1968 (3) TMI 9 - HC - Income Tax

Whether it is legal to make an assessment on an unregistered firm, after some of its partners have already been assessed to tax on their share income from the firm - held, no

Issues Involved:
1. Legality of assessing an unregistered firm after assessing its partners individually.
2. Interpretation of Section 3 of the Income-tax Act, 1922.
3. Application of Section 35 of the Income-tax Act, 1922.
4. Relevance of precedents and Supreme Court decisions.

Detailed Analysis:

1. Legality of assessing an unregistered firm after assessing its partners individually:
The primary issue is whether it is legal to make an assessment on an unregistered firm after some of its partners have already been assessed to tax on their share income from the firm. The Income-tax Officer initially assessed the individual partners, Girdhari Lal and Ram Dulari Devi, including their share of profits from the partnership firm. Later, the officer assessed the firm itself as an unregistered entity. The firm contended that once the partners were taxed individually, the profits could not be assessed again in the hands of the firm. The Tribunal dismissed this appeal, stating that the officer could tax the firm and then grant relief to the individual partners.

2. Interpretation of Section 3 of the Income-tax Act, 1922:
Section 3 of the Act provides that income-tax shall be charged on the total income of every individual, Hindu undivided family, company, local authority, firm, and other associations of persons, or the partners/members individually. This section allows an option to tax the income either in the hands of the firm or its individual partners. The court noted that a firm and its partners are distinct assessable entities, and once the option to tax the individual partners is exercised, the same income cannot be taxed again in the hands of the firm.

3. Application of Section 35 of the Income-tax Act, 1922:
The revenue argued that the Income-tax Officer's remark about rectifying the share under Section 35 implied no final option had been exercised. However, the court found that the officer had decided to tax the income in the hands of the individual partners, intending to rectify the shares later based on the firm's assessment. Section 35(5) allows rectification of a partner's assessment if their share in the firm's profits is incorrect, but it does not permit taxing the same profits in both the firm's and the partners' hands.

4. Relevance of precedents and Supreme Court decisions:
The court referred to several precedents, including Jyoti Prasad Agarwal v. Income-tax Officer and Commissioner of Income-tax v. Raja Reddy Mallalram, which established that once the Income-tax Officer opts to tax the profits in the hands of individual partners, he cannot tax the same profits in the firm's hands. The Supreme Court's decisions in Commissioner of Income-tax v. Kanpur Coal Syndicate and Commissioner of Income-tax v. Murlidhar Jhawar and Purna Ginning and Pressing Factory reinforced this interpretation, emphasizing that the option to tax either the firm or its partners is implicit in Section 3.

The court distinguished the case of Income-tax Officer, "A" Ward, Lucknow v. Bachu Lal Kapoor, where the assessment of individual members was based on the incorrect assumption that the family had partitioned. Here, the officer was aware of the firm's existence and chose to tax the individual partners.

Conclusion:
The court concluded that the Income-tax Officer, having opted to tax the profits in the hands of the individual partners, could not tax the same profits in the hands of the firm. The question was answered in the negative, favoring the assessee, and costs were awarded to the assessee.

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