1966 (9) TMI 15 - HC - Income Tax

Tribunal was right in holding that the ITO, while passing the order u/s 155 of the Act, was not justified in treating the share income of profit from the partnership firms as unearned

Summary

Issues:
Assessment of share income from partnership firms, rectification of assessment orders, treatment of share income as unearned income, jurisdiction under sections 154 and 155 of the Income-tax Act, 1961.

Analysis:
The judgment revolves around the assessment of the assessee's share income from three partnership firms for the years 1958-59, 1959-60, and 1960-61. Initially, the Income-tax Officer accepted the share income as returned by the assessee subject to rectification later. However, upon completion of assessments of the firms, it was found that the assessee's share of profit needed revision. The Income-tax Officer, under sections 154 and 155 of the Income-tax Act, 1961, issued notices to rectify the share income by including the correct share as determined in the firms' cases. The issue arose when the Income-tax Officer treated the enhanced share income as unearned income, contrary to the original assessments where it was considered earned income.

The Appellate Assistant Commissioner upheld the Income-tax Officer's orders, stating that the character or nature of income can be corrected under section 154, and the legislature intended to allow such corrections. The Appellate Tribunal, however, disagreed, emphasizing that section 155 applies to amend completed assessments of partners and does not allow for changing the character of income. The Tribunal held that the Income-tax Officer should have acted under section 155 instead of section 154.

The High Court, in its analysis, clarified that the Income-tax Officer's action should have been under section 155, as it deals with amending completed assessments of partners. The Court highlighted that section 155 does not permit rectification of mistakes apparent from the record but focuses on amending assessments under specific circumstances. Therefore, the Income-tax Officer was not justified in treating the share income as unearned under section 155. The Court ruled in favor of the assessee, stating that the Income-tax Officer's treatment of the income as unearned was not permissible under section 155.

In conclusion, the High Court's judgment focused on the correct application of sections 154 and 155 of the Income-tax Act, 1961, in rectifying assessment orders and emphasized that section 155 does not allow for changing the character of income in completed assessments of partners. The Court's decision favored the assessee, ruling that the Income-tax Officer was not justified in treating the share income as unearned under section 155.