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TMI Blog1979 (2) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee, it was a firm of two partners, Haridwarimal and Rudmal, each owning a 20% share with five minors admitted to the benefits of the partnership and the partnership is evidenced by a partnership deed dated August 20, 1968. Two minors, Purushottamkumar and Sanjaykumar, owning each a 15% share in the partnership, are the grandsons of Haridwarimal. The last three minors, Motilal, Chandulal and Kamal Kumari, each owning a 10% share, are the nephews of Rudmal. The group of Haridwarimal including his two grandsons were having a 50% share in the partnership and their total capital contribution is disclosed at Rs. 50,000. Haridwarimal's contribution to the capital is shown as Rs. 20,000. His two grandsons are shown to have contributed Rs. 15,000 each towards capital and the capital invested by these minor grandsons is claimed to have come out from earlier gifts made to the minors by Haridwarimal. Similarly, the group of Rudmal including his three nephews was, owning the balance of 50% share in the partnership. Rudmal has contributed Rs. 30,000 and his three minor nephews are shown to have each contributed Rs. 7,000, Rs, 6,000 and Rs. 6,000 towards capital, making the total contribution m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... my partner, the actual beneficiary being Sri Haridwarimal. However, on a protective basis the income returned by the assessee is accepted. " It is thus to be seen that the members belonging to the Haridwarimnal group filed their individual returns for the assessment year before three different ITOs and their assessments were made subject either to rectification under s. 155 in the case of Haridwarimal; on a protective basis and subject to necessary rectification on completion of the firm's assessment in the case of Purushottamkumar, on a protective basis as Sanjaykumar is only a dummy partner, the actual beneficiary being Haridwarimal in the case of Sanjaykumar. The ITO, ' C ' Ward, Special Circle-II, Hyderabad, before whom the assessment proceedings of the firm were pending, refused registration of the firm by his order dated March 23, 1973. He refused registration on two grounds, viz., (1) that the profits of the firm were not divided in accordance with the terms of the partnership deed, and (2) that the firm really consisted of only two partners and the minors were only " dummies He then proceeded with the assessment treating the assessee as an association of persons. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellate Tribunal justified in law in holding that the ITO was correct in making an assessment of the income of the firm in the hands of the firm again. The Income-tax Appellate Tribunal has thereupon referred to this court the following question of law: " Whether, on the facts and in the circumstances of the case, the ment of the unregistered firm was proper and legal? " Sri Panduranga Rao, the learned counsel appearing for the assessee, has argued that having assessed the share income returned by the partners, Sri Haridwarimal, Purushottamkumar and Sanjaykumar, it is not open to the ITO to assess the income in the hands of the assessee as an unregistered firm. In support of this contention, he has placed reliance on the decisions in CIT v. Murlidhar Jhawar and Purna Ginning and Pressing Factory [1966] 60 ITR 95 (SC) and Ch. Atchaiah v. ITO [1979] 116 ITR 675 (AP) and certain other decisions which have taken the same view. He has brought to our notice the decision of the Punjab and Haryana High Court in Rodamal Lalchand v. CIT [1977] 109 ITR 7, of the Patna High Court in Mahendra Kumar Agarwalla v. ITO [1976] 103 ITR 688 and of the Delhi High Court in Punjab Cloth Stores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of the tax payable by the partners if the firm were treated as a registered firm would be greater than the aggregate amount of the tax which would be payable by the firm under clause (a) and the tax which would be payable by the partners individually, may proceed to make the assessment finder clause (ii) of sub-section (1) of section 182 as if the firm were a registered firm; and where the procedure specified in this clause is applied to any unregistered firm, the provisions of sub-sections (2), (3) and (4) of section 182 shall apply thereto as they apply in the case of a registered firm. " The position regarding the assessment of a firm and its partners is as follows depending upon whether the firm was unregistered or registered: " Where the firm is unregistered, the tax payable by the firm itself is determined as in the case of any other distinct entity and the levy is made on the firm itself. If the firm was unregistered and the tax had been paid by the firm itself, no tax was payable by the partners in respect of their respective shares which had already borne tax in the hands of the firm. Tax is not payable by a partner of an unregistered firm in respect of his share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... protective assessments have been made in respect of 3 out of the 7 partners who returned patently false and low incomes. In Kalekhan Mohd Hanif v. CIT [1972] 86 ITR 196, the Madhya Pradesh High Court considered the question whether the assessment of the firm made after all the partners had been assessed first on the share income from the firm, were valid. That court held, following the decision of the Supreme Court in lain Brothers v. Union of India [1970] 77 ITR 107 (SC), that S. 23(5) of the 1922 Act was not involved in Murlidhar's case [1966] 60 ITR 95 (SC) and that, therefore, Murlidhar's case [1966] 60 ITR 95 (SC) has to be distinguished and that the assessment of the individual partners does not preclude the ITO from taking up the assessment of the firm as well. In another case, dealing with the assessment of a registered firm in CIT v. Chaganlal Durga Prasad [1968] 70 ITR 314, a Division Bench of the Rajasthan High Court has held that the effect of s. 23(5) and s. 3 5(5) of the Indian I.T. Act, 1922, is that the assessment proceedings with regard to a registered firm may continue for purposes of computation of the in come and even for the purpose of determining the shares o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income of any firm and other association of persons can be charged to income-tax when the same income has been charged to income-tax in the individual assessments of the partners of the firm or the members of the association. Section 23(5)(a) relating to the assessment of a registered firm and s. 23(5)(b) relating to the assessment of an unregistered firm were introduced into, the Indian I.T. Act, 1922, respectively, by the amendments made by the Indian I.T. Act, 1939, and s. 14 of the Finance Act,1956. The result is that while the income in the hands of an unregistered firm cannot be assessed to income-tax if the game has suffered income-tax in the individual assessments of the partners prior to April 1, 1956, such disability is no longer there after April 1, 1956. No similar provision was, however, made regarding the manner of assessment of association of persons or a body of individuals or its individual members which continued to be a taxable entity. The decision of the Supreme Court in CIT v. Murlidhar Jhawar and Purna Ginning and Pressing Factory [1966] 60 ITR 95 dealt with a case relating to the accounting year ending November 6, 1953. One Pannalal Lahoti and Govindbai wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can Liquor Syndicate [1974] 95 ITR 130 (AP). That again is a case which related to the assessment sought to be made of an association when the same income was earlier subjected to tax in the hands of the individual members. The decision of the Madras High Court in CIT v. R. Dhandayutham [1978] 113 ITR 602 and that of the Patna High Court in Mahendra Kumar Agarwalla v. ITO (1976] 103 ITR 688 and that of the Delhi High Court in Punjab Cloth Stores v. CIT [1980] 121 ITR 604 are also cases which dealt with assessments of association of persons and individual members thereof and need not be considered as applicable in any manner to the facts of this case. In the decision Girdhari Lal Laxman Prasad v. CIT [1968] 70 ITR 853 (All), the assessment year was 1958-59 in respect of the assessee, a partnership firm, consisting of three partners Girdhari Lal, Laxman Prasad and Ram Dulari Devi. For the same assessment year 1958-59, the ITO made the assessment of two of the partners, Girdhari Lal and Ram Dulari Devi, subject to the remark that the amount would be rectified later under s. 35 of the Indian I.T. Act, 1922, when the correct share was determined in the assessment of the assessee-firm. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It cannot be that the ITO in making the assessment had such right by the Amendment Act of 1970 and he did not have a similar right under the Amending Act of 1956. In the decision in Rodamal Lalchand v. CIT [1977] 109 ITR 7 (Punj), one Lalchand and Sohan Lal, two of the five partners of Rodamal Lal Chand, were assessed to income tax on February 5, 1968, in their individual capacity in respect of their income from the firm for the assessment year 1963-64. The ITO simultaneously proceeded to assess the firm and made a separate assessment order assessing the firm on March 26, 1968, for the same year. An objection was raised that when once the partners have been assessed in their individual capacity for their share income in the firm, the firm could not be legally assessed separately. It was held that the tax on the unregistered firm was to be determined in accordance with s. 183 of the I.T. Act, 1961, as it stood, prior to the Taxation Laws (Amendment) Act, 1970. It was further held that there is no prohibition in s. 4 of the I.T. Act, 1961, to restrain the assessing authority to proceed against the firm which is a taxable entity, and that the tax on the unregistered firm has to be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate set of accounts which were showing a different constitution of the firm and a much higher income the firm MR& in its business for that year. The two ITOs who made the subsequent assessments were naturally having this information and that was why they have made the assessments of those two minor partners on a protective basis. The duplicate set of accounts have revealed that these two minor partners were not having any share at all. The department was not haying any inforrmation at that time as to the persons for whose ultimate benefit the shares are shown in the partnership deed in the names of these two minors. It cannot, therefore, be contended that the ITOs have in exercise of their option made the assessments of these two minor partners and foreclosed the option of the department to assess the firm itself. Sri Pandurangarao, the learned counsel for the assessee, has tried to argue that the Tribunal went wrong in refusing registration to the firm. This is not a question which is referred to this court. Even assuming that the, grant or refusal of registration to the firm is a mixed question of law and,fact, the ITO, the AAC and the Tribunal have given proper reasons for ref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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