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PETITIONER: COMMSSIONER OF INCOME-TAX, BOMBAY,SOUTH POONA

       Vs.

RESPONDENT: MURLIDHAR JHAWAR & PURNA GINNING ANDPRESSING FACTORY, DHARMA

DATE OF JUDGMENT: 07/01/1966

BENCH: SHAH, J.C. BENCH: SHAH, J.C. SUBBARAO, K. SIKRI, S.M.

CITATION:  1966 AIR 1536            1966 SCR  (3) 219  CITATOR INFO :  D          1970 SC 778  (5)  RF         1979 SC1104  (8)

ACT: Income-Tax  Act,  1922-s.  23(3)-partners  in   unregistered partnership   assessed  individually-then  as   unregistered partnership-whether  Income-Tax Officer exercised option  to assess  individually-therefore whether second assessment  on unregistered partnership valid.

HEADNOTE: M, P and G carried on business in several commodities and in the assessment year 1954-55, the Income-Tax Officer  brought to  tax  a third share in Rs. 51,280., computed  as  profits from  the  business  in  the hands of  each  of  the  three, persons.  Thereafter, he called upon M to submit a return of the  "income of the joint venture" on the footing  that  the parties  thereto  constituted an unregistered  firm.   On  a return being filed, despite the objection of the  assessees, the Income-Tax Officer completed the assessment of the three persons  to  the joint venture under section  23(3)  of  the Income-Tax  Act, 1922 in the status of an unregistered  firm and  computed  the  income of the  "joint  venture"  at  Rs. 80,925.   An appeal to the Appellate Assistant  Commissioner was dismissed. In  second  appeal, the Tribunal held  that  the  Income-Tax Officer  had the option to assess the individual parties  to the  joint venture, and having exercised that option it  was not  open to the Income-Tax Officer thereafter  to  reassess the  same  income  collectively in the hands  of  the  three persons  as an unregistered firm.  On a reference, the  High Court confirmed this view. In  appeal to this Court it was contended on behalf  of  the Revenue  that  the  Income-Tax  Officer  making  the   first assessment  of the three persons was not informed that  they constituted an unregistered firm and he was therefore in law competent to assess the entity which was in truth liable  to be,  assessed  to tax; and in making the  earlier  order  of assessment  he  could  not be deemed to  have  exercised  an option which precluded him from assessing the income of  the three persons as an unregistered firm.

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HELD  : The three persons could be assessed individually  or they  could  be assessed collectively in the  status  of  an unregistered firm; the Income-Tax Officer could not seek  to assess  one income twice-once in the hands of  the  partners and again in the hands of the unregistered firm. [221 E] The  plea that the Income-Tax Officer was not in  possession of  information  relying on which, if he desired,  he  could have   assessed  the  three  persons  collectively   as   an unregistered firm cannot be accented. When  the,  Income-Tax Officer assessed  the  three  persons separately,  he unquestionably exercised an  option  knowing that  they had entered into a trading transaction  in  which they were jointly interested. [222 E]

JUDGMENT: CIVIL  APPELLATE JURISDICTION             Civil  Appeal  No. 327 of 1965. 220 Appeal  from the judgment and order, dated July 4,  1962  of the  Bombay  High Court in Income-tax Reference  No.  46  of 1960. A.   V. Viswanatha Sastri, N. D. Karkhanis, R. H. Dhebar and R.   N. Sachthey, for the appellant. Bishan  Narain,  B.  R. L. lyengar, S. K. Mehta  and  K.  L. Mehta, for the respondent. The Judgment of the Court was delivered by Shah,  J.  In  the  account year  ending  November  6,  1953 Murlidhar  Jhawar, Pannalal Lahoti and Govindbai carried  on business in groundnut, cotton and cotton-seed.  In the  year of  assessment  1954-55  the  Income-tax  Officer,   Nanded, brought  to  tax  a third share in Rs.  51,280  computed  as profits from the business in the hands of each of the  three parties, and thereafter he called upon Murlidhar to submit a return  of the "income of the joint venture" on the  footing that  the parties thereto constituted an unregistered  firm. Murlidhar  complied  with the requisition and  submitted  in November 1957 a return, but later applied to withdraw it  by application dated December 18, 1957.  The Income-tax Officer rejected  the  application  for  withdrawal  of  return  and completed  the assessment of the three parties to the  joint venture  under S. 23(3) of the Income-tax Act, 1922  in  the status  of an unregistered firm and computed the  income  of the joint venture at Rs. 80,925.  In appeal to the Appellate Assistant  Commissioner the order passed by  the  Income-tax Officer  was  confirmed.  In second appeal,  the  Income-tax Appellate  Tribunal  set aside the order  of  the  Appellate Assistant Commissioner.  The Tribunal held that the  Income- tax Officer had the option to assess the individual  parties to the joint venture, and he having exercised that option it was not open to him thereafter to reassess the same  income- collectively in the hands of the three parties to the  joint venture  in  the status of an unregistered firm.  But  on  a concession  made  by  counsel for  the  three  parties,  the Tribunal directed that the assessment be "rectified so as to restore the status quo ante." The Tribunal submitted a statement of the case and  referred the  following question to the High Court of  Judicature  at Bombay :               "Whether on the facts and in the circumstances               of the case the assessment of the unregistered               firm was proper and legal, the two partners of               this partnership               221

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             having  been  assessed  in  respect  of  their               shares   of  income  from   this   partnership               business ?" The  High  Court recorded an answer in the  negative.   With certificate granted by the High Court, this appeal has  been preferred. Under  s.  3  of the Indian Income-tax  Act,  income-tax  is charged in respect of the total income of the previous  year of  every  individual, Hindu undivided family,  company  and local authority, and of every firm and other association  of persons  or the partners of the firm or the members  of  the association  individually.   This Court in  Commissioner  of Income-tax, U.P. v.  Kanpur Coal Syndicate(1) observed at p. 228 :               "The  section  (s.  3)  expressly  treats   an               association  of  persons  and  the  individual               members of an association as two distinct  and               different  assessable entities.  On the  terms               of the section the tax can be levied on either               of  the  said two entities  according  to  the               provisions of the Act." The same principle would apply to the cases of assessment of partners individually of an unregistered firm.  The partners may  be  assessed  individually  or  they  may  be  assessed collectively  in  the status of an unregistered firm  :  the Income-tax  Officer  cannot however seek to assess  the  one income twice-once in the hands of the partners and again  in the hands of the unregistered firm. Mr.  Viswanatha Sastri for the Department contends that  the Income-tax Officer making the first assessment of the  three parties to the joint venture was not informed that the three parties  constituted an unregistered firm and therefore  the Income-tax Officer was in law competent to assess the entity which  was  in truth liable to be assessed to  tax,  and  in making  the earlier order of assessment he cannot be  deemed to  have  exercised  an  option  which  precluded  him  from assessing the income of the three parties as an unregistered firm.   It is true as pointed out by this Court in a  recent judgment:  Income-tax  Officer, Award, Lucknow  v.  Bachulal Kapoor(2) : that in dealing with a claim made by the Income- tax  Officer  to  assess income into the hands  of  a  Hindu undivided  family,  after assessing it in the hands  of  the members  on  the footing that the family  was  severed,  the "exercise  of  the  option to do one or  other  of  the  two alternatives  open  to an officer assumes knowledge  on  his part  of  the existence of two alternatives".   But  on  the materials before the Court we are unable (1) 53 I.T.R. 225 :[1964] 8 S.C.R 85. (2) [1966] 3 S.C.R. 68. 222 to  accept the plea that the Income-tax Officer was  not  in possession  of information relying on which, if he  desired, he could have assessed the three parties collectively as  an unregistered  firm.  There is no warrant for the  assumption which  counsel  for  the Department asks us  to  make,  that information about the true state of affairs was not with the Income-tax  Officer  when the first assessment was  made  by him. The  transactions in various commodities were carried on  by Pannalal  and Govindbai who were partners of Messrs.   Purna Ginning & Pressing Factory and by Murlidhar.  The Income-tax Officer  had  assessed  the  income  of  the  three  parties separately and added to the individual income of each  party his  or her share in the profits of the joint venture.   The Income-tax  Officer had information that the three  parties,

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two  of whom were members of a registered trading  firm  had effected transactions in groundnut, cotton and  cotton-seed. Apparently returns in respect of these trading  transactions were  separately made and a third share was included in  the individual  assessment of each of the three parties.   Apart from an association of individuals or a firm, the Income-tax Act  does  not recognize a collection of individuals  as  an entity capable of being assessed to tax.  The three  parties were  not a registered firm, and they could be  assessed  to tax  collectively as an association of individuals or as  an unregistered  firm  if  the relation  between  them  was  of partners.   When the Income-tax Officer assessed  the  three parties  separately  he unquestionably exercised  an  option knowing that they had entered into a trading transaction  in which  they  were  jointly  interested.   The   departmental authorities  have not chosen to place before the  Court  the returns  made by the three parties, and even the  orders  of assessment  individually made against the three  parties  by the  Incomes  Officer are not before this Court.   Only  the final order of the Income-tax Officer which directs : "Add : Joint venture income with Messrs.  Puma Ginning and Pressing Factory  taken provisionally subject to rectification  after the assessment of the joint venture" is incorporated in  the order of the Appellate Assistant Commissioner. It is common ground that the assessment made by the  Income- tax  Officer was not a "provisional assessment"  within  the meaning of s. 23B.  It would be reasonable to hold that  the income  of the three parties was assessed under s. 23(3)  of the Income-tax Act, for the income was earned in  commercial transactions  in  different  commodities.   The   Income-tax Officer in assessing the income of the joint venture,  could not have proceeded 223 without   scrutinizing  the  accounts  and  other   relevant documentary  evidence and without determining the skares  of the three parties to the joint venture.  In determining  the shares  of the three parties, he had also to  determine  the contractual relation which gave rise to the right to a share in  the profit.  Again the order of the  Income-tax  Officer clearly indicates that he was cognizant of the fact that the income of the joint venture was taxable collectively, but he thought  that he could in law in the first instance make  an "assessment  provisionally" of the three parties  separately and  then rectify the assessments later.  In so holding  the Income-tax  Officer may have committed an error of law,  but he  does not appear to have laboured under an  ignorance  of facts.   A  survey  of the  contentions  raised  before  the departmental  authorities, the Tribunal and the  High  Court makes  that inference irresistible.  The Income-tax  Officer who  made the assessment under challenge did not state  that when  the first assessment was made, the facts which  had  a bearing  on the true relationship between the three  parties were  not  placed,  and it was not even  argued  before  the Appellate Assistant Commissioner and the Tribunal that those facts  were not placed before the Income-tax  Officer.   The Tribunal held, relying upon J. C. Thakkar v. Commissioner of Income-tax(1) and Joti Prasad Agarwal & Others v. Income-tax Officer,   B-Ward  Mathura(2),  that  once  the  option   is exercised for assessing the individual partner and including his  share of profits in the firm in his assessment,  it  is not  open  to the Department to assess the  same  income  as income of the unregistered firm. The appeal therefore fails and is dismissed with costs. Appeal dismissed. (1)  27 I.T.R. 658.

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(2)  37 I.T.R. 107. 224