1979 (8) TMI 3 - SC - Income Tax

Excess cost of building was included in firm s income - Appellate Assistant Commissioner directed exclusion on the ground that the firm was not the owner of the building and it was to be debited to the co-owner - AAC in appeals before him could not convert the provisions of section 147(a) into those of section 153(3)(ii) and that provisions of section 153(3)(ii) were not applicable to the instant case - reassessment of individual co-owner partners is not valid

Summary

Issues:
1. Interpretation of provisions of section 147(a) of the Income-tax Act, 1961.
2. Application of section 153(3)(ii) of the Income-tax Act, 1961 in the assessment proceedings.
3. Determination of ownership of properties and assessment of concealed income.

Analysis:

The case involved a Hindu undivided family (HUF) with a business, where properties were acquired and buildings constructed. A partial partition led to a partnership firm taking over the business. Discrepancies arose regarding the ownership of properties and the cost of construction, leading to assessments by the Income Tax Officer (ITO). The Assessing Officer (AO) initially made additions to the firm's income, which were later divided among individual assessees under section 147(a) of the Act. The Appellate Assistant Commissioner (AAC) held that the firm was not the owner of the properties, leading to a series of appeals and references to higher authorities. The High Court held that the co-owners, being partners of the firm, were covered by section 153(3)(ii), removing the bar of limitation for assessments. However, the Supreme Court analyzed the findings and directions given by the AAC and concluded that they did not meet the criteria set by the Act for invoking section 153(3)(ii).

The Supreme Court emphasized that for section 153(3)(ii) to apply, there must be a necessary "finding" or "direction" in the order of the AAC. The findings must be directly involved in the disposal of the case and must pertain to the specific assessee and assessment year. The Court clarified that a mere observation that the ITO is free to take action does not constitute a valid "direction" under the Act. The judgment highlighted the importance of providing the assessees with an opportunity to be heard, as required by Explanation 3 to section 153(3). The Court distinguished this case from precedent where the AAC's inquiry was deemed necessary for deciding multiple appeals.

In conclusion, the Supreme Court held that the provisions of section 153(3)(ii) were not applicable in the instant case due to the lack of valid findings and directions by the AAC. The case was remanded to the High Court for an opinion on the applicability of section 147(a) of the Income-tax Act, emphasizing the importance of adhering to the procedural requirements and ensuring proper assessments based on valid findings and directions.