# S. SANKAPPA AND OTHERS v. THE INCOME-TAX OFFICER, CENTRAL CIRCLE II. "BANGALORE

- **Citation:** [1968] 2 S.C.R. 674
- **Court:** Supreme Court of India
- **Decided:** 1967-12-14
- **Bench:** J.C. Shah, V. R.Amaswami, V. Bhargava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/s-sankappa-and-others-v-the-income-tax-officer-central-circle-ii-bangalore-4266
- **Pages:** 11

## Headnote

lncbnte 1'ax Act, 1922, ss. 23, 35-lnco;ne Tax Act . . 1961. s.t.
155
297€-2) ('a)-Whetlzer proceedings on issue of notice under s. 35(5) o.'
the Act of 1922 for rectification are proceedings for asse;.·sn1en1 · v.•itlti:;
the meaning .of s. 297(2) (a) of the· Act of 1961.
.
'
During the assessment years 1958-59, 1959-60 :md
1~60-ol. t\1'•'
fums ir( which the six appellants were partners, filed returns declaring
themse1vcs to be registe1~<l firn1s and also presented applic~ilions for rcgis·
tration of the firms under s. 26A of the Income-tax Act, 1922. The lncome-
!ax. Officer refused re.i::istration of the firms an<l assessed the income of
the firms, trearJng them as unregistered. 'fhe assessments of the six appellant') were-·nlso made, so that their incomes from the t\\-'o firn1s \Vere
ir,cludcd in. their individual assessments as if they had received the income
J11 the caPacitfQf partners in url.rcgistcred firms.
Appeals n1ade by the
!irn1s against the order refusing registration \Vere allowed by the Appellate
Assist.ant Comn1issioner nnd, in pursuance of the appcilatc ordcr.s. the
Inconie Tax Officer passed a co~olidated order on 20lh Dccemhcr .. 1966.
revising the assessments of the firms for all these years on the basis that.
they were reg:stered firms and also apportioned the income of the. firms
bct\vccn the six partners.
Subsequently, the Income Tax Officer issued
notices under s. 155 of the Income Tax ACt, 1961, proposing to rectify
the individual assessments cf the six
appelian.ts in
r~!)Cct 0f each of
the three assessment y·~ars, whereupon the, appellants challc;igcd the validity
of the notices by \Vrit pctitio.ns.
It \Vas conceded before· the High Court
on behalf Pf th-e Incon1e Tax Officc!r that a'~ the rectification proposed r::.iatcd
to assessment years \Vhen the Income Tax Act, 192:!. was
<!ppticablc.
proceedings for rectificalion Could not be taken under s. 155 of thl! 196 I
.l\ct but only under s.' 35(5) ·of the 1922 Act. in view of the proviSions of
s. 297(2)(a) of th~ A~t of
1961,.
The High Court
dismissod · the
petitions:
In nppcal to this Court it was
contended, inter alia, that
prOCl!cdings for rectificai:ion under s. 35(5) of the Act of 1922 cannot he held
to be .Proceedings for assessment within the meaning of thut i::xprcssiOn
used in s. 297(2) (a) Of the Act of 1961, and therefore un.d~r that pr<.>·
vision of Jaw, the Act of 1922 could not be reson:ed ll'.l by the Jncome-wx
Officer in order to rectify the 'assCssments of the appellant~ that.· in an::
case, the provisions of s. 35(5) of the Act of 1922 are not 3'tractc<l.
because proceedings under that section. can only be taken when it is
'found on the assessment or rea~sesrn'cnt of a firm that the share of the
partner in the profit or loss of the firm has ·not beea included in the
nssessment of the p"artner or, if included', is no! correct; and. ln the pre·
~cnt cases, ther~ was no assessment or' creasscssment of the firms when
the Income-tax Officer. in pursuance of ithe appellate order, proce~ded to
pass orders rectifying the assessments of lhe firms under s. 35 (I) of the
A.ct of 1922; as there was no fresh computation of income the proceediag.s
~ought to be taken wcre·not proceedings for aS'sessment.
HELD : Dismissing the appeal :
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SANKAl'PA I'. I.T.0, (Bhargava, J.)
675
( 1) the wor<l "assessment" is used in the. Income-tax Act in. a number
of provisions in a comprehensive sense and includes all proceedings, starting with the filing of the
return or issue of notice
and ending ~th
determination of the tax payable by the assessee. When proceed!Dgs
are taken for rectification of aiSOSSment to tax either under s, 35(1) or
s. 35(5) of the Act of 1922, they must be held to be proceedings for
aSiessment.
In proceeding under those provisions, what .the
Income-tax
Officer does is to correct errors in. or rectify orders of assessment made
by him, and orders making such correction or rectifications are, therefore
clearly part of the

## Text

674
S. SANKAPPA AND OTHERS
I
v.
THE
INCOME-TAX OFFICER,
CENTRAL CIRCLE
II.
"BANGALORE
December 14, 1967
[J.C. SHAH, V. R.AMASWAMI AND V. BHARGAVA, JJ.]
lncbnte 1'ax Act, 1922, ss. 23, 35-lnco;ne Tax Act . . 1961. s.t.
155
297€-2) ('a)-Whetlzer proceedings on issue of notice under s. 35(5) o.'
the Act of 1922 for rectification are proceedings for asse;.·sn1en1 · v.•itlti:;
the meaning .of s. 297(2) (a) of the· Act of 1961.
.
'
During the assessment years 1958-59, 1959-60 :md
1~60-ol. t\1'•'
fums ir( which the six appellants were partners, filed returns declaring
themse1vcs to be registe1~<l firn1s and also presented applic~ilions for rcgis·
tration of the firms under s. 26A of the Income-tax Act, 1922. The lncome-
!ax. Officer refused re.i::istration of the firms an<l assessed the income of
the firms, trearJng them as unregistered. 'fhe assessments of the six appellant') were-·nlso made, so that their incomes from the t\\-'o firn1s \Vere
ir,cludcd in. their individual assessments as if they had received the income
J11 the caPacitfQf partners in url.rcgistcred firms.
Appeals n1ade by the
!irn1s against the order refusing registration \Vere allowed by the Appellate
Assist.ant Comn1issioner nnd, in pursuance of the appcilatc ordcr.s. the
Inconie Tax Officer passed a co~olidated order on 20lh Dccemhcr .. 1966.
revising the assessments of the firms for all these years on the basis that.
they were reg:stered firms and also apportioned the income of the. firms
bct\vccn the six partners.
Subsequently, the Income Tax Officer issued
notices under s. 155 of the Income Tax ACt, 1961, proposing to rectify
the individual assessments cf the six
appelian.ts in
r~!)Cct 0f each of
the three assessment y·~ars, whereupon the, appellants challc;igcd the validity
of the notices by \Vrit pctitio.ns.
It \Vas conceded before· the High Court
on behalf Pf th-e Incon1e Tax Officc!r that a'~ the rectification proposed r::.iatcd
to assessment years \Vhen the Income Tax Act, 192:!. was
<!ppticablc.
proceedings for rectificalion Could not be taken under s. 155 of thl! 196 I
.l\ct but only under s.' 35(5) ·of the 1922 Act. in view of the proviSions of
s. 297(2)(a) of th~ A~t of
1961,.
The High Court
dismissod · the
petitions:
In nppcal to this Court it was
contended, inter alia, that
prOCl!cdings for rectificai:ion under s. 35(5) of the Act of 1922 cannot he held
to be .Proceedings for assessment within the meaning of thut i::xprcssiOn
used in s. 297(2) (a) Of the Act of 1961, and therefore un.d~r that pr<.>·
vision of Jaw, the Act of 1922 could not be reson:ed ll'.l by the Jncome-wx
Officer in order to rectify the 'assCssments of the appellant~ that.· in an::
case, the provisions of s. 35(5) of the Act of 1922 are not 3'tractc<l.
because proceedings under that section. can only be taken when it is
'found on the assessment or rea~sesrn'cnt of a firm that the share of the
partner in the profit or loss of the firm has ·not beea included in the
nssessment of the p"artner or, if included', is no! correct; and. ln the pre·
~cnt cases, ther~ was no assessment or' creasscssment of the firms when
the Income-tax Officer. in pursuance of ithe appellate order, proce~ded to
pass orders rectifying the assessments of lhe firms under s. 35 (I) of the
A.ct of 1922; as there was no fresh computation of income the proceediag.s
~ought to be taken wcre·not proceedings for aS'sessment.
HELD : Dismissing the appeal :
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SANKAl'PA I'. I.T.0, (Bhargava, J.)
675
( 1) the wor<l "assessment" is used in the. Income-tax Act in. a number
of provisions in a comprehensive sense and includes all proceedings, starting with the filing of the
return or issue of notice
and ending ~th
determination of the tax payable by the assessee. When proceed!Dgs
are taken for rectification of aiSOSSment to tax either under s, 35(1) or
s. 35(5) of the Act of 1922, they must be held to be proceedings for
aSiessment.
In proceeding under those provisions, what .the
Income-tax
Officer does is to correct errors in. or rectify orders of assessment made
by him, and orders making such correction or rectifications are, therefore
clearly part of the proceeding.< for assessment. [678 B, G-H]
The orders passed under s. 35(1) by the Income·C.ax Officer on '.'.0th
De~mber, 1966 were all orders altering assessment orders made in the
proceedings for assessment of the firms, while under the impugned notices
1he Income-tax Officer was proposing to rectify orders mnde for_ computation of income and imposition of 1!ax under the charging section 111
the case of individual
partners.
Clearly,
therefore, in these
cases,
s. 297(2) (a) of the Act of 1961 permits the Income-tax Officer to proceed in accordance with the provisions of r.he Act of 1922 and he hau
rightly proposed
to take action under s.
35(5) of the Act of
1922.
[679 E-G]
Abrchanl v. J11co111e-tax Officer, 41 I.T.R. 425; Kala1vati Devi Harlalka
v. The Coinmissioner of Income-tax, West Bengal & Ors, Civil Appeal No.
1421 of 1966 decided on 1-5-1967, relied on.
M, M. Parikh, Income-tax, Officer, Special Jnvesti1-tation Circle "B"
Ahmedabad v. Navanagar Transport and Industries Ltd. and Another,
63 I.T.R. 663, distinguished.
The provision.;; of s. 23 and o:hcr relevant sections of the Act of 1922
clearly show that proceedings for assessment of a firm consist of computation of the income of the firms, determination of ~ax payable by the
firms, apportionment of the income of the firm bet¥.'een its partners in
the case of a registere.d firm and, in appropriate cases, imposition of tax
on the firm af1:er including the share of the income of certain partners
in. the income of the firm, even though the firm is registered.
The proceedings for assessment of the firm are not completed until all these
sieps have been taken by the Incorne-1!,ax Officer. and each o·f those steps
must be held to be a step in the proceedings for assc·ssment of the firm.
Consequently, when the Income-tax Officer passed the orders dated 20th
December · 1966 and appoo:.ioned the income of the firms between the
various partners, the orders which he made were clearly orders in pro'-
ceedings for assessment and it was in order to give effect to these orders
in the individual asse~sment, of the par·ncrs that the impugned notices
were issued. Thei first condition precedent that the proceedings under
s. 35(4) arc to he taken on the basis or information derived from orders
of assessment or re-assessment of the firm was, thus clearly satisfied.
[682 B-E]
V. S. Arulanandam v. Income-tax Officer, Turicorin, 43 I.T.R, 511,
at p. 517: distinguished.
The second condition precedemt was also satisfied as the share of each
partner in the profit or Joss of the firm was not included in the assessment of the partner for the purpose of assessment of that share to tax.
Inclusion contemplated by s. 35(5) is for assessment to tax of the share.
In fact the inclusion was for the liniited purposes of determining
the
exemption to which tlw partners were entitled under s. 14(2) (a) and fo1
determining the rate of tax payable in the separate assessments under
s. 16(1) (a). When the assessments of 1ihe unregistered firms were
set
aside, the
individual
partners ceased to be
entitJed to the benefit _of
L2Suo.C.l/68-13
676
SUPREME COURT REPORTS
[1%8] 2 SCR
s. 14(2)(;11. anJ s. 16(l)fa) alsll hccomc in:1pplic;1hit'.
\Vha£ \\o·as r..:-
quircd to be done v•<ts to add. the income of c.ach pJrtncr in his inJividuaT
;1ss~nh:n1 ;ind then in1po-.c tax on ii in accordance "'ith s. :!)(5)(:-.)(ii)
of the :\ct of 19~~. Thus. thi<> iw·as a clear case \Vhcrc the inclusion t'f
the ..,h,1rL' l1f ti:-: inconh.' of th\'.: p:ir1ncr in his individu;'ll
JS<"oe<;o;incnt
\\ ;1..;
not correct. [68.1 F-H: 68~ B·C]
C11 IL APPU.l.'11. Jt:R1sn1cno:-i: Ci1il Appeals l\os. 1664 to
1681 of 1967.
Appeals fro111 the jud~lllCnt and order dated Au:,:ust 30, 31.
1967 of the fllysorc High Court in Writ Petitions 'los. 354 to 37 l
of 1967
K.. Sri11irnsa11 and R: Gop11!11krisl1111111, for the appellants (in
all the appeals).
C. K. /Japhlan·. A11on1e1·-Ge11craf. S. K.
Airnr and R. N.
Sar/11/11·)-. for the respondent (in all the appeals).
The Judgment of the Court was delivered by
llhargarn, J. TIK>c' eighteen appeals hal'c been tiled by six
persons, some of whom were partners in a firm called "The Lalitha ·
Silk Throwing Factory". some in another Jinn called "The Srinivasa Textiles", and some in
both
thc.sc
firms.
The
<'ppeah
brought up to this Court under catificate gr<ulle<l hy the lligh
Court of Mysore arc agaimt the judgment of the High Court dis·
missing eighteen writ petitions hy thc.se six appellants prciying for
quashing notices issued by the Income-tax Ofliccr. Bangalore.
purporting to be under section l 55 of the lncomc'tax Act No. 4:1
of I 96 I, proposing to rectify the assessments of the appellants in
respect of the assessment years l 958-59. 1959-60 and 1960-61.
Thus. the notices challenged arc three notices for each of these
asse'5mcnt years in respect of each of the six appdlants, so that
there were l 8 petitions before the High Coun.
The High Court
decided all the petitions by a common judgment and. consequently
in these appeals. all of them arc being dealt with together.
During all these three assessment years l 958-59. 1959-60 and
1960-61. both the firms filed returns declaring themselves to he
regislcrcd Jinns and also presented applications for registration of
the lirms under s. 26A of the Income-tax Act No. I l of 1922.
The J ncomc-tax Officer refused registration of the firms and assc.'5ed the income of the finns. treating them as unregistered.
The
assessments of these six appellants were also made. so that their
incomes from the two firms were included
in
their individual
assessments as if they had received the income in the capacity of
partners !n unregistered firms.
The firms went
up in
appeal
against the orders of the Income-tax Officer refusing registration.
These appeals were allowed, by the Appellate Assistant CommisA
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SANKAPPA v. I.T.O. (Bhargava, J.)
67 7
sioner by an order dated 26th November, 1966 in respect of the
Lalitha Silk Throwing Factory, and 14th December,
1966
in
respect of Srinivasa Textiles.
The Income-tax Officer, in pursuance of the appellate order of ·the Assistant Commissioner,
passed a consolidated order revising the assessments of the firms
for all these years on the basis that they were registered firms and
also apportioned the income of the firms between these six partners.
Subsequently, the notices impugned in. these petitions were
issued on 19th January, 1967, whereby the Income-tax Officer
proposed to rectify the individual assessments of the six appellants
in respect of each of the three years of assessment under section
155 of the Act .of 1961.
The appellants in the writ petitions
challenged the validity ·Of these notices, but the High Court dismissed the writ petitions and, consequently, the appellants have
come up in these appeals before us.
It was conceded before the High Court on behalf of the Income
tax Officer that proceedings for rectification of the assessments of
the appellants could not be taken under s. 155 of the Act of 1961,
because, admittedly, the rectifications related to assessments of
tax for assessment years when the Act of 1922 was applicable, so·
that proceedings could only be taken under s. 35(5) of the Act of
1922 in view of the provisions of s. 297(2) (a) of the Act of
1961.
Before us, learned counsel for the appellants urged that
proceedings for rectification under s. 35 ( 5) of. the Act of 1922
cannot be held to be proceedings for assessment within the meaning; of that expression used ins. 297(2)(a) of the Act of 1961,
so that. under that provision of law, the Act of 1922 could not be
resorted to by the Income-tax Officer in order to rectify the assessments of the appellants.
On the same basis, it was further urged
that,)n any case, the provisions of s. 35(5) of the Act of 1922
are not attracted, because proceedings under that section can only
be taken when it is found on the assessment or reassessment of. a
l}rm that the share of the partner in the profit or loss of the (irrn
has not been included in the assessment of the partner .or; If iitclud·
ed, is not correct; and, in the present cases, there was no assessment or reas_sessmeJlf-IJf the firms when the Income-tax Officer, in
pursuance of the order of the. Appellate Assistant Commissioner
granting registration to the firms, proceeded to pass orders rectifying the assessments of the firms under s. 35 ( 1) of the Act of 1922
on 20th December, 1966. It was urged· that no fresh computation of income of the partners is sought to be made in pursuance
of the notices issued and, similarly, no fresh computation of the
income of the firms was made when the Income-tax Officer passed
his orders on 20th December, 1966 to give effect to the decision
of the Appellate Assistant ·commissioner granting registration to
the firms.
No fresh computation of income being involved, it
must be held that the poceedings now sought to be taken are not
678
SUPREME COURT REPORTS
[1968] 2 SC.R.
proceedings for assessment, and, similarly, no proceedings
for
assessment or reassessment were taken
by the
Income-tax
Officer when he passed his orders on 20th December, J 966.
This submission, in our opinion, has been rightly rejected by
the
High
Court.
because
it has
already been
explained
by thi; Court that the word "assessment" is used in the
Income-tax
Act in
a
number of provisions
in a
c0mprchcnsive sense and includes all
proceedings,
starting
with
the tiling of the return or issue of notice and enJing with determinaiion of the tax payable by the assessce.
Though in some
sections, the word "assessment" is used only with reference to
computacion of income, in other sections it has the more comprehensive meaning mentioned by us above.
Reference may be made
to the decision of this Court in Abraham v. Income-tax Officer(').
The same principle has been recently reiterated in the case of
Kuiall'ati Devi Har/alka v. Tire Commissioner of Income-tax, WeJt
Bengal & Ors. ( ') where. dealing with the word ''assessment" used
ins. 297 of the Act of 1961, the Court held:-
"It is quite clear from the authorities cited above
that the word 'assessment' can bear a very comprehensi\'e meaning; it can comprehend the whole procedure
for ascertaining and imposing liability upon the taxpayer.
Is there then anything in the context of s. 297
which compels us to give to the expression 'procedure
for the assessment' the narrower meaning suggested by
the learned counsel for the appellant?
In our view, the
answer to this question must be in the negative.
It
seems to us that s. 297 is meant to provide as far as
possible for all contingencies which may arise out of the
repeal of the 1922 Act.
It deals with pending appeals,
revisions, etc.
It deals with non-completed assessments pending at the commencement of the 1961 Act
and assessments to be made after the commencement
<Jf the 1961 Act as a result of returns of income filed
after the commencement of the 1961 Act."
It is clear that. when proceedings arc taken for rectification of
assessment tG tax either under s. 35 (I) or s. 35 ( 5) of the Act of
1922. thc>se proceedings must be held to be proceedings for
assessment.
In proceeding under those
provisions,
what the
focome-tax Officer docs is to correct errors in, or rectify orders of
assessment made hy him. and orders making such corrections or
rectifications are, therefore, clearly part of the proceedings for
assessment.
(I) 41 I .T.R. 425.
(2) Civil ApJ><al No. 1421 of 1966 decided on l.S. 1967.
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SANKAPPA V. I.T.O, (Bhargava, !.)
67 9
The main stay of the argument of learned counsel for the
appellants against this view was the decision of this Court in
M. M. Parikh, Income-tax Officer, Special f;;vestigation Circle
"B", Alzmedabad v. Navanagar Transport and Industries Ltd. and
Another(') in which cas.e the Court was dealing with the question
whether an order imposing: additional super-tax under s. 23A of
the Act of 1922 was an order of assessment and held to the contrary.
The dedsion in that case does not, in our opinion, support
the submission made on behalf of the appellants in tbe present
cases.·· It was explained there that, under s. 23A of the Act of
1922, there was no computation of income or determination of
tax imposed by the charging section.
That section by itself
empowered the Income-tax Officer to impose the super-tax by his
own order, and an _order imposing such a tax could not be held
to be an order of assessment.
Further examples of similar orders
were cited in that case and reference was made to orders under
ss. 18A(l), 35(9), 35(10) and 35(11) of the Act of 1922.
After referring to these provisions, the Court clearly indicated the
reason for holding that proceedings under those provisions were
not proceedings for assessment of tax by stating :
"The salient feature of these and other orders is
that the liability to pay tax arises not from the charge
created by statute, .but from the order of the Income-tax
Officer."
In the present cases the orders, which have been rectified or are
being taken up for rectification, are all orders under which there
was assessment of incomes and determination of the charge to tax
in accordance with the charging sections.
The orders passed
under s. 35 ( l) by the Income-tax Officer on 20th December, 1966
were all orders altering assessment orders made in the proceedings for assessment of the firms, while under the impugned notices
the Income-tax Officer is proposing to rectify orders made for
computation of income and imposition of tax under the charging
section in the case of individual partners.
Clearly, therefore, in
these cases, s. 297 ( 2 )(a) of the Act of 1961 permits the Incometax Officer to proceed in accordance with the provisions of tlie
Act of 1922 and he has rightly proposed to take action under
s. 35(5) of the Act of 1922 on the basis of rectifications made in
the assessments of the firms under s. 35 ( 1) of that Act on 20th
December, 1966 in pursuance of the appellate orders granting
registration to the firms.
The second point raised by learned counsel was that, in any
case, the orders actually made by the Income-tax Officer on 20th
December, 1 966 in the cases of these firms cannot be held to be
orders of assessment, because all that the Income-tax Officer did
(I) 63 I.T.R. 663.
6~0
SUPRE~IE COURT REPORTS
/ 1968] 2 S.C.R.
and was required to do in order to give effect to the orders of the
Appellate Assistant Commissioner granting registration was to
re-calculate the tax payable by the firms under s. 23(5)(aJ of the
Act of 1922, and such an order would not be an order of assessment at all.
Copies of the orders actually passed by the Tncometax Officer under s. 35 ( J) in the cases of both the firms have been
produced before us.
They show that the orders consist of two
parts.
In the first part, the tax payable by the firms was recalculated on the basis that the firms were registered firms
and
refund was allowed, because a larger amount of tax
had
been
assessed and realised, treating the firms as unregistered.
In the
second part, the share income of the assessee firms was allocated
between the various partners.
It appears to us that this composite order re-determining the tax payable by the fim1s directing
refund and apportioning the income of the firms
between -the
partners can be held to be nothing other than an order made in
proceedings for assc>smcnt of the firms.
Under the Act of I 922. the assessment of a finn is made under
s. 2~(5) which is as fodows :-
"23 ( 5). Nothwithstanding anything
contained
in
the foregoing sub-sections. when the assessee is a firm
and the total income of the firm has been assessed under
sub-section(!), sub-section f'.1) or sub-section (4), as
the case mav be.-·
(a) in the case of a registered firm,
I i) the income-tax payable by the firm itsdf shall
be determined: and
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( ii ) the total income of each partner of the firm,
F
including therein his share of it~ income, profits
,ind gains of the previous year, shall be assessed
dnd the sum payable by him on the basis of
such assessment shall be determined :
Provided that if such share of any partner is a loss it
>hall be set off against his other income or carried forward and set off in accordance with the provisions of
•cction 24 :
Pro\'ided further that when any of such partners is
a person not resident in the taxable territories, his share
,,f the income. profits and gains of the firm
shall be
asse"c'I on the tim1 at the rates which would be applicable if it were assessed on him personally, and the sum
so detennincd as payable shall be paid by the finn:
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SANKAPPA v. l.T.0. (Bhargava, J.)
Provided also that if at the time of assessment of
any partner of a registered firm, the Income-tax Ollicer
is of opinion that the partner is residing in Pakistan, the
partner's share of the income, profits and gains of the
tirm shall be assess~d. on the ·firm in the manner laid
down in the preceding proviso and the sum so determined as payable shall be paid by the firm; and
•
( b) in the case of an unregistered firm, the Incometax Officer may, instead of determining the sum payable by the firm itself, proceed to assess the total income
of each partner of the firm, including therein, his share
of its income, profitS'1llld gains of the previous year, and
determine the tax payable by each partner on the basis
of such assessment, i( in
the Income-tax Officer's
opinion, the aggregate amount of the tax including
super-tax, if any, payable by the partners under such
procedure would be greater than the aggregate amount
which would be· payable by the firm and the partners
individually, if separately assessed; and where the procedure specified in this clause is applied to any unregistered
firm. the provisos to clause (a) of this sub-section shall
apply thereto as they apply in the case of a. registered
iirm.··
681
It will be noticed that, under this provision, various orders have
to be made by the Income-tax Officer.· In the case of a registered firm, the Income-tax Officer, after computing the income, has
to determine the tax payable by the firm itself, and prevision is
.made that, thereafter, the share in the income of the firm of each
partner· is to be included in· his total income for purposes of his
individual assessment to tax. . It is true that the Income-tax
Officer assessing the firm may not be the same Officer who may
be dealing with the individual assessment of the partners Jllld, in
any case, even if he· .be the same Officer, the proceeding for assessment of the partners has to be treated as a separate proceedirig;
but it is. als'o clear that the ·proceedings for assessment of the firm
under this section do not come to an end merely on computation
of the income of the firm and determination of the tax payable
by the firm on that income.
The Income-tax ·Officer, who deals
with the assessment of the firm, has also to apportion the income
of the firm, in the case of a registered firm, between its partners
and the notice of that apportionment has to be given under
s. 23 ( 6) by him to the firm. This apportionment is clear;y treated
as a part of the proceeding for assessment of the firm and that is
why the notice is to be given to the firm.
The second proviso to
s. 30 ( 1) also clarifies this position by laying down that the right
of appeal in respect of the apportiomnent is to be exercised by the
68~
SUPRDU: COURT Rl'PORTS
(1968) ~ SCR
partner' by filing appeals against the order of assessment of t~
Jinn and no: against orders made in the course of subsequent proceedings for the individual nssessmc;1ts of the
partners
themselves.
The second proviso to s. 23(5) (a) also brings out this
position.
In certain case;, after the apportionment of the income
of th.: r~gisterd firm, the share of a particular partner, who is not
resident in th~ ::ixable territories, is to be assess~d to tax also as
if it is the income of the registered fimi.
All
these provisions
clearly show that proceedings for assessment of a tim1 consist of
computation of the income of the firm, determination of tax payable by the Jim1, apportioniw:m of the income of the firm between
its partners in the case of a registered firm and, in appropriate
cases, impositio11 of tax on the finn after including the share of
the income of certain partners in the income of the firm,
even
though the firm is registered.
The proceedings for assessment of
the firm arc not completed until all these steps have been taken
by the Income-tax Officer, and each one of those steps must be
held to be a step in the proceedings for assc'ssmcnt of the finn.
Consequently, when the Income-tax Officer passed the order; dated
20th December, 1966 and apportioned the income of the firms
between the various partners. the orders which he
made were
clearly orders in proceeding' for assessment and it was in order
to give effect to these orders in the individual a'5essrrient of the
partners that the impugned notices were issued.
The fir;t condition precedent that the proceedings under s. 35(5) are to be taken
on the basis of information de1 ;ved from orders of assessment or
re-assessment of the firm was. thus, clearly satisfied.
In this connection, learned counsel drew our a~:.:ntion to a
decision of the Madras High Court in V. S. Arulanandani v.
Income-tax Officer, Tuticorin( 1), where that Court, dealing with
section 35 ( 5) of the Act of 1922, held :-
"The respondent relied at on~ stage on section
35 ( 5) of the Act.
It should be obvious that the petitioner's case did not come within the scope of section
35 ( 5).
There was no reassessment of the income of
the finn; nor was there an appeal against the assessment
of the finn.
The only appeal of the finn was against
the order of the Income-tax Ofticer refusing registnrt.ion
under section 26A. In fact, the f.nalitv of the assessment
of the firm dated November 11. 1954, was left untouchd all through. an aspect to which we shall have to
ad,. ~rt again.'"
Reliance was placed on this comment. because in that case also
the finn, of which thc,asscsscc was a partner. was first rcfu!ied
(I) 43 l.T.R. 511: at p. 517.
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SANKAPPA v. I.T.0. (Bhargava, J.)
683
registration and the assessment of the partner was sought to be
rectified when, subsequently, registration of the firm was allowed.
The facts of that case were, however, different.
In that case,
there was no assessment or reassessment of the firm subsequent to
the grant of registration.
The petition filed by the assessee in the
High Court under Art. 226 of the Constitution against proceedings of rectification sought to be taken by the Income-tax Officer
was allowed on two grounds.
One was that the
Income-tax
Officer had given no opportunity to the assessee before completing the proceedings of rectification under s. 35.
The .other was
that the income of the firm had already been taxed as the income
of the unregistered firm and there could be no second assessment
of the same income in respect of the assessee's share in his assessment until the assessment of that income to tax in the hands of
the firm was set aside.
What was thus set aside was the at.tempt
to tax the same income twice.
It was in these circumstances that
the Court observed that there was no scope for the applitability
of s. 35(1) ors. 35(5) of the Act of 1922.
Section 35(5) did
not apply, because, in fact, there was no assessment or reassessment of the income of the firm subsequent to the order granting
registration.
The finality of the assessment of the firm had been
left untouched and while that order remained intact, the provisions of s. 35 (5) could not possibly be attracted. In the case
before us, after registration of the firms was allowed in appeal,
the Income-tax Officer in the proceedings for assessment of the·
firms proceeded further to make a fresh assessment of the tax
payable by the firms and also to apportion the income of the firms
between various partners, so that the income of the firms
no
longer remained taxed as income of unregistered firms, and liability arose of the partners to be taxed in their assessments in respect of their shares of the income. Clearly, in these circums:ances.
s .. 35 ( 5) was rightly applied.
The last point urged l\y learned counsel was that, in.s. 35(5)
of the Act of 1922, there is a second condition precedent, on the·
existence of which alone proceedings for rectification can be taken
under it and that condition is that it should be found that the share
of the partner in the profit or loss of the firm had not been included
in the assessment of the partner, or, if included, was not correct:
and there was no such finding in the present cases.
The share of
each partner was not included for the purpose of assessment of
that share to
tax.
Inclusion
contemplated by
s.
35 (5)
is for assessment to tax of the share.
The inclusion was
for only two limited purposes.
One purpose was of determining the exemption to which the partners were entitled under s. l4(2)(a)
of
the
Act
of
1922.
The other
purpose was for determining the. rate at which tax was payable in
the separate assessments of the partners under s.
16(1)(a) of
(j~.1
SUl'RBIE COURT REPORTS
[1%8] 2 S.C.R.
1ha1 Acl.
The .shares of the income of the partners were never
included for the purpose of bringing those shares of income to
lax in their individual assessmenls.
The tax was actually imposed
in the assessment of the firms thc1melves treating it as the income
of unregistered firm>.
When· the assessments of the unregistered
Jinns were set aside. the individual partners ceased to be entitled
to the benefit of. s. 14(2)(a), ands. 16(1)(a) also became inapplicable.
What was required to be done was to add the income of each partner in his
individual
assessment and
then
impose tax on it in accordance withs. 23(5)(a)(ij) of the Act
of ! 922.
Thus, this was a clear case where the inclusion· of the
'hare of the income of the partner in his individual assessment
was not correct.
If the submission made on behalf of the appcl·
lants be accepted, a curious result would ensue, because the liability of the firms to p~y t.ix on the basis that they were unregistered firms would stand vacated, while tlie shares of the partners in
:he firms would not be brought to tax in their individual assessments under s. 2315)(a)(ii), so that the income would escape
charge to tax altogether.
It is clear th al s. 35 ( 5) of the Act of
1922 is cnact•cd precisely to mccl situalions of the type that has
come up in the present cases. so that when the imposition of the
lax on the itnn as an unregistered firm is set aside. tax
can be
imposed on the shares of the income of the partners in their indi-
,.idual as;cs;i11cnts by rcGlifying them under s. 35 ( 5) of the Act
of I 922.
This submission, consequently. has no force.
The appeal> fail and are dismissed with costs.
There shall be
Ont! hearing fee.
R K.P.S.
Appeals dismissed.
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