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PETITIONER: THE INCOME TAX OFFICER

       Vs.

RESPONDENT: ARVIND N. MAFATLAL

DATE OF JUDGMENT: 27/02/1962

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. AIYYAR, T.L. VENKATARAMA AYYANGAR, N. RAJAGOPALA SINHA, BHUVNESHWAR P.(CJ) SUBBARAO, K. GAJENDRAGADKAR, P.B. MUDHOLKAR, J.R.

CITATION:  1963 AIR  493            1962 SCR  Supl. (3) 455  CITATOR INFO :  RF         1966 SC1583  (7)

ACT: Income  Tax--Partners of registered firm holding  shares  of company  as  benamidars  of  the  firm--Error  in  computing tax--Proceeding  to rectify errors--Income tax  officer,  if could effect  readjustment to avoid  illogicalities  Income- tax Act, 1922(11 of 1922), ss. 16(2), 18(5), 35.

HEADNOTE: The respondents were the four partners of a firm M, which  I was  registered under the Indian Income Tax Act.   Three  of these  four  partners  held amongst  them  forty  shares  in private limited company which was registered in the  Phaltan State. For  the account year ending 30-9-1943 the  Phaltan  Company disclosed  a net profit, butt did not declare  any  dividend out  of  these  profits but paid  income-tax  and  super-tax thereon.   After the merger of Phaltan State in  the  Indian Union,  the Income-tax Officer issued notice to the  Phaltan Company  under  s.  34  of the Act  and  acting  tinder  the provisions of s.23A directed that the undistributed asscess- able  income  of the company should be deemed to  have  been distributed as dividend among the shareholders.  Before  the date  of  this order, the assessment of the firm M  and  the individual   assessment  of  its  four  partners  had   been completed.   In  order  to bring to  tax  the  undistributed dividend  deemed  to  be  declared  under  s.23A  among  the shareholders of the company, notices were issued to the four partners under s..34 of the Income-tax Act.  In response  to the  notice,  the partners appeared and contended  that  the forty shares held by the three of the four partners were  in fact the property of the registered firm M. This  contention was accepted by the Income-Tax Officer who thereupon treated the  dividend attributable to the total of the forty  shares as  the  dividend income of the firm and  proceeded  to  the apportion  the  said  income  among  the  four  partners  in

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proportion of the shares which each of them held in the firm and added this to the income already assessed.  In doing  so however,  the  Income-tax Officer committed  an  error.   In recomputing total income of each of these four assessees  he included only the net dividend "deemed to 456 be received" by each but as again this addition he allowed a deduction  of  the tax paid by the company  attributable  to such dividend.  Subsequently this mistake was discovered and thereupon the Income-tax Officer issued notice pointing  out the  error  in  including in the  income  the  net  dividend without  being grossed up, while at the same  time  allowing credit  for  the tax deemed to have been paid  thereon,  and averred  that  this was a mistake apparent  on  the  record" which he proposed to rectify under s.35 of the Act. Held,  that in view of the decision in M/s.  Howrah  Trading Co. v Commissioner of Income-tax, it is only the  registered shareholders  who are entitled to the benefit of the  credit for  tax paid by the company under s.18(5.) as well  as  the corresponding grossing up under s. 16(2).  On that basis the only persons who were entitled to be treated as shareholders to  whom  the  provisions of s.16(2) and  s.  18(5)  of  the Income-Tax  Act  were attracted were the three  partners  in whose name the forty shares stood registered. Held, further, that the Income-tax Officer and  jurisdiction under  s.36  to  rectify errors but  not  to  effect  merely readjustment  so  as to avoid the illogically  in  an  error which is still permitted to continue. Held, also, that it is not possible- to correct the  initial error  in  the  proceedings because the  notice  under  s.35 issued  to  the  parties  which is  the  foundation  of  the jurisdiction  to  effect the rectification, sought  not  the correction of the error but the perpetuation of it though in an  altered and a less objectionable from the point of  view of Revenue. Messrs.   Howrah  Trading Co., Ltd. v. The  Commissioner  of Income-tax, Calcatta [1959] Supp. 2. S. C. R. 448 applied.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION  C. As.  Nos. 502 to  505  of 1960. Appeals from the judgment and orders dated January 14,  1957 of the Bombay High Court in Special Civil Applications  Nos. 1848 to 1851 of 1956. N.   D. Karkhanis and P. D. Menon for the appellant (in  all the four appeals). S.   T. Desai and I. N. Shroff fur the Respondents. 457 1962.   February,  27.   The  Judgment  of  the  Court   was delivered by AYYANGAR, J.-These four appeals are pursuant to certificates granted  by the High Court of Bombay under Art 133(1)(c)  of the   constitution   and  raise  identical   questions   for consideration. The  respondent in these four appeals are each of  the  four partners  in a firm constituted under the name  of  Mafatlal Gagalbhai  &  Sons and which was  composed  of  Navinchandra Mafatlal, Arvind N. Mafatlal, Yoginder N.Mafatlal and Homant Mafatlal   with  shares  of  5/16,  3/16,  3/16,  and   5/16 respectively  in  that  firm (It has to  be  mentioned  that Navinchandra  died  subsequent to the decision of  the  High Court  and  his legal representatives have been  brought  on record in Civil Appeal No. 502 of 1959 but this circumstance

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being  irrelevant  we are ignoring it for  the  purposes  of these  appeals)  The firm was registered  under  the  Indian Income  Tax Act.  There was a private limited company  named Mafatlal  Apte  and Kantilal Limited  registered  under  the Phaltan  State  Companies Act.  Ton Shares in  this  private company  stood in the name of Navin Chandra, 10 in the  name of  Arvind and 20 in the name of Ham ant.  For  the  account year  of the company ending September 30, 1945  the  company disclosed  a  net profit of Rs.  1,09,165/-.   The  company, however,  did not declare any dividend out of those  profits but paid income-tax and super-tax thereon.  After the merger of the Phaltan State in the Indian Union and the ex. tension of the provisions of the Indian Income Tax Act thereto,  the In come Tax Officer who had jurisdiction over the assessment of  the  company,  issued notice to it under s.  34  of  the Indian Income Tax Act and acting under the provisions of  s. 23A  thereof  directed  that  the  undistributed  assessable income of the company which amounted to Rs. 68,228/-  should be deemed to have been distributed as dividend 458 among  the shareholders as on the date of the  General  Body Meeting of the company (i.e., on March 11 1946).  Before the date  of this order the assessment of the firm  of  Mafatlal Gaalbhai  & Sons and the individual assessment of  its  four partners  had been completed.. In order to bring to tax  the undistributed dividend "deemed to be declared" under s.  23A among  the shareholders of the company notices .were  issued to the four partners under s. 31 of the Income Tax Act.   In respondent  to the notice the partners appeared and  it  was stated  in their behalf that the 40 shares hold by three  of the  partners in .the company were in fact the  property  of the  Registered  firm and were held by them benami  for  the firm.   This  contention  was accepted  by  the  Income  Tax Officer  who thereupon treated the dividend attributable  to the  40  shares  as the dividend income  of  the,  firm  and proceeded  to  apportion  the said  income  among  the  four partners in the proportion of the shares which each of  them held  in  the  firm and added this  to  the  income  already assessed,  In doing so however, the Income Tax Officer  com- mitted an error.  In recomputing the total income of each of these  four assessees he included only the net dividend.  to be received" by each but as against this addition he allowed a  deduction of the tax paid by the company attributable  to such dividend.  There was no appeal against these assessment orders  which became final.  Subsequently this  mistake  was discovered  and  thereupon  the  lncome-Tax  officer-issued, notices to the four partners on April 13, 1954 pointing  out the  error  in  including in the  income  the  net  dividend without  being grossed up, while at the same  time  allowing credit  for  the tax deemed to have been  paid  thereon.  He averred  that this was a mistake’ apparent from the  records and stated that he intended to rectify the same under S.  35 of  the Income Tax Act.. The four assessees objected to  the rectification,  but  almost the entirely of the  grounds  on which the objection was  459 based related to the legality of the original assessment and the  assessees desired that if any rectification was  to  be made it must be in relation to those items and not in regard to  that for which notice had been served. ..he  Income  Tax Officer  by  his  order dated  October  12,  1955  rectified the  .assessment  by grossing up the  newly  added  dividend income  by the addition of the tax deemed to have been  paid by  the  company thereon and retained  the  original  relief granted  under  B. 18(5) of the Act.   After  unsuccessfully

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appealing to the higher authorities for relief against  this rectification  the assessees filed writ  petitions  invoking the  jurisdiction of the High Court under Arts. 226 and  227 of  the  constitution for prohibiting the  authorities  from taking  proceedings for the enforcement of the orders  dated October 12, 1955.  The learned Judges allowed the petitions. The  Income Tax Officer thereafter moved the High Court  for certificates  of  fitness  under Art.  133(1)(c)  and  these having been granted the appeals are now before us. The  ground upon which the learned Judge granted the  relief to  the  respondents  was  briefly  this  :  The  order   of assessment  had  proceeded  on the basis that  the  firm  of Mafatlal Gagalbliai & Sons was the shareholder who had  been in  receipt  of  the  dividend-income  and  the   individual partners of the firm had been made liable for their share of the  profits  derived from this registered  firm.   In  such circumstances   the  learned  Judges  held  that  what   was distributed  to the individual partners could not be  deemed to be dividend-income within s. 16(2) of the Income Tax Act. It  is  to test the correctness of this construction  of  s. 16(2) that these appeals have been preferred. In our opinion, however the appeals have to ’be dismissed on a  short ground which does not involve any consideration  of the  correctness  of the Construction adopted  by  the  High Court, of s. 16(2) 460 of the Income Tax Act This Court has held in Messrs.  Howrah Trading Co., Ltd. v. The Commissioner of Income-Tax Calcutta (1)  that  it  is only the  registered  shareholder  who  is entitled  to the benefit of the credit for tax paid  by  the company  under  s.  18  (5) as  well  as  the  corresponding grossing up under s. 16(2).  On that basis the only  persons who were entitled to be treated as shareholders to whom  the provisions of ss. 16(2) and 18(5) of the Income Tax Act were attracted  were  the three partners in whose  names  the  40 shares stood registered, as detailed earlier.  An error  had therefore  been  committed  by the  Income  Tax  Officer  in treating  the registered firm as the owner of the shares  in respect of the entire number of 40 shares.  It was not  this initial  and  fundamental  error  that  was  sought  to   be rectified by the proceedings under s. 35, but the removal of an  anomaly in that error which continued to be  affixed  in other words the object of the proceedings under s. 35 was to carry out to its logical conclusion the error which had been committed in the order of assessment dated October 12,  1955 passed after invoking the provisions of s. 34.  We  consider the  submission of learned Counsel for the respondents  that the  Income  Tax  Officer had jurisdiction under  s.  35  to rectify errors but not to effect merely readjustments so  as to avoid illogicalities in an error which is still permitted to continue is wellfounded. It  has further to be mentioned that it is not  possible  to correct  the initial error in these proceedings because  the notice   under  s.  33  which  is  the  foundation  of   the jurisdiction  of  the officer to effect  the  rectification, sought  in reality not the correction of the error  but  the perpetuation   of   it  though  in  an  altered   and   less objectionable form from the point of view of Revenue In this connection it would be noticed that one of the four partners Yoginder Mafatlal had no shares standing in has name and by (1)  [1959] Supp. 2 S.C.R. 448. 461 the order of assessment under s. 34 he had been saddled with a liability to the extent of his 3/16th share in the firm  , though this has been partially offset by the credit given to

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him, obviously wrongly, of relief under s. 18(5) of the  tax deemed to have been paid by the company on that incomes. We therefore consider that the appeals must fail.  They  are accordingly dismissed but in the circumstances of this  case there will be no order as to costs. Appeals  dismissed.