http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6  

PETITIONER: COMMISSIONER OF INCOME-TAX,HYDERABAD

       Vs.

RESPONDENT: SRI RAJAREDDY MALLARAM

DATE OF JUDGMENT: 20/11/1963

BENCH: SHAH, J.C. BENCH: SHAH, J.C. SARKAR, A.K. HIDAYATULLAH, M.

CITATION:  1964 AIR  825            1964 SCR  (5) 508  CITATOR INFO :  R          1964 SC1095  (5)  R          1965 SC 325  (4)

ACT: Indian  Income  Tax Act, 1922 (11 of 1922), ss.  23(4),  44, 63(2)   -Dissolution  of’  Business  Association-Notice   of assessment on one member-If order of assessment  enforceable against  members not served with notice-Dissolution,  effect of-s.  44,  Scope  and effect  of--"Every  person",  meaning of--"Tax payable". meaning of. Practice-Question  which  did not arise  out  of  Tribunal’s order and was not referred--If could be raised. 509

HEADNOTE: An  association  of three persons carrying  on  business  in liquor was dissolved.  No return was filed on behalf of  the association  or  the  individual  members.   The  Income-tax Officer  issued a notice under s. 34 of the  Income-tax  Act calling   upon  Baba  Gowd,  one  of  the  members  of   the association,  to  file  a  return  of  the  income  of   the association but he did not so.  The Income-tax Officer  then assessed  the  taxable income of the  association  under  s. 23(4)  of the Act and determined the tax payable.   Attempts to  recover  tax from Baba Gowd were  not  successful.   The Income-tax  Officer  then issued a notice of demand  to  the respondent,  another  member of the  dissolved  association. The  respondent applied under s. 27 for cancellation of  the assessment.   The  application was  rejected  by  Income-tax Officer.   The  Appellate  Assistant  Commissioner   ordered cancellation  of  the  assessment and  directed  that  fresh assessment  be  made  after giving  an  opportunity  to  the respondent  to  file  a return and to  produce  evidence  in support  thereof.   The Income-tax Appellate  Tribunal  held that  a valid order of assessment had already been made  and there  was  no  occasion  to issue a  fresh  notice  to  the respondent or to make a fresh assessment. At the instance of the respondent, the Tribunal referred  to the High Court two questions whether the order of assessment made  by the Income-tax Officer under s. 23(4) on  September 30,  1953 was bad in law or not and whether  the  respondent

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6  

was  or  was  not liable for the amount of  tax  payable  as determined  in  that order of assessment by  reason  of  the terms  of s. 44 of the Incometax Act.  The High  Court  held that the order of assessment under s. 23 (4) was bad in  law and the respondent was not liable.  In appeal to this Court. Held:The order of assessment made by the lncome-tax  Officer under s. 23(4) on September 30, 1953 was not bad in law  and the  respondent  was liable for the amount  of  tax  payable under the order of assessment. Under  Chapter IV of the Income-tax Act, an  association  of persons  can  be  assessed as a unit of  assessment  or  the individual members can be assessed separately in respect  of their respective shares of income.  The Act does not contain any  machinery  for  assessing the  income  received  by  an association, in the hands of its members collectively.   The unit  of assessment in respect of the income earned  by  the association  is  either the association or  each  individual member  in respect of his share in the income.  This  is  so when the association is existing and the same is true  after its dissolution.  There can be no partial assessment of  the income of an association, limited to the share of the member who  is  served with notice of assessment.   The  theory  of assessment  binding only those members who were served  with the  notice  of assessment, is not valid.  The  use  of  the expression "tax payable" in s. 44 in the context in which it occurs  can only mean tax which the association but for  its dissolution  or discontinuance of its business,  would  have been assessed to pay. 510 By  virtue of s. 44, the personality of the  association  is continued  for  the  purposes of assessment.   What  can  be assessed is the income of the association recieved prior  to its dissolution and the members of the association would  be jointly and severally assessed thereto in their capacity  as members of association.  For the purpose of such assessment, the  procedure is that applicable for the assessment of  the income  of association as if it had continued.  A notice  to the  appropriate person under s. 63(2) would, therefore,  be sufficient  to  enable the authority to assess  to  tax  the association.   The plea that the respondent was  not  served personally  with the notice of assessment and was  therefore not liable to pay the tax assessed, cannot be sustained. C.A.  Abraham,  Uppoottil, Kottayam v.  Income-tax  Officer, Kottayam, [1961] 2 S.C.R. 765, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 290 of 1963. Appeal  from the judgment and order dated January 19,  1960, of  the Andhra Pradesh High Court in case referred No. 7  of 1958. K. N. Rajagopal Sastri and R.N. Sachthey, for the appellant. K. Bhimasankaram and K.R. Sharma, for the respondent. November 20, 1963.  The Judgment of the Court was  delivered by SHAH,  J.-Baba Gowd, P.V. Rajareddy and  Rajareddy  Mallaram formed  an  association of persons called  "Nizamabad  Group Liquor  Shops"-called for the sake of brevity  ’the  Group’. For  the Fasli year 1358 i.e. October 1, 1948  to  September 30,  1949 the Group carried on business in liquor  contracts obtained  from the former State of Hyderabad.  With the  end of  Fasli  year  1358 the contracts came  to  an  end.   The business was then discontinued, and the Group was dissolved. The  Group did not make a return of its income  pursuant  to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6  

the  general notice under s. 22(1)of the  Indian  Income-tax Act.The Incometax Officer, Nizamabad Circle, issued a notice under s. 34 of the Income-tax Act calling upon Baba  Gowdone of  the members of the Group-to file a return of the  income of the Group, but Baba Gowd failed to file the return on the due  date.  The Incometax Officer then assessed the  taxable income of the 511 Group  under  s.  23(4) at Rs. 51,000,  and  determined  Rs. 8,826-14-0 as the tax payable.  Attempts made by the Income- tax  Department  to recover the tax from  Baba  Gowd  having proved  unsuccessful,  on  March 13,  1954,  the  Income-tax Officer  issued  a notice of demand addressed  to  Rajareddy Mallaramanother  member  of  the  Group.   The  latter  then applied  under s. 27 of the Indian Income-tax Act  for  can- cellation  of the assessment.  The application was  rejected by  the  Income-tax  Officer.  In appeal  to  the  Appellate Assistant  Commissioner,  the order was set  aside  and  the Income-tax  Officer  was  directed to cancel  the  order  of assessment  under  s. 23(4) and to make a  fresh  assessment after giving an opportunity to Rajareddy Mallaram to file  a return and to produce the books of account of the  dissolved Group.  The Income-tax Appellate Tribunal, Hyderabad  Branch modified the order of the Appellate Assistant  Commissioner. The Tribunal held that a valid order of assessment under  s. 23(4) having already been made in the case there could be no occasion to issue a fresh notice to Rajareddy Mallaram or to make  a fresh assessment, but somewhat  inconsistently  with that  opinion,  ’the Tribunal directed  that  the  Appellate Assistant   Commissioner  do  consider   whether   Rajareddy Mallaram had been prevented by sufficient cause from  making the return. At  the  instance of Rajareddy Mallaram  the  following  two questions were referred to the High Court of Andhra  Pradesh by the Tribunal.               "(1) On the facts and in the circumstances  of               the case, was the order of assessment made  by               the Income-tax Officer under section 23(4)  on               30-9-1953 bad in law?               (2)   If  the answer to the above question  is               in the negative, was not the applicant  liable               for the amount of tax payable as determined in               that  order  of assessment by  reason  of  the               terms of section 44 of the Income-tax Act?" The   High  Court  answered  the  first  question   in   the affirmative and held that the second question did 512 not fallto be determined.  In arriving at its conclusion the HighCourt recorded the following findings:               "(1)On  the facts and in the circumstances  of               this case, the order of assessment made by the               Income-tax  officer under section 23 on  30-9-               1953 is bad in law,               (a)   absolutely, because he Made the  assess-               ment  of the association and not of those  who               were members of the association at the time of               the dissolution jointly and severally; and               (b)   particularly  as against any  member  on               whom notices under sections 34 and 22(4)  were               not  served because of such failure  to  serve               notices on him.               The   assessment   is  not  binding   on   the               petitioner, as no notice under section 22  was               issued  to  him  and as he  was  not  assessed               severally  or jointly with others referred  to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6  

             above.               (ii)  The  applicant  is not  liable  for  the               amount  of  tax payable as determined  in  the               order  of assessment dated 30-9-1953, as  that               assessment  was  not made in  conformity               with section 44 of the Income-tax Act." The  sole  question which fell to be determined  before  the taxing authorities was whether the order of assessment  made by the Income-tax Officer, subsequent to the dissolution  of the Group, assessing its income, after serving a notice upon one and not all the members of the Group, could be  enforced against  members  of  the Group who were  not  served.   The material  part  of  s. 44 of  the  Indian.   Income-tax  Act (insofar  as  it dealt with the  liability  of  discontinued associations) before it was amended by s. 11 of Finance  Act XI of 1958 with effect from April 1, 1958, stood as follows:               "Where  any business, profession  or  vocation               carried  on  by a association of  persons  has               been discontinued, or where an               513               association  of  persons is  dissolved,  every               person   who   was  at  the   time   of   such               discontinuance of dissolution a member of such               association  shall, in respect of the  income,               profits and gains of the . .  association,  be               jointly  and  severally liable  to  assessment               under  Chapter IV and ,for’ the amount of  tax               payable  and all the provisions of Chapter  IV               shall,  so  far as may be, apply to  any  such               assessment." The section declares the liability for assessment under  Ch. IV of the Act in case of discontinuance, of the business  of or  dissolution  of an association.   The  Group  admittedly discontinued its business at the end, of Fasli year 1358 and it was also dissolved.  Every person who was at the time  of such discontinuance or dissolution a member of the Group was by the express terms of s. 44 liable to be assessed  jointly and severally in respect of, the,, income, profits and gains of  the  Group  and was also liable for the  amount  of  tax payable.  This Court in examining the scheme of S. 44 as it’ stood  before its amendment in 1958 in its application to  a firm  which  had discontinued its  business  observed:  C.A. Abraham,  Uppoottil,  Kottayam Y.  The  Income-tax  Officer, Kottayam and another               "In  effect,  the Legislature has  enacted  by               s..44  that the assessment proceedings may  be               commenced  and  continued against  a  firm  of               which   business   is   discontinued   as   if               discontinuance   has  not  taken  place.    It               is  .enacted manifestly with a view to  ensure               continuity in the application of the machinery               provided for assessment and imposition of  tax               liability notwithstanding dis.,continuance  of               the business of firms.  By a fiction, the firm               is deemed to continue after discontinuance for               the purpose of assessment under, Chapter IV." In  Abraham’s  case  (1) the Court  was  concerned  with;the assessment of a firm -of which the business was discontinued because of the’ dissolution of the  (1)[1961] 2 S.C.R. 765 at p. 770. 514 firm, by the death of one of the partners.  But s. 44 as  it stands amended by Act, 7 of 1939 applies to  ’discontinuance of  the  business of associations of persons as well  as  of firms, and the question which directly fell to be determined

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6  

in  that  case  was  whether  penalty  for  concealing   the particulars   of  income  or  for  deliberately   furnishing inaccurate  particulars  of  income  in  the  return   could lawfully  be imposed after discontinuance of  the  business. It is true that the validity of the order assessing the firm was  not  expressly challenged, though at the  date  of  the order  of  assessment  the firm  stood  dissolved,  and  its business   was  discontinued,  but  the  ’Court  could   not adjudicate  upon the validity of the order imposing  penalty without  deciding whether there was a valid assessment,  for an order imposing penalty postulates a valid assessment. Counsel  for  the  respondent contended  that  even  if  the assessment  after  dissolution of the Group be  regarded  as valid, it is binding upon only those persons who were served with the notice calling for a return, and in support of this plea.  relied upon the clause "every person who-was  at  the time of such dissolution, a member of such association shall in   respect   of  the   income                     of   the association be jointly and severally liable to  assessment". He  urged that the expression "every person" in s. 44  means all persons, and that by enacting that such persons shall be liable to assessment "jointly and severally" it was intended that after the association is dissolved only the members  at the  date of dissolution can be assessed in, respect of  the income of the association.  As: a, corollary to the argument it  was  submitted -that all members who are  sought  to  be assessed   must  be  individually  served  with  notice   of assessment,  and those not, served will not be bound by  the assessment.  The argument is plainly inconsistent with what, was observed by this Court in Abraham’s case(".  If, by  s., 44  the continuity of the. firm or association-,is  for  the purpose of assessment ensured, (1)  [1961] 2 S.C.R. 766 at P. 770. 515 no  question  of  assessing the individual  members  of  the association can arise.  Under Ch.  IV of the Income-tax  Act an  association  of persons may be assessed as  a:  unit  of assessment,  or  the  individual  members  may  be  assessed separately  in  respect of their respective  shares  of  the income, but the Act contains no machinery for assessing  the income  received  by  an association, in the  hands  of  its members collectively.  The unit of assessment in respect  of the  income  earned  by  the.  association  is  either   the association  or  each individual member in  respect  of  his share  in  the income.  This is so when the  association  is existing,  and after it is dissolved as well.  There can  be no  partial  assessment  of the income  of  an  association, limited to the share of the member who is served with notice of assessment.  For the purpose of assessment the Income-tax Act invests an association with a personality apart from the members constituting if, and if that personality is for  the purposes  of Ch.  IV, insofar as it relates  to  assessment, continued,  the  theory  of  assessment  binding  only  upon members  who were served with the notice of  assessment  can have no validity.  This view is supported by the use of  the expression  "tax payable" in s. 44 which in the  context  in which it occurs can only mean tax which the association  but for  dissolution,  or discontinuance of its  business  would have been assessed to pay.  Since the primary purpose of  s. 44 is to bring to tax the income of the association after it is dissolved or its business is discontinued, assessment  of an aliquot share of that income is not contemplated by s. 44 of the Income-tax Act. The  effect of s. 44 is as we have stated, merely to  ensure continuity  in the application of the machinery provided  in

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6  

Ch.  IV of the Act for assessment and for imposition of  tax liability notwithstanding discontinuance of the business  of the association or its dissolution.  By virtue of s. 44  the personality of the association is continued for the  purpose of  assessment  and  Ch. IV applies thereto.   What  can  be assessed is the income of the association received prior  to its dissolution and the members of the association would be 516 jointly and severally assessed thereto in their capacity  as members  of  the  association.   For  the  purpose  of  such assessment, the procedure is that ’applicable for assessment of the income of the association as if it had continued.   A notice  to  the  appropriate person under  s.  63(2)  would, therefore,  be sufficient to enable the authority to  assess to  tax the association.  The plea ’that the respondent  not having been served personally with the, notice of assessment is  not liable to pay the tax, assessed cannot therefore  be sustained. Counsel for the respondent then contended that the  original assessment  made under s. 23(4) was invalid, because  notice of  assessment was not served upon the Group in  the  manner provided by s. 63(2) of the lndian Income-tax Act, Baba Gowd who  was  served with’ the notice not  being  the  principal officer  who .could be served, with notice on behalf of  the Group.   But  no  such  contention  was  raised  before  the Tribunal.   It  does  not  arise out of  the  order  of  the Tribunal  and the question referred by the Tribunal  to  the High  Court  does not. justify consideration of  that  plea. The  respondent  .’cannot be permitted to raise  a  question which  did not arise out of the order of the  Tribunal,  and has  not  been referred.  The case must be  decided  on  the footing  that  notice of assessment was properly  served  on Baba  Gowd and that the assessment, was properly ,  made  by the Income-tax Officer tinder s. 23(4). We hold that the answer to the first question will be in the negative.   If the order of assessment is held to be  valid, the application made by the respondent for setting aside the assessment  on  the ground that he was not served  with  the notice of assessment must fail., The second question will be answered as follows "The  applicant  was liable’for the amount  of  tax  payable under the order of assessment." The appeal is allowed.  The respondent will pay the costs of this appeal in this Court and in the High Court. Appeal allowed. 517