# [1962] Supp. 3 S.C.R. 455

- **Citation:** [1962] Supp. 3 S.C.R. 455
- **Court:** Supreme Court of India
- **Decided:** 1962
- **Bench:** B. P. Sinha, K. Subba Rao, N. Rajagopala Ayyangar, J. R. Mudholkar, T. L. Venkatarama Aiyar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1962-supp-3-s-c-r-455-2391
- **Pages:** 7

## Headnote

lneome Tax-Partners of registered firm holding shares of
company as benamidars of the firm-Error in computing taxProceeding to rectify errors-Income tax officer, if could effect
readju8tment to avoid illogicalities-lncome·tax Act, 1922( 11 of
1922), 88. 16(2), 18(5), 35.
The respondents were the four partners of a firm M,
which 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 30-9-1945 the Phaltan
Company disclosed a net profit, but did not declare any divi·
<lend 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 under
the provisions of s.23A directed that the undistributed assessable 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 Mand 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 firrn and proceeded to the apportion the said income
among the four partners in proportion of the ~hares which each
of them held in the firm and added this to the income already
assessed. In doing so however, the Income-tax Officer commited an error. In rrcomputing the total income of each of these
folJl" ,.ssess~es he included only the net dividend "deemed tq
196P
February t'l.
1962
Tiu lnumt T .x
Officer
v.
iruiM N. MaftJtJal
4fi6 SUPREME COURT REPORTS [1962) SUPP.
be received" by each but as again this addition he allowed
a deduction of the tax paid by the company attributable to
such dividend. Subc;cqL1cntly this rnic;takc
\Ya<> discovered and
thereupon the [ncon1e-1ax Officer i:-sucd notice pointing out
the error in including in the inco1nc the net dividend without
being grossed up, \Yhilc at the same time allowing credit for
the tax deemed to have br-en paid thereon, and averred
that this wa.c; a mistake apparent on the record" which he
proposed to rectify under s.35 of the Act.
Held, that in vic1,v
of the dccbion in .M/s. Hou1rah
Trading
Co.
v.
Co,nniissioner uf Income-.1ax, it is only the
rcgistere<J shareholder::. \'/h:> arc
entitled to the benefit of
the credit for tax paid by the company under s.18(5) as well
as tl1e cnnesponding grossing
up under s.16(2).
On that
basis the
only
p~rsons \vho were entitled to be treated
as shareholders to whom the provisions of s.16(2) ands. 18(5)
of the lncomc-1'ax Act \\'ere attracccd were the three partners in whose natne the forty shares stood registered.
Held. further, that the Income-tax Officer and Jurisdiction under s.3j Eo rectify errors but not to effect merely
rc-arljustmcn t ~o as to avoid the illogicality in an error which
is still permitted to contint1c.
!Jehl, also, that it is not possible to correct the initial
error in the procee:iings because the notice under s.35 issued
tu the parties \\·hich is thr foundation of the jurisdiction to
effect the rcc1ific;1tion 1 sought not the correction of the error
but the perpetuation of it th'lugh. in an altered and a less
objectionable frcn11 the point of vic\v of Revenue.
lJ!t:ssrs. llo1crnh 7'rading Co., Ltd. v. TM Commis1ioner
of Income-tar, Calr.atlct, ll9:19 Supp. 2. S. C.R. 448 applied.
CIVIL APPELLATE JuRISllICTION: C. As. Nos.
502 to 505 of 1960.
Appeals from the judg

## Text

3 S.C.R.
SUPREME COURT REPORTS
455
THE INCOME TAX OFFICER
'I!
ARVIND N. MAFATLAL
(B. P. SINHA, c. J., K. SUBBA RAO, N. RAJAGOPALA
AYYANGAR, J. R. MUDHOLKAR and
T. L. VENKATARAMA AIYAR, JJ.)
lneome Tax-Partners of registered firm holding shares of
company as benamidars of the firm-Error in computing taxProceeding to rectify errors-Income tax officer, if could effect
readju8tment to avoid illogicalities-lncome·tax Act, 1922( 11 of
1922), 88. 16(2), 18(5), 35.
The respondents were the four partners of a firm M,
which 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 30-9-1945 the Phaltan
Company disclosed a net profit, but did not declare any divi·
<lend 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 under
the provisions of s.23A directed that the undistributed assessable 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 Mand 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 firrn and proceeded to the apportion the said income
among the four partners in proportion of the ~hares which each
of them held in the firm and added this to the income already
assessed. In doing so however, the Income-tax Officer commited an error. In rrcomputing the total income of each of these
folJl" ,.ssess~es he included only the net dividend "deemed tq
196P
February t'l.
1962
Tiu lnumt T .x
Officer
v.
iruiM N. MaftJtJal
4fi6 SUPREME COURT REPORTS [1962) SUPP.
be received" by each but as again this addition he allowed
a deduction of the tax paid by the company attributable to
such dividend. Subc;cqL1cntly this rnic;takc
\Ya<> discovered and
thereupon the [ncon1e-1ax Officer i:-sucd notice pointing out
the error in including in the inco1nc the net dividend without
being grossed up, \Yhilc at the same time allowing credit for
the tax deemed to have br-en paid thereon, and averred
that this wa.c; a mistake apparent on the record" which he
proposed to rectify under s.35 of the Act.
Held, that in vic1,v
of the dccbion in .M/s. Hou1rah
Trading
Co.
v.
Co,nniissioner uf Income-.1ax, it is only the
rcgistere<J shareholder::. \'/h:> arc
entitled to the benefit of
the credit for tax paid by the company under s.18(5) as well
as tl1e cnnesponding grossing
up under s.16(2).
On that
basis the
only
p~rsons \vho were entitled to be treated
as shareholders to whom the provisions of s.16(2) ands. 18(5)
of the lncomc-1'ax Act \\'ere attracccd were the three partners in whose natne the forty shares stood registered.
Held. further, that the Income-tax Officer and Jurisdiction under s.3j Eo rectify errors but not to effect merely
rc-arljustmcn t ~o as to avoid the illogicality in an error which
is still permitted to contint1c.
!Jehl, also, that it is not possible to correct the initial
error in the procee:iings because the notice under s.35 issued
tu the parties \\·hich is thr foundation of the jurisdiction to
effect the rcc1ific;1tion 1 sought not the correction of the error
but the perpetuation of it th'lugh. in an altered and a less
objectionable frcn11 the point of vic\v of Revenue.
lJ!t:ssrs. llo1crnh 7'rading Co., Ltd. v. TM Commis1ioner
of Income-tar, Calr.atlct, ll9:19 Supp. 2. S. C.R. 448 applied.
CIVIL APPELLATE JuRISllICTION: C. As. Nos.
502 to 505 of 1960.
Appeals from the judgment and orders dat~d
Janunry 14, 19.57 of the Bomhny High Court in
Special Civil Applicn.tions Xos, 1848 to 1851 of
1956.
N. D. Karkhrini8 and P. D. Men.on for the
l\ppellant (in a.II the four appeals).
S. T. Desai .and J. N. Shroff for the Respondents.
•
•
•
3 S.C.R. SUPREME COURT REPORTS
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(l)(c} of the constitution
and raise identical questions for consideration.
'rhe 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. 502of19f9
but this circumstance 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. Ten Shares in this private
company stood in the name of Navin Chandra, 10
in the name of Arvind and 20 in the name of Hamant.
For the account year of the company ending Sep-
. tember 30, 1945 tl:>e 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 extension of the provisions of the Indian Income Tax
Act thereto, the Income 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. ~3A thereof
directed that the undistributed assessable incom!' of
the company which amounted to Rs. 68,228/- should
be deell'.led to have been djstribnted as divide:nd
196!
Ihe lni:om1 Tax
· • O.fficer
••
A.•ind N. Mafatl al
Ayyangar J.
1961
Tht lncuma TAK
O/fl«r
••
• Ard"d N. Maf•llaJ
Ay~·an.('4" J.
458 SUPREME COURT REPORTS [1962] SUPP.
among the shareholders as on the date of the General Rody Meeting of the company (i.e., on Jia.rch II
1940).
Before the <late of thiH order the aHsessment
of the firm of Mafatlal Gagalbhai & Sons and the
individual aRscssrnent of its four partners had been
compl<'td. In order to bring to tax the undistribu·
ted dividend "deemed to bo declared" under s. 23A
among the shareholderR of the compan.v notices
were i;;sued to tlw foul' partners under s. 3! of the
Inc''llh' T;ix Act.
[n response to the notice the
partners appeared and it was stated in their behalf
that. the 40 shareR heir! by three of the partners in
th" company were in fact thn property of the
Rq;ist1·red firm and were held by them benami for
the fi:m.
This eontention was
acc~ptl'<I by the
Income Tax Oflicer who then'upon treated the divi·
d('n<l attributable to the 40 shar('s as tho dividend·
income of the firm an•l proceeded to apportion the
saicl incunw among the four partners in the. propor.
tion of tho shares "·hi1·h each of them held in the
firm and added this to the income already assessed,
Jn doing so however, the Income Tax OfficBr committ.ccl an error. In recomputing the total income
of t:ach of thPoe four ass1·.ss.,t•s lw included only the
net dividend "dec:mPrl to he received'' I"· ear.,h but
as against thi• addition he allowed a de·;1uctio11 of
the tax paid by the company attributable to such
dividend. There was no appieal again,;t these assess•
mPnt orders which bocamc final.
Subsequently this
mistake was diR<,overcd and thereupon the Income
Tax officer issued notices tu the fuur partnerH on
April 1:1, 19;)4 pointing out the error in including in
the income the net. divideut without being ~rosse<l
up, while at the samu time allowing credit for the
I.ax deomed to have b1•cn paid thereon. He a1·crrcd
that this was a mi•t.ake apparent from the rncorclH
and stated that he intun<le1l to rectify th•i •amo
under s. :l;) of th<' lnc:ome Tax Act.
The four a8BCH·
se1>s oi.Jj"ctcd to the rectification, but almost tho
o!ltirely of the grounds on which the objection w~'
•
3 S.C.R. SUPREME COURT REPORTS
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. The Income Tax Officer by
his order dated October 12, 1955 rectified the
assessment by grossing up the newly added dividendincome by the addition of the tax deemed to have
been paid by the company thereon and retained the
original relief granted under 's. 18( 5) of the Act.
After unsuccessfully appealing to the higher authorities for relief against this rcetification 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(l)(c) and these having been granted the appeals
are now before us.
The ground upon which the learned Judges
granted• the relief to the respondents was briefly
this : The order of assessment had proceeded on
the basis that the firm of Mafatlal Gagalbhai &
Sons was the shareholder who had bet>n 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 th;s registered firm. In
such circumstances the learned Judges held that
what was distributed to the individual ·partners
could not be deemed to bn 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 preforred.
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
constrqction adopted by the Hi$h Coqrt, of s.16(2)
196~
The ln&"mt TDX
Officer
v.
A,vjnd N. Mafatlal •
AyyanlarJ.
1962
Tiu ft1rotrl4 T11x
Ofji"'
v.
At11ind N • .\l ojatlai
460 SUPREME OOURT REPORTS (1962] SUPP.
of the Income Tax Act. This Court has held in
Messrs. Howrah Trading Co., Ltd. v. '!'he Commissioner
of Income-1'm: Calwtta (1) that it is only the registered shareholder who is entitled to the benefit of the
cr•)dit for tax paid by the co!upany under s. 18(5)
ae well as the corresponding grossing up under
s. 16( 2).
On that basis the only p~rsons who were
entitled to ho treated as shareholders to whom the
provisions of ss. 16(2) and 18(1) of the Income Tax
Act wore attracted W('re the three partnern in whose
names thP 40 shares stood registered, as detailed
<'Airlier.
An error had therf'fore been committed by
the Ineome Tax Offieer in treating the registered firm
as the owner of the shares in respect of the entire
number of •IO shares. It was not this initial and
fundamental error th:it was sought to be r<'ctified
by tho proceedings under s. 35, hut. tho removal of
an ,inomaly in that error which continued to be
affirmed; in other words the object of the proceedings under s. ;15 was t•> carry out to its logical con·
clusion the error which had been committed in the
order of assesRment dated October 12, l!J55 paBRed
after invoking the provisions of s. 34.
We consider
the submission of leiirned Counsel for th?: respondents that the Income Tax Officer had jurisdiction
under s. 3.) to rectify errors hut not to effect merely
readjustments so as to avoid illogicalities in an
error wlii~h is still permitted to continue is wellfounded.
It has furthl'r to be mentioned that it is not
possible to correct the initial error in these proceedings because the notice under s. 3 3 w)lich is the
foundation of tho jurisdiction of the officer to effect
the rectification, sou!!ht in realitv not t.he correction
of the (•rror but the 1>erpotuation of it though in an
altered a11<l less nhjeetionable form from the point
of view of Revenue. In thi~ connection it would ho
noticccl Lh:it one of th" four
partners-¥ oginder
l\fafatle.1 had no shares standing in his name and br
\I) [1959J Supp. 2 s.c.R. ff!!,
3 $.C.R.
SUPREME COURT REPORTS
461
the order of 'tSsessment 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 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.
KANJI MANJI
v.
THE TRUSTEES OF THE PORT OF BOMBAY
(S. K. DAS, M. HIDAYATULLAH and J. c. SHAH, JJ.)
Ejectment-Suit by Government or local Authority against
assignees of leased land and building-Applicability of Rent
Act-Jurisdiction of City Civil Court-Joint tenancy-Notice
on one tenant, if sufficient-Suit if bad for non-joinder of legal
representative of the deceased joint tenant-Assignee of tenancy
if bound by the terms of the original lease-Where eviction of
sub-tenant not possib/,e under statute, whether a ground to defeat
the rights of the Local Authorities-Bombay Rents.
Hotel and
Lodging Houses Rates (Control) Act, 1947 (Bom. 57 of 1947),
88. 4, 5( 8), 15.
In 1924, the Trustees of Port of Bombay granted a lease
of land for ten years to a partnership firm, with the covenant
that the lessee would, at their own expense construct upon the
said land, certain buildings to the specifications of the trustees.
It was provided inter alia that the lessee would be at liberty
to remove the buildings, erected by them, within three
months after the expiration of the term. It is not clear what
happened actually after the expiration of the term of ten
years.
In 1942, the Trustees granted to M/s. D and 0 their
respective heirs,
executors,
administrators and assigns, a
monthly tenancy of the land together with the buildings
standing thereon. It was agreed with them that on the
1962
The Income T
Officer
v.
Aruind N. Mofatlal
Ayyangar J.
19&2
F~bruary 27.