the  "direction" to the Income Tax officer that he was  free to assess the excess amount in the hands of the co-owners. It held that the Appellate Assistant Commissioner could convert  the provisions  of s. 147(i) into those of s. 153(3)(ii)  of  the  Act  and  that  the  provisions  of  s. 153(3)(ii) of the Act applied to the case.      In the assessee’s appeals to this Court on the question whether s. 153(3)(ii) can be invoked.      Allowing the appeals, ^      HELD: (1) The provisions of s. 153(3)(ii) of the Income Tax Act,  1961 are  not applicable to the instant case. [280 C]      (2)  The   expression  "finding"  and  "direction"  are limited in  meaning. 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  the  particular  assessee  and  in relation  to   the  particular  assessment  year.  To  be  a necessary finding,  it must  be  directly  involved  in  the disposal of the case. [277G]      (3) Where  the facts  show that  the income  can belong either to  A or  B and  to no  one else,  a finding  that it belongs to  B or does not belong to B would be determinative of the  issue whether  it can  be taxed  as  A’s  income.  A finding respecting B is intimately involved as a step in the process of  reaching the  ultimate finding respecting A. If, however, the  finding as  to A’s  liability can  be directly arrived at  without necessitating a finding in respect of B, then a finding made in respect of B is an incidental finding

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only. It  is not a finding necessary for the disposal of the case pertaining  to A.  The same  principles apply  when the question is  whether the  income under enquiry is taxable in the  assessment   year  under  consideration  or  any  other assessment year. [278A-B]      (4)  It   is  now  well  settled  that  the  expression "direction" in  s. 153(3)  (ii) of  the  Act  must  mean  an express direction  necessary for  the disposal  of the  case before the  authority or  court. It must also be a direction which the  authority or  court is  empowered to  give  while deciding the case before it.                                                       [278C] 274      5. (i) Section 153(3) (ii) is not a provision enlarging the  jurisdiction  of  the  authority  or  court.  It  is  a provision which  merely raises  the bar  of  limitation  for making an assessment order under s. 143 or s. 144 or s. 147. [278D]      Income  Tax   Officer,  A-Ward,  Sitapur  v.  Murlidhar Bhagwan Das,  52 ITR  335; N.  Kt.  Sivalingam  Chettiar  v. Commissioner  of   Income-tax,  Madras,  66  ITR  586  (SC); referred to.      In the  instant case  all that has been recorded is the finding that  the partner  ship firm is not the owner of the properties. The  finding proceeds on the basis that the cost has been  debited in the accounts of the four co-owners. But that does  not mean, that the excess over the disclosed cost of construction  constitutes the  concealed  income  of  the assessees. The  finding that  the  excess  represents  their individual income  requires a  proper enquiry  and for  that purpose an  opportunity of being heard is needed to be given to the  assessees. That is plainly required by Explanation 3 to s.  153(3). The finding contemplated in Explanation 3, is a finding  that the  amount represents the income of another person. [278H-279B, D]      (ii) It  is one  thing for the partners of a firm to be required to  explain the source of a receipt by the firm, it is quite  another for  them in their individual status to be asked to  explain the  source of amounts received by them as separate individuals. [279C]      (iii)  The   observation  of  the  Appellate  Assistant Commissioner cannot  be  described  as  such  a  finding  in relation to the assessee. [279D]      (iv) It  is also  not possible to say that the order of the Appellate  Assistant Commissioner  contains a  direction that the  excess should  be assessed in the hands of the co- owners. The observation that the Income Tax Officer "is free to take  action" cannot  be described  as a  "direction".  A direction by  a statutory  authority is  in the nature of an order requiring  positive compliance. When it is left to the option and  direction of  the Income  Tax Officer whether or not to  take action  it cannot  be described as a direction. [279E-F]      (v) The  order of  the Appellate Assistant Commissioner contains neither  a ’finding’  nor a  ’direction’ within the meaning of  s. 153(3)(ii) of the Act in consequence of which or  to   give  effect   to  which  the  impugned  assessment proceedings can be said to have been taken. [279G]      Commissioner of  Income tax,  Andhra Pradesh  v.  Vadde Pullaiah & Co., 89 ITR 240; referred to.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil Appeals Nos. 1864-

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1869 of 1972.      Appeals by  Special Leave  from the  Judgment and Order dated 17-9-1971  of  the  Delhi  High  Court  in  Income-Tax Reference Nos. 22, 25 and 26 of 1970.      S. C. Manchanda and A. D. Mathur for the Appellants.      T. A.  Ramachnadran and  Miss  A.  Subhashini  for  the Respondent. 275      The Judgment of the Court was delivered by      PATHAK,  J:   These  appeals,  by  special  leave,  are directed against  a judgment dated September 17, 1971 of the High Court of Delhi, disposing of an income tax reference.      There was  a Hindu  undivided family  consisting of the karta, Lala Sham Nath and his three sons, Rajinder Nath, Ram Chander Nath  and a minor, Surinder Nath. The family carried on business.  On April 29, 1949, land was acquired in Sunder Nagar, New Delhi in the name of the karta, and the price was paid out  of  the  books  of  the  family.  A  building  was constructed on the land and was completed in September 1954. Another building  was constructed in the following year on a plot at Golf Links, New Delhi.      On March 18, 1950, there was a partial partition of the Hindu undivided family, and its business was taken over by a partnership  firm   Messrs.  Faqir   Chand  Raghunath   Dass consisting of  Lala  Sham  Nath  and  the  two  elder  sons, Rajinder Nath  and Ram  Chander Nath.  The partnership  firm debited a sum of Rs. 98,418/- in the building account of the firm towards  the cost  of construction  of the Sunder Nagar property  during   the  assessment   year  1955-56.  In  the assessment year  1956-57, the partnership firm debited a sum of Rs.  99,148/-on account  of the  construction of the Golf Links property.      The assessees, who are members of the partnership firm, field separate  returns in  their individual  status for the assessment years  1955-56 and 1956-57. They claimed that the Sunder Nagar  and the  Golf Links properties belonged to the four members of the family in their individual capacity. But the Income  Tax officer regarded the properties as belonging to the  partnership firm,  and in the assessment proceedings of the  firm for  those years,  he  estimated  the  cost  of construction at a higher figure than the cost disclosed, and made additions  accordingly to  the returned  income of  the firm. The  partnership firm  appealed. Allowing the appeals, the Appellate  Assistant Commissioner deleted the additions. He found  that when  the construction  of the  buildings was commenced the  moneys were  advanced by the New Delhi branch of the  firm, and  the debit in its books was transferred to the Head  Office where  one-fourth of  the total expenditure was debited to the account of each co-owner. On that he held that  the   partneship  firm   was  not  the  owner  of  the properties, and,  therefore, it  could not  be said  to have earned any concealed income.      The Income Tax Officer then initiated proceedings under section 147(a)  of the  Income Tax  Act,  1961  against  the individual assessees 276 for the  assessment  years  1955-56  and  1956-57,  and  the additions on  account of concealed income originally made in the assessments  of the  partnership firm  were now  divided between the  assessees  and  included  in  their  individual assessments. The Income Tax officer rejected the plea of the assessees that  as they  had already disclosed that they had invested  in  the  properties  when  filing  their  original individual returns  there was  no case  for invoking section 147(a). The  Appellate Assistant  Commissioner,  on  appeal,

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agreed that  there  was  no  default  on  the  part  of  the assessees to  warrant proceedings  under section  147(a) and that ordinarily  the assessments  would have  been barred by limitation. But the maintained the assessments on the ground that section  153(3) (ii)  of the  Act  applied.  In  second appeal, the  Income-tax Appellate  Tribunal, while rejecting the contention  that the  assessees were  not covered by the expression "any  person" in  section 153(3)(ii), pointed out that nevertheless  that provision could not be availed of by the  Income  Tax  Officer  because  there  was  neither  any "finding" nor  a "direction"  in the  earlier order  of  the Appellate Assistant Commissioner in consequence of which, or to give  effect to  which, the  impugned assessments  can be said to have been made. It also observed that no opportunity had been  afforded to  the assessees  of being heard, as was required by  Explanation 3  to section  153(3)  before  that earlier order  was made.  The Tribunal further expressed the view  that  the  Appellate  Assistant  Commissioner  had  no jurisdiction in  the  appeals  before  him  to  convert  the assessments made  by the  Income Tax  Officer under  section 147(a) to "assessments passed under section 153(3) (ii)".      The Commissioner  of Income Tax obtained a reference to the High Court of Delhi on the following two questions:-           "1. Whether  on the facts and in the circumstances      of the  case, the  Appellate Assistant Commissioner was      legally justified  in holding  that the  provisions  of      section 147(a)  of the  Income-tax Act,  1961, were not      applicable to the case for the assessment years 1955-56      and 1956-57 respectively ?           2. Whether  on the  facts and in the circumstances      of the case, the Tribunal was justified in holding that      the Appellate  Assistant Commissioner in appeals before      him could  not convert the provisions of section 147(1)      into those of Section 153(3)(ii) of the Income-tax Act,      1961 and  that provisions of section 153(3) (ii) of the      Act were not applicable to the instant case ?" 277      The High  Court noted  the  finding  of  the  Appellate Assistant Commissioner that the properties did not belong to the partnership firm, and therefore the excess amount of the cost of  construction could not be regarded as the concealed income of  the firm.  The High  Court observed  that such  a finding was  necessary for  the disposal  of of  the appeals filed by  the firm,  and as a corollary it was held that the buildings belonged  to the co-owners. This, according to the High Court,  necessitated the  "direction" to the Income Tax Officer that  he was free to assess the excess amount in the hands of the co-owners.      The High Court, taking the view that the co-owners were partners  of   the  firm  and,  therefore,  covered  by  the expression "any person" in section 153(3)(ii) of the Income- tax Act,  held that  the bar  of limitation  for making  the impugned assessments  was raised by that provision, and that the assessments  could be  sustained by  reference  to  that provision. It  answered the  second question referred by the Tribunal in favour of the Revenue and, in the circumstances, considered it unnecessary to answer the first question.      The present  appeals have been filed by individuals who are partners  of the  firm. No  appeal  has  been  filed  by Surinder Nath  who, at  the time  when the  partnership  was constituted was a minor and was not admitted to the benefits of the partnership.      The case  has been  dealt with  throughout on the basis that if  section 153(3) (ii) of the Act applies, and the bar of limitation  thereby removed,  it is  immaterial that  the

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assessments have  been made under section 147(a) of the Act. The question,  therefore, is  whether section 153(3)(ii) can be invoked.  It is  not contended on behalf of the assessees that they  are not covered by the expression "any person" in section 153(3)(ii)  of the  Act. The only contention is that there is  no "finding"  or "direction" within the meaning of section 153(3) (ii) of the Act in the order of the Appellate Assistant Commissioner  in consequence  of which  or to give effect to which the impugned assessments have been made.      The expressions  "finding" and  "direction" are limited in meaning.  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  the  particular  assessee  and  in relation  to   the  particular  assessment  year.  To  be  a necessary finding,  it must  be  directly  involved  in  the disposal of  the case.  It is possible in certain cases that in order  to render  a finding in respect of A, a finding in respect of B may be called for. For instance, where the 278 facts show  that the  income can belong either to A or B and to no  one else,  a finding that it belongs to B or does not belong to  B would  be determinative of the issue whether it can be  taxed as  A’s income.  A  finding  respecting  B  is intimately involved as a step in the process of reaching the ultimate finding  respecting A.  If, however, the finding as to  A’s   liability  can  be  directly  arrived  at  without necessitating a finding in respect of B, then a finding made in respect  of B  is an incidental finding only. It is not a finding necessary for the disposal of the case pertaining to A. The  same principles  seem to  apply when the question is whether  the   income  under   enquiry  is  taxable  in  the assessment year  under consideration or any other assessment year. As  regards  the  expression  "direction"  in  section 153(3)(ii) of  the Act,  it is now well settled that it must be an  express direction  necessary for  the disposal of the case before  the authority  or court.  It  must  also  be  a direction which  the authority or court is empowered to give while deciding the case before it. The expressions "finding" and "direction"  in section  153(3) (ii)  of the Act must be accordingly confined.  Section 153(3)(ii) is not a provision enlarging the  jurisdiction of the authority or court. It is a provision  which merely  raises the  bar of  limitation of making an  assessment order under section 143 or section 144 or section  147. Income  Tax  Officer,  A-Ward,  Sitapur  v. Murlidhar Bhagwan  Das and  N. Kt.  Sivalingam  Chettiar  v. Commissioner of  Income-tax, Madras. The question formulated by the  Tribunal raises  the  point  whether  the  Appellate Assistant  Commissioner  could  convert  the  provisions  of section 147(1)  into those of section 153(3)(ii) of the Act. In  view  of  section  153(3)(ii)  dealing  with  limitation merely, it  is not  easy  to  appreciate  the  relevance  or validity of the point.      In  the   present   case,   the   Appellate   Assistant Commissioner found  that the  cost of  constructing the  two buildings had not been met by the partnership firm. The firm had merely  advanced money to the individual four co-owners, whose personal  accounts in  the books  of the firm had been debited  accordingly.   On  that   material  the   Appellate Assistant Commissioner held that the partnership was not the owner of  the property  and consequently any excess over the disclosed cost  of construction  could not  be added  in the assessments of  the firm.  All that has been recorded is the finding that  the partnership  firm is  not the owner of the properties. It  is true  that the  finding proceeds  on  the

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basis that  the cost has been debited in the accounts of the four co-owners. But that does not mean, without anything 279 more,  that   the  excess   over  the   disclosed  cost   of construction  constitutes   the  concealed   income  of  the assessees. The  finding that  the  excess  represents  their individual income  requires a  proper enquiry  and for  that purpose an  opportunity of being heard is needed to be given to the  assessees. Indeed,  that is  now plainly required by Explanation 3  to section  153(3). The  expression  "another person" in  the Explanation would include persons intimately connected with the person in whose case the order is made in the sense  explained by  this Court in Murlidhar Bhagwan Das (supra). It  is one  thing for  the partners of a firm to be required to  explain the source of a receipt by the firm, it is quite  another for  them in their individual status to be asked to  explain the  source of amounts received by them as separate individuals.  On such opportunity being provided it would have  been open  to the  assessees to  show  that  the excess alleged  over the  disclosed cost of construction did not constitute  any taxable income. The finding contemplated in Explanation  3, it  will be  noted is  a finding that the amount represents  the income  of  another  person.  We  are unable  to  hold  that  the  observation  of  the  Appellate Assistant Commissioner can be described as such a finding in relation to the assessees.      It is  also not  possible to  say that the order of the Appellate Assistant  Commissioner contains  a direction that the excess should be assessed in the hands of the co-owners. What is a "direction" for the purposes of section 153(3)(ii) of the  Act  has  already  been  discussed.  In  any  event, whatever else  it may  amount to,  on  its  very  terms  the observation that  the Income  Tax Officer  "is free  to take action" to  assess the  excess in the hands of the co-owners cannot be  described as  a "direction".  A  direction  by  a statutory authority  is in  the nature of an order requiring positive compliance.  When it  is left  to  the  option  and discretion of  the Income Tax Officer whether or not to take action  it  cannot,  in  our  opinion,  be  described  as  a direction.      Therefore, in  our judgment  the order of the Appellate Assistant Commissioner  contains neither  a  finding  nor  a direction within  the meaning  of section  153(3)(ii) of the Income Tax  Act in consequence of which or to give effect to which the  impugned assessment  proceedings can  be said  to have been taken.      Reliance was  placed by  the Revenue on Commissioner of Income-Tax, Andhra  Pradesh v. Vadde Pullaiah & Co.  In that case. 280 there  were  two  appeals  before  the  Appellate  Assistant Commissioner, an  appeal by the firm and another by Pulliah, a partner  of the  firm, filed in his individual status. The question was  whether the  business was  the business of the firm or  that of  Pullaiah. In order to decide the appeal of the  firm  as  well  as  that  of  Pullaiah,  the  Appellate Assistant Commissioner  had to  decide whether  the business was that  of the  firm or  that of Pullaiah. In finding that the business  was that  of the firm and not of Pullaiah, the Appellate Assistant  Commissioner had necessarily to inquire into a  matter which  covered the subject matter of both the appeals.      In the circumstances, differing from the High Court, we held that  the provisions  of section  153(3)  (ii)  of  the Income Tax  Act are  not applicable to the instant case. The

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question is  answered in favour of the assessees and against the Revenue.      The High  Court did  not enter  into the first question formulated for  its opinion,  that is  to say,  whether  the provisions of  section 147  (a) of  the Income  Tax Act  are applicable for  the assessment years 1955-56 and 1956-57. It is agreed by the parties that if section 153 (3) (ii) of the Act cannot  be invoked  by the  Revenue, it  is necessary to decide the  first question  formulated by  the Tribunal.  In view of  the opinion  expressed by  us on the application of section 153(3)(ii)  of the Act, the case must go back to the High Court for its opinion on the first question.      The appeals  are allowed,  the judgment dated September 17, 1971  of the  High Court  governing  the  cases  of  the different assessees  for the  assessment years  1955-56  and 1956-57 is  set aside.  The provisions of section 153(3)(ii) of the  Income Tax  Act, 1961  are  not  applicable  to  the instant case.  Accordingly, the  second question is answered in favour  of the  assessees and  against the  Revenue.  The cases are  remanded to the High Court for its opinion on the first  question  formulated  by  the  Income  Tax  Appellate Tribunal. The assessees are entitled to their costs of these appeals. N.V.K.                                      Appeals allowed. 281