# that the appeal should be dismissed with costs. Appeal dismissed. COMMISSIONER OF INCOME-TAX, HYDERABAD v. SRI RAJAREDDY MALLARAM

- **Citation:** [1964] 5 S.C.R. 508
- **Court:** Supreme Court of India
- **Decided:** 1963-11-20
- **Case number:** Civil Appeal No. 290of1963
- **Bench:** A.K. Sarkar, M. Hidayatullah, J.C. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/that-the-appeal-should-be-dismissed-with-costs-appeal-dismissed-commissioner-of-2989
- **Pages:** 9

## Headnote

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 ~{-"Tax payable". meaning
of
Practice-Question which did not arise out of Tribunal's order
and was not referred-If could be raised.
I'
-
...
r
"..
'
•
..
5 S.C.R.
SUPREME COURT REPORTS
509
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 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 Incon1e~
tax 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 Income-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 ~se. of the expression "tax payable" in s. 44
m the context m 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.
1963
Commissioner
of Income-tax
v.
Sri R«iareddy
Mallaram
510
SUPREME COURT REPORTS
[1964]
1963
By virtue of s. 44, the personality of the association is con-
--
tinued for the purposes of assessment. What can be assessed
Commissioner of is the income of the association recieved prior to its dissolution
Income-tax
and the members of t~e association would be jointly a_nd. severally
assessed thereto m their capacity as members of assocrnt10n. For
the purpose of such assessment, the procedure is that applic

## Text

508
SUPREME COURT REPORTS
. [1964)
1963
the partners and therefore on him. The partnership
agreement did not speak of market value or fair
Jivarajbhai
value. It stated that the purchase price or the book
Ujamshi Sheth value as the. case may be alone could be taken into
and others
account. This meant that the book value where
.
v ·
available and the purchase price in other cases only
Chrntamanrao were to enter in the calculations. There was thus
Balaji an'!.._othersno option to go to fair value or market price at all.
Hidayatullah J.
I do not think that we should supersede the
1963
November 20.
arbitration agreement under s.19. No circumstance
was made out for such a course. I would have directed a remit to the arbitrator under s. 16 of the Arbitration Act 1940 but my brethren take a different
view of the matter and I leave the matter there. The
contention of the appellants on the question of jurisdiction decided against them must fail and I agree
that the appeal should be dismissed with costs.
Appeal dismissed.
COMMISSIONER OF INCOME-TAX,
HYDERABAD
v.
SRI RAJAREDDY MALLARAM
(A.K. SARKAR, M. HIDAYATULLAH AND J.C. SHAH JJ.)
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 ~{-"Tax payable". meaning
of
Practice-Question which did not arise out of Tribunal's order
and was not referred-If could be raised.
I'
-
...
r
"..
'
•
..
5 S.C.R.
SUPREME COURT REPORTS
509
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 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 Incon1e~
tax 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 Income-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 ~se. of the expression "tax payable" in s. 44
m the context m 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.
1963
Commissioner
of Income-tax
v.
Sri R«iareddy
Mallaram
510
SUPREME COURT REPORTS
[1964]
1963
By virtue of s. 44, the personality of the association is con-
--
tinued for the purposes of assessment. What can be assessed
Commissioner of is the income of the association recieved prior to its dissolution
Income-tax
and the members of t~e association would be jointly a_nd. severally
assessed thereto m their capacity as members of assocrnt10n. 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.
v.
Sri Rajnreddy
Mallaram
Shah J.
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.
CIVIL APPELLATE JURISDICTION: Civil
Appeal
No. 290of1963.
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 the general notice
under s. 22(1 )of the Indian Income-tax Act.The Incometax Ofhcer, 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
,
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5 S.C.R.
SUPREME COURT REPORTS
511
Group under s. 23(4) at Rs. 51,000, and determined
1963
Rs. 8,826-14-0 as the tax payable. Attempts made
--
by the Income-tax Department to recover the tax Commissioner of
from Baba Gowd having proved unsuccessful, on
Income-tax
March 13, 1954, the Income-tax Officer issued a notice
v.
of demand addressed to Rajareddy MallaramSri RaJareddy
another member of the Group. The latter then applied
Mallaram
under s. 27 of the Indian Income-tax Act for cancellation 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 Ofhcer 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:
"(I) 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 Hi~h Court answered the first question in the
affirmative and held that the second question did
Shah J.
512
SUPREME COURT REPORTS
[1964]
1963
not fall to be determined. In arriving at its conclusion
the High Court recorded the following findings:
Co7missioner of
"(i) On the facts and in the circumstances of
ncome-tax
this case, the order of assessment made
v.
by the Income-tax officer under section 23(4)
Sri Rajareddy
on 30-9-1953 is bad in law,
Mallaram
Shah J.
(a) absolutely, because he made the assessment 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 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
•
t
,,
)
...
5 S.C.R.
SUPREME COURT REPORTS
513
association of persons is dissolved, every person
1963
who was at the time of such discontinuance of
dissolution
.
. a member of such association Commissioner of
shall, in respect of the income, profits and gains
Income-tax
of the .
. association, be jointly and severalv.
ly liable to assessment under Chapter IV and Sri Ra}areddy
for the amount of tax payable and all the proMallaram
visions of Chapter IV shall, so far as may be,
apply to any such assessment."
Shah J.
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 v. The Income-tax Officer, Kottayam and
another <1>
·
"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 discontinuance 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 ui the Court was
concerned
with the assessment of a firm of which the business
was discontinued because of the dissolution of the
(I) [1961] 2 S.C.R. 765 at p. 770.
I SCI/64-33
514
SUPREME COURT REPORTS
[1964]
1963
firm, by the death of one of the partners.
But
s. 44 as it stands amended by Act 7 of 1939 applies to
Commissioner of discontinuance of the business of associations of
Income-tax
persons as well as of firms, and the question which
v.
directly fell to be determined in that case was whether
Sri Rajareddy penalty for concealing the particulars of income
Mallaram
or for deliberately furnishing inaccurate particulars
of income in the return could lawfully be imposed
Shah 1·
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 exi::ression "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< 1>. If by s. 44 the continuity of the firm or
association is for the purpose of assessment ensured •
(!) [1961] 2 S.C.R. 766 at p. 770.
t
(
..
t
5 S.C.R.
SUPREME COURT REPORTS
515
no question of assessing the individual .. members
1963
of the association can arise. Under Ch. IV of the
Income-tax Act an association of persons may be Commis3ioner of
assessed as a unit of assessment, or the individual
Income-tax
members may be assessed separately in respect of
v.
their respective shares of the income, but the Act Sri Rajareddy
contains no machinery for assessing the income
Mal/aram
received by an association, in the hands of its members
collectively. The unit of assessment in respect of
Shah J.
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 it, 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 machinery1
provided in Cb. JV 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
1963
Commissioner
of Income-tax
v.
Sri Rajareddy
Mallar am
Shah l.
516
SUPREME COURT REPORTS
[1964]
f.
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 Indian Income-tax Act, Baba Gowd who was
served with the notice not being the principalofficer 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 9f assessment
was properly served ·on Baba Gowd and that the
assessment was properly made by the Income-tax
Officer under 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.