1990 (2) TMI 20 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the reconstituted partnership.
2. Option to assess income in the hands of the association or its members.
3. Exercise of the option by the Income-tax Officer.
4. Legality of assessing the same income twice.

Detailed Analysis:

1. Validity of the Reconstituted Partnership:
The firm "S. R. Kandan Chettiar and Sons" initially consisted of two partners, Nachimuthu Chettiar and Shanmugham Chettiar. After Nachimuthu Chettiar's death, the firm was reconstituted with Subramaniam (son of Nachimuthu Chettiar) joining as a partner. The Income-tax Officer granted registration for the assessment years 1960-61 and 1961-62. However, the Commissioner of Income-tax, under section 33B of the Indian Income-tax Act, 1922, deemed the reconstituted partnership invalid, canceled the registration and directed fresh assessments. This decision was upheld by the Tribunal.

2. Option to Assess Income in the Hands of the Association or its Members:
The main legal question was whether the Income-tax Officer had the option to assess the income of the assessee-association in the hands of its members individually. Under section 3 of the Indian Income-tax Act, 1922, and sections 2(31) and 4 of the Income-tax Act, 1961, an association of persons and its individual members are treated as distinct assessable entities. The Supreme Court in CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 and CIT v. Murlidhar Jhawar and Purna Ginning and Pressing Factory [1966] 60 ITR 95 affirmed that the Income-tax Officer has the option to assess either the association or its individual members.

3. Exercise of the Option by the Income-tax Officer:
The Tribunal found that the Income-tax Officer had exercised the option to assess the income in the hands of the members individually. This conclusion was based on the fact that the assessments of Subramaniam Chettiar were revised, treating his share of income as taxed, while the assessments of Shanmugham Chettiar were not revised, and his share was treated as not taxed. This indicated that the Income-tax Officer had chosen to assess the income individually, as the assessments of Shanmugham Chettiar had become final.

4. Legality of Assessing the Same Income Twice:
The court held that the Income-tax Officer cannot assess the same income twice-once in the hands of the partners and again in the hands of the unregistered firm. The Tribunal's decision was supported by precedents, including CIT v. Blue Mountain Engineering Corporation [1978] 112 ITR 839, which ruled that assessing a firm after a partner has been assessed on his share of income is not legal. The Tribunal concluded that since the income was assessed in the hands of one member, it could not be assessed again in the hands of the association.

Conclusion:
The court affirmed that the Income-tax Officer had the option to assess either the association or its members individually and that this option was exercised. Consequently, the Tribunal had valid materials to hold that the assessments made in the hands of the association were not valid, as the income had already been assessed in the hands of one of its members. The appeals by the Department were dismissed, and the Tribunal's decision was upheld.