2003 (12) TMI 30 - HC - Income Tax

Assessment of firm - validity of the assessment - whether the assessment of the assessee-firm was valid when two of its partners had already been assessed individually in respect of their shares in the income of the firm. - the question of law referred to this court is answered in the affirmative i.e. in favour of the Department and against the assessee.

Summary

Issues:
Assessment validity of an unregistered firm when partners already assessed individually.

Analysis:
The case involved an unregistered firm with two partners, both of whom had filed individual returns which were accepted by the Income-tax Officer. Subsequently, the firm was asked to file its return, and an assessment was made. The firm challenged the assessment, arguing that since the partners had already been assessed individually, there was no legal basis for assessing the firm for the same income. However, the Appellate Assistant Commissioner and the Tribunal rejected this claim, citing a previous decision of the Punjab and Haryana High Court.

The main issue in this case was whether it was valid to assess the unregistered firm when its partners had already been assessed individually for their share of the firm's income. The court explained that an unregistered firm is treated as an association of persons for income tax purposes. When a firm is unregistered, there is a single assessment on the firm, and no assessment on individual partners. On the other hand, a registered firm divides its income among partners, resulting in lower tax liability for partners due to individual assessments.

The court held that there was no legal impediment to assessing an unregistered firm even after individual partners had been assessed. This was justified for two reasons. Firstly, when a firm is unregistered, only the firm is assessed as a single entity, and individual partners are not separately assessed on their share of the firm's income. Secondly, the Income-tax Officer can make a protective assessment to ensure correct taxation, as established in various judicial precedents.

Citing previous case law, the court emphasized that it is permissible to make assessments on multiple persons for the same income to avoid time limitations on assessment proceedings. The court also referred to a Supreme Court observation that the Income-tax Officer must tax the right person liable for the income, even if a wrong person was initially taxed. The court distinguished earlier decisions under the 1922 Act and upheld the decision of the Punjab and Haryana High Court relied upon by the Department.

In conclusion, the court answered the question in favor of the Department and against the assessee, affirming the validity of assessing the unregistered firm despite individual assessments of the partners.