1997 (9) TMI 97 - HC - Income Tax

Issues Involved:
1. Correctness of the Commissioner's directive to reassess based on the reconstituted firm's partnership deed dated March 28, 1978.
2. Validity of setting aside the firm's assessment without issuing notice under section 34 to the firm.
3. Applicability of section 28(1) regarding the reconstitution of the firm.
4. Relevance of the firm's constitution at the time of assessment.
5. Interpretation of section 28(1) concerning the liability of the firm and its partners.

Issue-wise Detailed Analysis:

1. Correctness of the Commissioner's Directive to Reassess:
The court examined whether the Commissioner was correct in directing the assessing authority to pass a fresh assessment order on the petitioner for the assessment year 1978-79 based on the reconstituted firm's partnership deed dated March 28, 1978. The court noted that the original assessment was made considering the firm constituted by the partnership deed dated December 18, 1974, which had 20 partners. The Commissioner argued that the assessment should reflect the reconstitution on March 28, 1978, which reduced the partners to 10. The court concluded that even if the assessment must be made on the firm as constituted at the time of making the assessment, the recovery can only be made from the persons who were members during the previous year. Therefore, the court found the Commissioner's directive incorrect, answering the first question in the negative against the Revenue and in favor of the assessee.

2. Validity of Setting Aside the Firm's Assessment Without Notice:
The court declined to answer the question regarding the validity of setting aside the firm's assessment without issuing a notice under section 34 to the firm, considering it unnecessary in light of the answers to other questions.

3. Applicability of Section 28(1) Regarding Reconstitution:
The court affirmed that the reconstitution of the firm is considered a change in the constitution, thus attracting section 28(1) of the Agricultural Income-tax Act, 1950. The assessment should be made on the firm as constituted at the time of making the assessment. This interpretation aligns with the legislative intention to raise liability against the firm as it exists at the time of assessment. The court answered this question in the affirmative, in favor of the Revenue and against the assessee.

4. Relevance of the Firm's Constitution at the Time of Assessment:
The court declined to answer the fourth question about the relevance of the firm's constitution at the time of assessment, as it was unnecessary given the answer to the first question.

5. Interpretation of Section 28(1) Concerning Liability:
The court discussed the interpretation of section 28(1) in detail, emphasizing that the assessment should be made on the firm as constituted at the time of making the assessment. However, the recovery of tax should be from the persons who were members of the firm during the previous year. The court noted that imposing tax liability on the reconstituted firm or its partners for income not received during the previous year would be against the provisions of the charging section and clause (a) of sub-section (5) of section 18. Consequently, the court declined to answer the fifth question.

Conclusion:
The court provided a nuanced interpretation of section 28(1) and related provisions, ensuring that tax liability is correctly apportioned based on the income received by partners during the relevant previous year. The judgment emphasized the importance of assessing firms as constituted at the time of assessment while ensuring that tax recovery aligns with the income received by partners in the previous year.

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