1959 (5) TMI 6 - SC - Income Tax

Whether the order of the Appellate Assistant Commissioner left the Income-tax Officer free of his earlier order, and whether he was under a duty to reconsider the position under section 23(5)(b)? Held that - The Income-tax Officer, therefore, was under a duty to modify the assessments of the partners accordingly, and to take the matter up again from the point at which the order of the Appellate Assistant Commissioner had placed it. He had once again to determine whether he would, in the altered circumstances apply section 23(5)(b) to this case or not.In our opinion, the Income-tax Officers in question did not do their duty as required by law, and we should, therefore, by a writ compel them to do so. With due respect, that the High Court should have, on a correct appraisal of the legal situation, ordered this relief, and we accordingly, after explaining the law applicable to the case, order the appropriate Income-tax Officer to hear and determine this matter in the light of our observations. Appeal allowed.

Summary

Issues Involved:
1. Jurisdiction of the Income-tax Officer under Section 23(5)(b) of the Indian Income-tax Act.
2. The validity of the Appellate Assistant Commissioner's order and its implications.
3. The applicability and interpretation of proviso (d) to Section 24(2) of the Indian Income-tax Act.
4. The appropriateness of issuing a writ of mandamus.
5. The relevance of finality of assessment orders.

Detailed Analysis:

1. Jurisdiction of the Income-tax Officer under Section 23(5)(b):

The Income-tax Officer initially treated the unregistered firm as a registered firm under Section 23(5)(b) of the Indian Income-tax Act, as he believed more tax would be realized from the individual partners. This section allows the Income-tax Officer to treat an unregistered firm as a registered firm if it results in higher tax revenue. However, when the Appellate Assistant Commissioner later determined that the firm had incurred a loss, the basis for applying Section 23(5)(b) was invalidated. The Supreme Court held that the reversal of profit to loss by the Appellate Assistant Commissioner nullified the Income-tax Officer's jurisdiction under Section 23(5)(b).

2. Validity of the Appellate Assistant Commissioner's Order:

The Appellate Assistant Commissioner's order converting the profit into a loss for the assessment year 1940-41 and directing the Income-tax Officer to modify the assessments accordingly was valid. The Supreme Court emphasized that the Appellate Assistant Commissioner's order implied the annulment of the Income-tax Officer's previous assessment under Section 23(5)(b). The Income-tax Officer was required to reconsider the matter afresh in light of the Appellate Assistant Commissioner's findings.

3. Applicability and Interpretation of Proviso (d) to Section 24(2):

Proviso (d) to Section 24(2) states that if an unregistered firm is assessed as a registered firm under Section 23(5)(b), its losses should be carried forward and set off as if it were a registered firm. The Supreme Court clarified that this proviso is not a general power to carry losses to the partners' accounts but is contingent upon the condition that more revenue would be realized by treating the firm as registered. The proviso should be read harmoniously with Section 23(5)(b), ensuring that the interests of the revenue are considered.

4. Appropriateness of Issuing a Writ of Mandamus:

The Supreme Court found that the Income-tax Officers failed to apply their minds correctly under Section 23(5)(b) after the Appellate Assistant Commissioner's order. The High Court should have issued a writ of mandamus to compel the Income-tax Officers to reconsider the matter. The Supreme Court ordered the appropriate Income-tax Officer to hear and determine the matter afresh in accordance with the law.

5. Relevance of Finality of Assessment Orders:

The Department argued that the assessment order had become final and could not be altered except under Sections 34 and 35. However, the Supreme Court held that the Appellate Assistant Commissioner's order, which converted the profit into a loss, effectively annulled the initial assessment. The Income-tax Officer was required to modify the assessments of the partners accordingly, considering the altered circumstances.

Conclusion:

The Supreme Court allowed the appeal, directing the appropriate Income-tax Officer to reconsider the matter in light of the observations made. The partners were ordered to return the refunded amounts before further action. The appeal was allowed with costs to be paid by respondents Nos. 2 and 3, while the Union of India bore its own costs.