1962 (1) TMI 12 - SC - Income Tax

whether relying upon clause (5) of section 35 an Income-tax Officer may rectify the assessment of a person who is a partner of a firm when the assessment of the firm is completed before the 1st of April 1952? Held that - Clause (5) of section 35 of the Indian Income-tax Act which was enacted by the Income-tax (Amendment) Act 1953 was not declaratory of pre-existing law and as it clearly affected vested rights which had accrued to the assessee must be deemed to have come into force from April 1 1952. It had no greater retrospective effect than was expressly granted to it. The power to rectify assessment of a partner consequent upon the assessment of the firm of which he is a partner by including or correcting his share of profit or loss can therefore be exercised only in case of assessment of the firm made on or after April 1 1952. The Income-tax Officer has no jurisdiction under clause (5) of section 35 of the Act to rectify the assessment of a partner of a firm consequent upon the assessment or reassessment of the firm disclosing an error made before April 1 1952. Appeal dismissed.

Summary

Issues Involved:
1. Validity of rectification under Section 35 of the Income-tax Act.
2. Applicability of Section 35(5) of the Indian Income-tax (Amendment) Act, 1953.
3. Retrospective operation of Section 35(5).

Issue-wise Detailed Analysis:

1. Validity of Rectification under Section 35 of the Income-tax Act:
The primary issue was whether the Income-tax Officer (ITO) had the authority to rectify the assessments of the assessee under Section 35 of the Income-tax Act. The ITO issued notices for rectification based on the share of losses computed in the assessments of the firms in which the assessee was a partner. The court held that Section 35(1) empowers the income-tax authorities to rectify mistakes apparent from the record of certain orders passed by them, but this power is subject to two conditions: (1) there must be a mistake apparent from the record of the assessment, and (2) the rectification must be made within four years from the date of the assessment sought to be rectified. The court found that a mistake discovered in the assessment of a firm is not a mistake apparent from the record of the assessment of the individual partner. Therefore, Section 35(1) could not be invoked for rectification in this case.

2. Applicability of Section 35(5) of the Indian Income-tax (Amendment) Act, 1953:
The ITO relied on Section 35(5), which was incorporated by the Indian Income-tax (Amendment) Act, 1953, effective from April 1, 1952. Section 35(5) provides that the inclusion or correction of a partner's share in the assessment of the partner, consequent upon the assessment or reassessment of the firm, shall be deemed to be a rectification of a mistake apparent from the record. The court noted that this clause was enacted to address discrepancies between the share of a partner included in the individual assessment and the share disclosed in the assessment of the firm. However, the court emphasized that Section 35(5) confers an additional power of rectification and does not amend Section 35(1). The court concluded that the rectification of assessments under Section 35(5) could only be applied to assessments of firms made on or after April 1, 1952.

3. Retrospective Operation of Section 35(5):
The court examined whether Section 35(5) could be applied retrospectively to assessments of firms completed before April 1, 1952. The court held that the provision enacted by Section 35(5) affects vested rights of the assessee and, in the absence of compelling reasons, should not be given greater retrospectivity than warranted by the plain words used by the legislature. The court referred to the Judicial Committee of the Privy Council's observation that once a final assessment is arrived at, it cannot be reopened except in circumstances detailed in Sections 34 and 35 of the Act and within the time limited by those sections. The court found that the legislature did not intend to grant the revenue authorities the power to rectify assessments falling within Section 35(5) where the firm's assessment was completed before April 1, 1952. The court also noted that while Section 35(6) explicitly authorized rectification whether the assessment was completed before or after the commencement of the Indian Income-tax (Amendment) Act, 1953, no such provision was made in Section 35(5). Thus, the court concluded that Section 35(5) was not declaratory of pre-existing law and had no greater retrospective effect than expressly granted.

Conclusion:
The court held that the Income-tax Officer had no jurisdiction under Section 35(5) of the Act to rectify the assessment of a partner of a firm consequent upon the assessment or reassessment of the firm disclosing an error made before April 1, 1952. Consequently, the appeals were dismissed with costs.