1971 (10) TMI 14 - HC - Income Tax

Whether, the assessments on the firm made after all the partners had been assessed first on the share income from the firm, were valid - it cannot be said that assessment of individual partners prevents assessment of registered firm therefore, the assessments on the firm made after all the partners had been assessed first on the share income from the firm, were valid

Summary

Issues:
Validity of assessments on a firm after all partners have been individually assessed.

Analysis:
The judgment addresses the question raised by the Income-tax Appellate Tribunal regarding the validity of assessments on a firm after all partners have been individually assessed. The firm in question carries out the business of manufacturing bidis. The Tribunal allowed the question to be raised as a matter of law, even though it was negatived by the Tribunal. The issue revolves around the interpretation of sections of the Income-tax Act, 1922, specifically sections 3, 23, and 35. Section 23(5) outlines the procedure for assessing a firm and its partners, distinguishing between registered and unregistered firms. The argument presented by the assessees is that once the department chooses to assess the income in the hands of the partners, it cannot subsequently assess the firm and rectify the assessments of individual partners under section 35(5) of the Act. The argument is supported by legal precedents, including the case of Girdhari Lal Laxman Prasad v. Commissioner of Income-tax, which emphasizes the department's option to assess either the association or the firm, or the partners individually, but not both.

The judgment further discusses the distinction between registered and unregistered firms under section 23(5) of the Act. For registered firms, both the firm and individual partners are assessable entities, whereas for unregistered firms, the Income-tax Officer has the discretion to choose which entity to assess. The judgment highlights that legal precedents cited by the assessees do not apply in the case of registered firms, as those cases primarily dealt with unregistered firms or associations of individuals. The Supreme Court's decision in Jain Brothers v. Union of India is referenced to emphasize the amendments made to section 23(5) post-1956, recognizing the firm as a separate entity subject to tax. The judgment concludes that the assessment of individual partners does not preclude the Income-tax Officer from assessing the registered firm as well.

Moreover, the judgment explains the rationale behind the insertion of sub-section (5) in section 35, allowing the Income-tax Officer to rectify the assessment of individual partners based on the assessment of the registered firm. It clarifies that post the 1956 amendment, there is no impediment to assessing the registered firm after individual partners have been assessed. Consequently, the court answers the reference by affirming the validity of assessments on the firm after all partners have been individually assessed. The respondent is awarded costs of the reference, with counsel's fee fixed at Rs. 100.