1967 (10) TMI 4 - SC - Income Tax

Reassessment under s. 35(5) - Rectification of partner s assessment on the basis of firm s assessment - Partner s assessment should not have been made after provision came into force - Revenue s appeal is allowed

Issues Involved:
1. Interpretation of section 35(5) of the Income-tax Act, 1922.
2. Retrospective application of section 35(5).
3. Validity of rectification orders under section 35(5).

Issue-wise Detailed Analysis:

1. Interpretation of Section 35(5) of the Income-tax Act, 1922:
The case primarily revolves around the interpretation of section 35(5) of the Income-tax Act, 1922. Section 35(5) was introduced by the Income-tax (Amendment) Act, 1953, and was deemed to have come into force on April 1, 1952. Section 35(5) allows for the rectification of a partner's assessment based on the final assessment of the firm. Specifically, it states that if it is found on the assessment or reassessment of the firm that the share of the partner in the profit or loss of the firm has not been included in the assessment of the partner or is incorrect, such inclusion or correction shall be deemed to be a rectification of a mistake apparent from the record.

2. Retrospective Application of Section 35(5):
The respondents argued that section 35(5) should not apply retrospectively to assessments completed before April 1, 1952. The court examined whether the legislature intended for section 35(5) to have retrospective effect. The judgment emphasized that the legislature intended for the rectification to apply whenever the discrepancy was discovered, provided it was within four years from the final order passed in the case of the firm. The majority opinion held that section 35(5) was intended to apply retrospectively to final orders made in the case of the firm, thereby allowing rectification of the partner's assessment.

3. Validity of Rectification Orders under Section 35(5):
The court considered whether the rectification orders issued under section 35(5) were valid. The majority opinion concluded that the rectification orders were valid and binding on the respondents. The judgment also discussed previous decisions, including Income-tax Officer, Madras v. S. K. Habibullah and Second Additional Income-tax Officer v. Atmala Nagaraj, and found that the decision in Atmala Nagaraj's case was not correctly decided. The court held that section 35(5) was intended to give retrospective effect to final orders made in the case of the firm by incorporating the result thereof in the case of the partner as an individual.

Separate Judgments:
Majority Opinion:
The majority opinion, delivered by Mitter J., held that section 35(5) was intended to apply retrospectively and that the rectification orders were valid. The judgment emphasized that the legislature intended to align the assessment of the individual partner with that of the firm and that the power of rectification should logically follow the reassessment or modification of the firm's assessment.

Dissenting Opinion:
Hegde J. delivered a dissenting judgment, arguing that the decisions in Habibullah's case and Atmala Nagaraj's case were correctly decided. He contended that section 35(5) should not apply to assessments completed before April 1, 1952, and that the concept of "completed assessment" introduced by the amending Act 25 of 1953 should apply only to assessments made on or after April 1, 1952. Hegde J. emphasized the importance of finality in legal assessments and the principle that taxing statutes should be construed strictly in favor of the subject.

Conclusion:
The appeals were allowed, and the judgment and order of the High Court of Madras were set aside. The orders of rectification passed by the Income-tax Officer were held to be effective and binding on the respondents. There was no order as to the costs of the appeals.

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