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PETITIONER: C.I.T., ANDHRA PRADESH

       Vs.

RESPONDENT: M/S.  VADDE PALLAIAH & CO.

DATE OF JUDGMENT08/03/1973

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. REDDY, P. JAGANMOHAN KHANNA, HANS RAJ

CITATION:  1973 AIR 2434            1973 SCR  (3) 655  1973 SCC  (4) 121  CITATOR INFO :  RF         1979 SC1933  (15)  R          1984 SC 993  (22)

ACT: Income-tax  Act (11 of 1922) s. 34(3), Second  Proviso-Scope of.

HEADNOTE: Upto  the  assessment  year 1953-54  a  business  was  being carried on by P as an individual. in March 1953, he  entered into  a partnership consisting of himself and  others.   For the  assessment years 1954-55, 1955-56 and 1956-57 the  firm filed  returns of income and applied for registration  under s. 26A of the Income-tax Act. 1922.  The income-tax  officer rejected’ the application holding that there was no  genuine firm.  He accordingly assessed P as an individual in respect of  the  income earned in that business.   As  against  that order  the  firm  as well as P  appealed  to  the  Appellate Assistant  Commissioner who allowed both the  appeals.   The Appellate Assistant Commissioner held that the business  was that of the firm and’ not of P. When the income-tax  Officer proceeded to assess the firm for the assessment years  1954- 55,  1955-56  and 1956-57, the firm resisted it  taking  the plea that the proceedings were barred by limitation under  s 34(3)  of the Act.  On the question whether  the  assessment for  each of the assessment years was valid the High  Court, on reference, held that the assessments were barred by  time and were not saved by the second’ proviso to s. 34(3) of the Act. Allowing the appeals to this Court. HELD  : Under the proviso the limitation of time  would  not apply to an assessment or re-assessment made on the assessee or  any  person in consequence of or to give effect  to  any finding or direction contained in an order under s. 31,  33, 33A  and 33B, 66 or 66A.  A finding which can be  considered as  relevant  under  the  proviso  must  be  one  which  was necessary for deciding the appeal before the authority;  and the  expression  ,any  person’ refers to one  who  would  be liable  to be assessed for the whole or part of  the  income that  went into the assessment of the year under  appeal  or revision.   The person should be intimately  connected  with

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the proceedings in which the finding was given. [658 CD; 660 A-B, E-F] In  the present case, the order of the  Appellate  Assistant Commissioner was made under s. 31.  Though he had not  given any direction, the order made by the Income-tax Officer  was in  consequence  of  the  finding  given  by  the  Appellate Assistant Commissioner.  The finding given by the  Appellate Assistant  Commissioner  that the business was that  of  the firm was absolutely necessary for deciding both the  appeals before him.  P, who was the dominant partner of the firm was not  only  interested  in his own assessment  but  was  also interested, in the assessment of the firm.  The partners and the firm were intimately connected with him and hence, they  are ’persons’ coming within the scope of the  proviso. [658 E-F; 660 C, F-G] Income-tax  Officer,  A-Ward, Sitapur v.  Murlidhar  Bhagwan Das,  52  I.T.R.  335;  344,  N.M.  Sivalingam  Chettiar  v. Commissioner  of  Incometax,  Madras,  66  I.T.R.  586   and Daffadar Bhagat Singh and Sons v. Incometax Officer,  A-Ward Ferozepore, 71 I.T.R. 417, followed.

JUDGMENT: CIVIL APPELLATE JURISDICTION Civil Appeals Nos.1682 to  1684 of 1970. 656 Appeals  by special leave from the judgment and order  dated October 3, 1969 of the Andhra Pradesh High Court in R.C. No. 4 of 1966. S. T. Desai, B. D. Sharma, S. P. Nayar, and R. N.  Sachthey, ,for the, appellant. N.  D.  Karkhanis,  and  K.  Rajendra  Chowdhary,  for   the respondent. The Judgment of the Court was delivered by HEGDE,  J.These  are appeals by Special Leave.   They  arise from a common judgment of the Andhra Pradesh High Court in a reference under section 66(i) of the Indian Income Tax  Act, 1922,  to  be  hereinafter referred to as  the  "Act".   The reference  in  question  relates to the  assessment  of  the assessee for the assessment years 1954-55, 1955-56 and 1956- 57.   The  question  of  law referred  by  the  Tribunal  is "Whether on the facts and the circumstances of the case, the assessment  made  on the firms, for each of  the  assessment years 1954-55, 1955-56 and 1956-57, are valid in law ?" Now we shall set out the material facts as could be gathered ’from the case stated by the Tribunal.  Up to and  including the  assessment  year  1953-54 business with  which  we  are concerned  in this case, was carried on by  Vadde  Pallaiah. He  was assessed as an ’individual’.  On March 20-3-1953  he entered  into a partnership consisting of himself and  three others.  That partnership was known as "M/s.  Vadde  Pulliah &  Co." In that partnership Pulliah had 8 as. share and  out of  the  remaining three partners two had 3 as.  share  each and o ne had 2 as. share.  For the assessment years 1954-55, 1955-56 and 1956-57, this firm filed returns of income as  a firm.   It also applied for registration under section  26A. The  Income-tax  Officer rejected that  application  holding that  there was no genuine firm.  He came to the  conclusion that  the  business  was  exclusive  that  of  Pulliah.   He accordingly  assessed Pulliah as an ’individual’ in  respect of  the  income earned in that business.   As  against  that order both the firm as well as Pulliah went up in appeal  to the Appellate Assistant Commissioner.  Before the  Appellate Assistant  Commissioner, the question for consideration  was

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whether  the  firm in question was a genuine firm.   If  the firm  was  a  genuine firm,  it  necessarily  followed  that Pulliah  was wrongly assessed.  If, on the other  hand,  the ’firm was not a genuine firm, Pulliah was rightly  assessed. Therefore, the sole question that arose for decision in  the appeals  filed by the firm as well as Pulliah was as to  the genuineness   of  the  firm  in  question.   The   Appellate Assistant  Commissioner after examining the material  before him  came to the conclusion that the firm in question was  a genuine firm.  Consequently, he allowed the 657 appeal  of  the  firm as well as that of  Pulliah.   In  the firm’s  appeals,  he  directed  the  Income-tax  Officer  to register,  that firm and in Pulliah’s appeal he  set  aside the assessment made on him. In the operative portion of  his order he stated thus               "The  Income-tax Officer is directed to  adopt               the, correct, share of income of the appellant               from this firm." But  in the body of his order he specifically held that  the business. in question was carried on by the firm and not  by Pulliah. After this order was made, the Income-tax Officer  proceeded to  assess the firm in respect of the income earned by  that firm during the assessment years 1954-55, 1955-56 and  1956- 57 When the Income-tax Officer initiated proceedings against the  firm for the purpose of assessment, the  firm  resisted the same taking the plea that the proceedings in question is barred  by  limitation under section 34(3) of the  Act.   He rejected that contention.  Aggrieved by that order the  firm went up in appeal to the Appellate, Assistant  Commissioner. The  Appellate Assistant Commissioner upheld the  contention of the, assessee and set ’aside the order of’ the Income-tax Officer.  As against that order the Income tax Officer went up  in  appeal to the Income-Tax  Appellate  Tribunal.   The Tribunal  partly  accepted  the  appeal  of  the  Income-tax Officer.. It came to the conclusion that the assessment  in respect  of  assessment years 1955-56 and  1956-57  are  not barred in view of the Second Proviso to section 34(3) of the Act.   But it opined that the assessment in respect  of  the assessment year 1954-55 was barred by limitation. Aggrieved  by the decision of the Tribunal both the  Commis- sioner  of  Income-tax  as well as the  assessee  moved  the Tribunal  under  section 66(i) of the Act to  refer  certain questions  of law to the High Court of Andhra Pradesh.   The Tribunal submitted’ the question set out earlier to the High Court.’ The High court has answered that question in  favour of  the  assessee.   It  came to  the  conclusion  that  the impugned  assessments were barred by time and they  are  not saved by the Second Proviso to sub-section(3) of section  34 of  the Act.  Tit is as against that decision these  appeals have been brought by the Commissioner of Income-tax. In order to decide the controversy before us it is necessary to  refer  to  the material portions of  section  34.   That section  deals with income escaping assessment.  We are  now concerned with sub-section (3) of section 34 and the  Second Proviso there to Sub-section (3) of section 34 reads :               "No order of assessment or reassessment, other               than an order of assessment tinder section  23               to  which  ’clause(c) of  sub-section  (1)  of               section 28 applies or an order- 658 of assessment or reassessment in cases falling within clause (a)  of sub-section (1) or sub-section (1A) of this  section shall be made after the expiry of four years from the end of

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the  year in which the’ income, profits or gains were  first assessable." The First Proviso is not relevant for our present  purposes. Hence  we shall proceed to quote the Second Proviso to  sub- section (3) of section 34.  That Proviso gays               "Provided  further that nothing  contained  in               this  section limiting the time within,  which               any   action  may  be  taken  or  any   order,               assessment or re-assessment may be made, shall               apply to a re-assessment made under section 27               or  to an assessment or re-assessment made  on               the  assessee or any person in consequence  of               or to give effect to any finding or  direction               contained  in  an  order  under  section   31,               section 33, section 33A, section 33B,  section               66 or section 66A." The  question  before us is whether the assessee’s  case  is covered  by the Second Proviso to section 34(3) ?  Before  a case can be said to be covered by the said Proviso  certain requirements  will  have  to be fulfilled.   The  first  and foremost  requirement  is that the order made  must  be  one either  under  section 31 or section 33 ,or section  33A  or section  33B or section 66 or section 66A.  In  the  present case,  admittedly,  the  order in question  was  made  under section 31.  The present case does not fall within the scope of section 27 about which there is no dispute. The next requirement is that the order made by the IncomeTax Officer  must be to give effect to any finding or  direction given  by  the  Appellate  Authority.   In  this  case,  the Appellate   Assistant  Commissioner  had  not   given   ’any direction  to assess the assessee.  Therefore, all that  we have  to  see is whether the order made by  the  Income  tax Officer  was  in  consequence  of a  finding  given  by  the Appellate  Assistant  Commissioner.  The  further  ,question that  we have got to decide is whether the assessee  can  be considered as one of the persons coming within the scope  of the  proviso  in  question.   There  has  been  considerable controversy  as to the meaning of the word ’finding’ in  the Second  Proviso  to section 34(3).  This  question  came  up before  this Court for consideration in Income-Tax  Officer, A-Ward,  Sitapur v. Murlidhar Phagwan Das.(1) This  is  what this Court observed in that case               "The  expression "finding or  direction",  the               argument  proceeds, is wide enough to take  in               at  any  rate a finding that is  necessary  to               dispose  of  the  appeal  or  direction  which               Appellate Assistant Commissioners have in (1) 52 I.T.R. 335 ; 344. 659               practice   been   issuing   in   respect    of               ’assessments  of  the years other  than  those               before   them  in  appeal.   What   does   the               expression "finding" in proviso to sub-section               (3) of section 34 of the Act mean ?  "Finding"               has  not been defined in the  Income-tax  Act.               Order  XX,  rule  5,  of  the  Code  of  Civil               Procedure reads :               "In  suits in which issues have  been  framed,               the court shall state its finding or decision,               with the reasons therefor, upon each  separate               issue, unless the finding upon any one or more               of  the issues is sufficient for the  decision               of the suit."               Under this Order, a "finding" is, therefore, a               decision  on an issue framed in a  suit.   The

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             second  part  of the rule shows  that  such  a               finding shall be one which by its own force or               in  combination with findings on other  issues               should  lead  to  the decision  of  the  suit1               itself.  That is to say, the finding shall  be               one which is necessary for the disposal of the               suit.  The scope of the meaning of  expression               "finding" is considered by a Division Bench of               the Allahabad High Court in Pt.  Hazari Lal V.               Income-Tax  Officer, Kanpur,(’,).   There  the               learned judges pointed out               The  word ’finding’, interpreted in the  sense               indicated   by  us  above,  will  only   cover               material questions which arise in a particular               case for decision by the authority hearing the               case or, the appeal which, being necessary for               passing  the final order or giving  the  final               decision  in the appeal, has been the  subject               of controversy between the interested  parties               or  on which the parties concerned  have  been               given a hearing." We agree with this contention of finding." The same view was taken  by  this  Court  in  N.KT.  Sivalingam  Chettiar   v. Commissioner of Income-tax, Madras (2) . .LM15 Therein  this Court ruled that a finding or direction by  an appellate  authority in an order relating to the  assessment of  one  year does not warrant the avoidance of the  bar  of limitation  under  section 34 of the Indian  Incometax  Act, 1922,  against initiation of proceedings for assessment  for another  year.   A  finding within  the  second  proviso  to section  34(3),  must  be a finding  for  giving  relief  in respect  of  the  assessment for the year  in  question.   A finding  may only be that which was necessary for  the  dis- posal  of an appeal in respect of an assessment of a  parti- cular year. (1) 39 I.T.R. 265.        (2) 66 I.T.R. 586. 660 The  law on question was elaborately examined by this  Court again  in  Daffadar  Bhagat Singh  and  Sow  v.  Income,-tax Officer,   A   Ward  Ferozepure(1).   Therein   this   Court reiterated  that  a  finding  which  can  be  considered  as relevant  under the second proviso to section 34(3) must  be one  which was necessary for deciding the appeal before  the authority.   Having set out the law let us  examine  whether the finding given in this case is one that was necessary for the  decision  of the case before  the  Appellate  Assistant Cornmissioner.   As mentioned earlier the question that  the Appellate  Assistant Commissioner had to decide in  the  two appea ls  before him, which he heard together,  was  whether the  business  in question was the business of the  firm  or that  of Pulliah.  He had only two alternatives before  him. In order to decide the appeal of the firm as well as that of Pulliah,  he had to decide whether the business was that  of the firm or that of Pulliah.  He came to the conclusion that the business was that of the firm and not of Pulliah.  There is no room for doubt that the finding given by the Appellate Assistant Commissioner was absolutely necessary for deciding both the appeals before him. This  takes us to the other branch of the second proviso  to section 34(3), namely, whether the firm can be considered as coming within the expression ’any person’ in the proviso  in question.  In Murlidhar Bhagwan Das (Supra), this Court came to  the conclusion that the expression ’any person’  in  the second proviso to section 34(3) referred to one who would be

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liable to be assessed for the whole or a part of the  income that  went into the assessment of the year under  appeal  or revision.    Further,  that  person  should  be   intimately connected  with  the proceedings in which  the  finding  was given.  The same view was taken in other cases refierred  to earlier.   In  the  instant case Pulliah  was  the  dominant partner of the firm as found by the Tribunal.  He had 8  as. share in ;the firm.  He, was the original owner of the firm. He  was  not only interested in his own assessment,  he  was also interested in the assessment of the firm.  The  partner of  Pulliah were ,intimately connected with him.   Hence  we were  clearly of the opinion that they are "persons"  coming within the scope of the second proviso to section 34(3).  It may  be noted that the Appellate Assistant Commissioner  had to  deal with--the cases of Pulliah as well as that  of  the firm. In  our opinion the High Court erred in coming to  the  con- clusio.n  that the finding given by the Appellate  Assistant Commissioner, in the appeals filed by Pulliah as well as  by the  firm, that the business was carried on by the firm  was not  a  necessary .finding for deciding the  appeals  before him.  That finding was (1) 71 I.T.R, 417. 661 clearly  necessary.  But for that finding he could not  have decided  the appeals before him in the way he decided.   The High  Court was also wrong in its conclusion that  the  firm was a stranger to the assessment made on Pulliah.  The  firm was  intimately  connected with Pulliah and  the  assessment made on him. For  the reasons mentioned above we set aside the  order  of the  High  Court.  We vacate the answer given  by  the  High Court and answer the question referred to in the affirmative and  in favour of the Revenue.  The appellant will  got  his costs from the Respondent.  One hearing fee. V.P.S.                       Appeal allowed. 662