1968 (10) TMI 36 - HC - Income Tax

Assessment order was made pursuant to return of income filed before commencement of new Act - ITO is not justified in issuing the notice proposing to rectify u/s 154 of new Act

Issues Involved:
1. Jurisdiction of the Income-tax Officer to make an order of rectification under section 154 of the new Act.
2. Validity of the order of rectification under section 35(1) of the old Act.
3. Nature of the mistake alleged to be apparent from the record.
4. Characterization of capital gain in the hands of the partners.
5. Discretion of the Income-tax Officer under section 23(5)(b).

Analysis:

1. Jurisdiction of the Income-tax Officer to Make an Order of Rectification under Section 154 of the New Act
The petitioner-firm contended that the respondent had no jurisdiction to make an order of rectification under section 154 of the new Act since the rectification related to the assessment year 1949-50, to which the old Act was applicable. The court held that proceedings for rectification of an order of assessment are proceedings for assessment and where an assessment order is made pursuant to a return of income filed before the commencement of the new Act, proceedings for rectification would, by reason of section 297(2)(a), be governed by section 35 of the old Act. Therefore, the respondent had no power to make an order of rectification under section 154 of the new Act.

2. Validity of the Order of Rectification under Section 35(1) of the Old Act
The court noted that a wrong reference to the power under which an order is made does not per se vitiate the order if there is some other power under which the order could lawfully be made. The respondent had power to make an order of rectification under section 35 of the old Act, and the order of rectification could not therefore be regarded as an order made by the respondent without jurisdiction. The exercise of the power in making the order of rectification must be held to be referable to section 35 of the old Act which confers validity upon it.

3. Nature of the Mistake Alleged to Be Apparent from the Record
The court examined whether the conditions for exercising the power under section 35 were satisfied. The contention of the petitioner-firm was that there was no mistake committed by the Income-tax Officer who made the assessment order dated 22nd March, 1962. The court held that the mistake alleged by the respondent was the failure of the Income-tax Officer to apply section 23(5)(b) in the assessment of the petitioner-firm. The court concluded that there was no mistake in the assessment order and the condition precedent for the exercise of the power of rectification under section 35 of the old Act was not satisfied.

4. Characterization of Capital Gain in the Hands of the Partners
The court addressed the question of whether the share of each partner in the capital gain of the firm could be said to be profits or gains derived from any business carried on by the partner. The court held that the share of each partner in the capital gain of the firm would not be business income in the hands of the partners. The character of capital gain would continue to attach to this amount even in the hands of the partners. Therefore, the Income-tax Officer making the original assessment order did not make any mistake in not applying section 23(5)(b) in the assessment of the petitioner-firm.

5. Discretion of the Income-tax Officer under Section 23(5)(b)
The petitioner-firm contended that section 23(5)(b) merely conferred a discretion on the Income-tax Officer to assess an unregistered firm as if it were registered if in his opinion the aggregate amount of the tax payable by the partners under such procedure would be greater than the aggregate amount which would be payable by the firm and the partners individually if separately assessed. The court did not find it necessary to decide this contention in light of its findings on the other issues.

Conclusion:
The court allowed the petition, quashed and set aside the order of rectification dated 18th March, 1966, and the notice of refund dated 19th March, 1966. The respondent was ordered to pay the costs of the petition to the petitioner.

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