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TMI Blog2006 (11) TMI 650X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of section 183 of the Act would be applicable. Even in the assessment order we find that the Assessing Authority had loosely described the applicant to be an AOP only on the ground that the registration has been refused. The Income-tax Officer while making the assessment had proceeded to compute the income of the applicant treating it to be a firm. However, the status of AOP has been mentioned only because the registration of the firm has been refused. In fact, the assessment has been made in accordance with section 183 of the Act. The CIT(A) has rightly corrected the status from that of AOP to URF as it was only an error. It is to be remembered that u/s 251 of the Act the appellate authority has been conferred a very wide power while deciding the appeal. It includes power to correct all the errors which may have crept in the order under appeal. In the present case we are of the considered opinion that the Income-tax Officer had only committed an error in mentioning the wrong status of AOP instead of URF in the assessment order which error has rightly been corrected by the CIT(A). Whether the Tribunal should have given due regard to the legitimate outgoin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether on a true appreciation of the legal position, the Tribunal should not have held that the assessment order passed on Association of Persons suffered from a serious jurisdictional error which could not have been corrected or rectified by the first appellate authority? 2. It appears that in the application filed under section 256(1) of the Act, the applicant had raised eight questions of law out of which only four questions were referred by the Tribunal. Thereafter, the applicant approached this Court by filing an application under section 256(2) of the Act and this Court directed the Tribunal to refer the following question of law also:- Whether, in determining the taxable income of the assessee, the Tribunal should not have given due regard to the legitimate outgoings in the form of entire purchases of gas cylinders but for which the returned income could not have been earned? 3. Both the references relate to the assessment year 1982-83. 4. Briefly stated, the facts giving rise to the present references are as follow:- The assessee filed the return on 15-10-1982 showing an income of ₹ 50,571. It derived the income from its business in welding m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of rule 6DD. The applicant sent reply which was considered and time was allowed to it to do the needful. He, however, noticed that the applicant did not come forward with the correct facts and has been adopting delaying practice. The Income-tax Officer noted that the payments of those fake vouchers and bills were shown either by showing cash payment of partly cash payment and partly by showing fictitious outstanding liability. Correspondingly, fictitious transport freight and cartage were also shown as narrated by him at para 9 of the assessment order. The Income-tax Officer discussed the various items in detail with facts and figures which were reproduced in the assessment order. The Income-tax Officer noted amongst other things that the applicant had also failed to furnish/produce supporting vouchers or explanation in respect of the total sum of ₹ 50,000 credited in the accounts of M/s. Asiatic Oxygen and Acetylene Co. Ltd. which was considered as income from undisclosed sources. In the case of M/s. Sardarji Co., Lucknow the Income-tax Officer brought out various facts and figures in the assessment order itself in order to show that it was beyond doubt th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28.7 per cent The G.P. disclosed for the year under consideration as such is in consonance and comparable to the G.P. disclosed in the earlier two years. At the same time it must be taken note of that against the purchases disclosed there were matching sales and sales could not have been made without purchases having been made. That in the past the book results had always been accepted. Under the circumstances, it was submitted that there was no justification for the addition. 2.2 I have carefully considered these submissions but find no merit in the same. In this case there was a complaint that the appellant had been indulging in malpractices in connivance with the appellant s purchasers inasmuch as the original as well as half filled cylinders were being received which were being resupplied at full cost. That bogus purchases were being shown from its principals to match these sales. It was in view of these complaints that the Income-tax Officer has proceeded to make enquiries particularly in respect of purchases from M/s. Asiatic Oxygen Acetylene Co. Ltd. and M/s. Sardarji Co., their principals. The Income-tax Officer sent copies of the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an error in allocating the status of AOP while completing the assessment. His intention was to treat the firm as URF which is amply clear from the facts on record and he always intended to refuse registration and to treat the firm as URF. After referring to various paragraphs of the assessment order, the Commissioner of Income-tax (Appeals) had come to the conclusion that neither the show-cause notice nor anywhere in the assessment order the Income-tax Officer had discussed and given any reasons for holding the applicant to be an AOP and in the notice issued to the applicant as to why grant of renewal of registration be not denied, the action of the Income-tax Officer point towards renewal of registration and treating the firm as URF. The mistake as such was only technical which would not make the assessment invalid in view of the specific provision of section 292B of the Act. He accordingly held that the assessment had been made on an unregistered firm. 8. The applicant appealed before the Tribunal. The Tribunal after taking into account the rival submissions confirmed the additions in question by observing as follows:- 17. We have heard both the sides on this point also, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also sustained. 10. We have heard Sri S.K. Garg, learned counsel for the applicant, and Sri A.N. Mahajan, learned standing counsel appearing for the revenue. 11. Sri S.K. Garg, learned counsel, submitted that the Assessing Authority had not disbelieved the purchases of gas cylinders by the applicant including the transport charges. He has only disallowed/disbelieved the purchase vouchers. The trading account as such had not been disturbed and, therefore, there was no justification for making the additions. The Income-tax Officer had only doubted the sellers. The applicant was entitled for the set off of the purchase price of the gas cylinders while computing the income. According to him, the gross profit disclosed by the applicant was quite reasonable and the addition made was not justified. He further submitted that the applicant had filed its return of income in the status of a registered firm and neither any show-cause notice nor any opportunity was given by the Income-tax Officer to show cause as to why the assessment be not made in the status of an AOP. In this view of the matter, the assessment framed on an entirely different status is liable to be annulled. According t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be decided by the appellate authority in view of the provisions of section 251 of the Act. According to him, the Commissioner of Income-tax (Appeals) was perfectly justified in holding that the assessment has been framed in the status of unregistered firm and not that of an AOP. In support of his aforesaid pleas, he has relied upon the following decisions:- (i) CIT v. Amritlal Bhogilal Co. [1958] 34 ITR 130 (SC); and (ii) Badri Narain Kashi Prasad v. Addl. CIT [1981] 128 ITR 663 4 (All.). 13. We have given our anxious consideration to the various pleas raised by the learned counsel for the parties. 14. Before adverting to the various submissions made by the learned counsel for the parties, it would be appropriate to reproduce the various provisions of the Act, as it stood during the relevant period, which have material bearing in the proper adjudication of the issues raised herein :- 2. Definitions.-In this Act, unless the context otherwise requires,- ****** (7) assessee means a person by whom any tax or any other sum of money is payable under this Act, and includes- (a )every person in respect of whom any proceeding under this Act ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the association or body at such higher rate. (2) Where the individual shares of the members of an association of person (other than a company or co-operative society) in any part of the income of such association are indeterminate or unknown, the income-tax payable by the association shall be the aggregate of- (i )the amount of income-tax calculated on the aforesaid part of the total income, at the maximum marginal rate; and (ii)the amount of income-tax with which it would have been chargeable had the remaining part of the total income been its total income. Explanation.-For the purposes of this section, (a ) maximum marginal rate shall have the meaning assigned to it in Explanation 2 below sub-section (3) of section 164; (b)the individual shares of the members of an association of persons in the income of such association shall be deemed to be indeterminate or unknown if such shares are indeterminate or unknown on the date of formation of such association or body or at any time thereafter. 182. Assessment of registered firms.-(1) Notwithstanding anything contained in sections 143 and 144 and subject to the provisions of sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst an order of assessment, he may confirm, reduce, enhance or annul the assessment; or he may set aside the assessment and refer the case back to the Income-tax Officer for making a fresh assessment in accordance with the directions given by the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) and after making such further inquiry as may be necessary, and the Income-tax Officer shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax payable on the basis of such fresh assessment; (b)in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty; (c )in any other case, he may pass such orders in the appeal as he thinks fit. (2) The Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction. Explanation.-In disposing of an appeal, the Appellate Assistant Commissioner or, as the case may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority has been given a very wide power while deciding the appeal. He can confirm, reduce, enhance or annul the assessment proceeding, set aside the assessment and refer the case back to the Assessing Authority for making a fresh assessment. He is also empowered to pass such order in the appeal as he thinks fit. Section 292B provides that no return of income, assessment, notice, summons or other proceeding shall be invalid merely by reason of any mistake, defect or omission if in substance and effect it is in conformity with or according to the intent and purpose of the Act. 16. What constitutes a partnership firm or an AOP have been the subject- matter of discussion by the various Courts. 17. In the case of CIT v. A.W. Figgies Co. [1953] 24 ITR 405 , the Apex Court has held as follows :- It is true that under the law of partnership a firm has no legal existence apart from its partners and it is merely a compendious name to describe its partners but it is also equally true that under that law there is no dissolution of the firm by the mere incoming or outgoing of partners. A partner can retire with the consent of the other partners and a person can be introduced in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of a firm proceeds on the basis that it is a distinct assessable entity. In that respect it is distinct even from its partners : CIT v. A.W. Figgies Co. [1953] 24 ITR 405 (SC). As an assessable entity it is also distinct from a HUF, which in itself is regarded as a separate unit of assessment under section 3 Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 (PC). . . . (p. 134) In the case of N. Khadervali Saheb v. N. Gudu Sahib [2003] 261 ITR 1 1 the Apex Court has held that a partnership firm is not an independent legal entity, the partners are the real owners of the assets of the partnership firm. Actually the firm name is only a compendious name given to the partnership for the sake of convenience. The assets of the partnership belong to and are owned by the partners of the firm. So long as the partnership continues, each partner is interested in all the assets of the partnership firm as each partner is the owner of the assets to the extent of his share in the partnership. On dissolution of the partnership firm, accounts are settled amongst the partners and the assets of the partnership are distributed amongst the partners as per their respective shares in the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (p. 551) 21. The aforesaid decision was subsequently followed by the Apex Court in the case of Mohamed Noorullah v. CIT [1961] 42 ITR 115 ; CAIT v. Raja Ratan Gopal [1966] 59 ITR 728 and G. Murugesan Bros. v. CIT [1973] 88 ITR 432. 22. In the case of Deccan Wine General Stores v. CIT [1977] 106 ITR 111 , the Andhra Pradesh High Court while considering the expression AOP, after referring to the decision of the Apex Court in the case of Indira Balkrishna (supra), has held as follows :- It is, therefore, clear that an association of persons does not mean any and every combination of persons. It is only when they associate themselves in an income-producing activity that they become an association of persons. They must combine to engage in such an activity; the engagement must be pursuant to the combined will of the persons constituting the association; there must be a meeting of the minds, so to speak. In a nutshell, there must be a common design to produce income. If there is no common design, there is no association. Common interest is not enough. Production of income is not enough. This interpretation of the expression association of persons flows from the meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the particular facts and circumstances of each case as to whether that conclusion can be drawn or not. This case was followed in Mohamed Noorullah v. CIT [1961] 42 ITR 115 (SC). Also see CIT v. Buldana District Main Cloth Importers Group [1961] 42 ITR 172 (SC) and G. Murugesan Bros. v. CIT [1973] 88 ITR 432 (SC). It would thus be seen that in order to constitute an association, persons must join in a common purpose or common action with an object to produce income. Such combination should be voluntary and even minors can become members of an association through their guardian if the guardian gives his consent for the said purpose. In the case of co-owners of property if their shares are not definite or ascertainable they may be assessable as an association of persons, but if the shares are definite and ascertainable, mere co-ownership is not sufficient to constitute an association of persons. . . (p. 25) 24. From the aforesaid decisions, it is to be seen that a partnership is a relation between the persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Before a partnership is constituted under law, there must be an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer taking the second step and determining the sum payable as tax. But the case of a firm is specially dealt with by sub-section (5). This sub-section only comes into operation after the total income of the firm has been computed or assessed under one of the earlier sub-sections. It draws a distinction between registered and unregistered firms. In the case of a registered firm the firm does not itself pay income-tax and therefore the sub-section directs that the sum payable by the firm shall not be determined, but that each partner s share of the firm s income shall be included in the assessment or computation of the total income of that partner. Thereupon the sum payable by that partner as tax is to be determined on the basis of that assessment which includes his share of the firm s income. (p. 211) 27. In the case of CIT v. Amritlal Bhogilal Co. [1958] 34 ITR 130, the Apex Court has held as follows :- . . .Section 26A of the Act lays down the procedure for the registration of firms. An application has to be made by the firm in that behalf specifying the particulars prescribed by the said section and by the material rules framed under the Act. If r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce arises in the liability of the firm or its individual partners to be taxed for the total income as may be determined by the ITO. The computation of taxable income is not at all affected by the registration or otherwise of the firm. The only effect of registration is that the determination of the tax payable and making the demand for the tax so found due, changes according as the firm is registered or unregistered-vide sections 152 and 153 of the Act. (p. 667) 30. The Karnataka High Court in the case of CIT v. Angadi Bros. [1986] 157 ITR 4262, has held that there is an essential difference between a registered firm and an unregistered firm for the purpose of taxation under the Act. An unregistered firm is a distinct assessable entity quite different from a registered firm for the purposes of the Act. The registration of a firm affects the assessment procedure. It makes a difference for the purpose of determination of the tax payable and the demand for the tax so found due. 31. From the aforesaid decisions, it is absolutely clear that the Act draws a distinction between a registered and unregistered firm after the total income of the firm has been computed or assessed. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , considering the whole scheme of the Income-tax Act, 1961. The mode of their taxing and process (sic) of liability are also different. Thus, even if the identity of the members of the alleged firm and the association of persons is established, there cannot be a valid assessment altering the status declared in the return. Mandatory requirement of issuing of a notice under section 143(2) before making assessment under section 143(3) cannot be lost sight of. In this case, notice was given to the firm in relation to the return filed as firm, and no notice to the association of persons was issued. Therefore, even if it is correct to make assessment in certain status, such assessment cannot be made in relation to proceedings in an incorrect status. This, in our view, is the root of the controversy. Our opinion, therefore, is that the Tribunal was correct in quashing the assessment made by the ITO in the status of an association of persons under the circumstances. (p. 776) 36. In the case of CIT v. Smt. Phoolmati Devi [1983] 144 ITR 954 1, this Court has held as follows :- Relying upon section 292B of the Income-tax Act inserted by the Taxation Laws (Amendment) Act of 1975 lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeding after having duly assumed jurisdiction, it is the duty of the appellate authority to remove the particular defect or irregularity occurring in the course of the proceeding. (p.586) 39. In the present case we are of the considered opinion that the Income-tax Officer had only committed an error in mentioning the wrong status of AOP instead of URF in the assessment order which error has rightly been corrected by the Commissioner of Income-tax (Appeals). 40. This leaves us to the question as to whether the Tribunal should have given due regard to the legitimate outgoings in the form of the entire purchases of gas cylinders or not. The principle regarding making of a best judgment assessment has been well settled by the Apex Court in the case of Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 wherein the Apex Court has held as follows :- As regards the second contention, we are in entire agreement with the learned Solicitor-General when he says that the Income-tax Officer is not fettered by technical rules of evidence and pleadings, and that, he is entitled to act on material which may not be accepted as evidence in a court of law, but there the agreement ends ..... X X X X Extracts X X X X X X X X Extracts X X X X
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