1966 PLP 259 (PTD)

Date of hearing: 12th January 1966. CORNELIUS, C. J.‑This appeal by special leave is brought by Sheikh Muhammad Iftikharul Haq to call in question an order made by the High Court on a writ petition which he had moved to challenge the order of the 22nd April 1961, by the Income‑tax Officer, Bahawalpur imposing upon the defunct partnership firm, under the name of Sheikh Muhammad Saeed Friends & Co., of which he was a partner, a sum by way of super‑tax on the income and profits of the said firm for the year 1955‑

56. By a subsequent and consequential order of the 18th October 1961, a penalty of 10 per cent. of the assessed tax was imposed by the same Income‑tax Officer on the ground that notice of demand had not been complied with within time. The Income‑tax Officer purported to assess super‑tax under power derived from section 35 of the Income‑tax Act, for rectification of a mistake The circumstances set out were the following. Sheikh Muhammad Saeed Friends & Co. was a firm registered under the Income‑tax Act, so that it enjoyed the privilege that its profits were not taxable to income‑tax in the hands of the firm; but the shares of the partners in such profits were to be subject to tax in relation to the assessed total income of each partner separately. The firm stood dissolved with effect from the 31st August 1954. The business is said to have been continued under another name, but assessment was made on the basis of total discontinuance from the date mentioned. The profits for the accounting year 1954‑55 were duly assessed on the 26th. June 1958, at Rs. 62,951 and in a short order the Income‑tax Officer said that there would be no demand for income‑tax. In making that order the Income‑tax Officer over looked the fact that while it was correct that the profits were not to be taxed as profits of the firm, but only as part of the total income of each of the partners, yet the firm itself was under the law liable to pay super‑tax on its assessed‑ income. The point was noticed some two, years later and on the 15th October 1960, the Income tax Officer sent out a notice which is Annexure `A', referring to the provision in the Finance Act 1956, that super‑tax was payable by a firm at an anna in the rupee on income exceeding Rs. 25,000 at which rate, the super‑tax payable by the firm was Rs. 2,372 that this sum had not been charged inadvertently, and the mistake being apparent from the record the Income‑tax Officer intended to rectify it under section 35 of the Income‑tax‑Act. No reply being received, a demand notice was issued for the sum of Rs. 2,372 as stated above. Each of these notices was addressed to Sheikh Muhammad Saeed Friends & Co., but service was effected only on one ex‑partner, Sheikh Muhammad Izharul Haq. . However, it is evident that at least one other member of the firm, namely, Sheikh Muhammad Saeed also received this notice, for there is on the record a lawyer's protest made on his behalf, which is dated the 22nd May 1961. The present appellant, Sheikh Muhammad Iftikharul Haq himself filed a petition for revision of the Income tax Officer's order under section 35 before the Commissioner of Income‑tax on the 4th July 1961. These circumstances clearly indicate that although the notice was served in the first instance on Sheikh Muhammad Izharul Haq alone, the fact of the notice and that an assessment had been made on the firm, Sheikh Muhammad Saeed Friends & Co., had became known, among the ex‑partners (of whom there were four) very soon after the issue of notice. They were accordingly in a proper position to challenge the demand for super‑tax, and in fact did so. The first ground of challenge to the imposition of super‑tax by these means that was raised in the writ petition was that the action of the Income‑tax Officer was ultra vires of the power given be section 35 of the Income‑tax Act. This section empowers at Income‑tax Officer at any time within 4 years from the making of an assessment order, "of his own motion to rectify any mistake apparent from the record" with the condition that if the effect be to enhance an assessment, notice should be given to the assessee of the Income‑tax Officer's intention and a reasonable opportunity of being heard should be allowed. This being a case of an enhancement of assessment, notice was actually sent on the 15th October 1960, allowing seven days time for presenting any objection. The order imposing the assessment was not made until the 22nd April 1961, that is more than six months after issue of the notice, and it is clear, from the second order that the Income‑tax Officer had kept the case pending for want of a reply from the assessee. Therefore, the conditions specified in section 35 in this behalf would appear to have been duly satisfied. The action was taken within four years of the making of the assessment order in the first instance, and the question that remains is whether there was in law "a mistake apparent from the record" which the Income‑tax Officer was rectifying. The argument raised in the writ petition .was that in fact a new liability for super‑tax was created, by the order, and the appropriate course was for the Income‑tax Officer to have re‑opened the case under section 34 of the Act, but since limitation for this purpose had expired on the 31st March 1960, resort had been had to the power provided by section

35. The view taken in the High Court was that "if fresh facts have to be ascertained, then section 34 is the only one available, but if no new factual basis is to be adopted for the correction, and the correction is to be made on the basis of the facts previously accepted, as they appear from the record section 35 is also available." The High Court judgment does not contain a clear indication whether the learned Judges thought that the case was one where no new facts had to be ascertained, but on the face of the record, it is clear that that was indeed the case. There had been an oversight in respect of the imposition of super‑tax, for which no enquiry regarding income, profits, etc., is necessary beyond that which is requisite for imposition of income‑tax. That process had been gone through, in the case of this firm, and in order to assess super‑tax on the ascertained income, a simple mathematical formula had to be applied, which cannot fall within the meaning of the term "ascertainment of facts." An oversight is clearly a mistake of inadvertence and as such a mistake within the meaning of section 35 aforesaid. If authority be required on the point it is to be found in the Privy Council case, Commissioner of Income‑tax Bombay v. Khemchand Ramdas (65 I A 236) where also there had been failure through oversight to state the amount of super‑tax payable by a firm. It is not necessary to deal in this judgment with the precise circumstances of this precedent case beyond saying that they were in an essential respect more favourable to the assessee than in the present case. The following observation made in the judgment will make this clear:‑ "in their Lordships' opinion, the case clearly would have fallen within the provisions of section 35 had the Income‑tax Officer exercised his powers under the section within one year from the date on which the earlier demand was served upon the respondents. For looking at the record of the assessments made upon them as it stood after the cancellation of the respondent's registration‑and the order affecting the cancellation would have formed part of that record‑it would be apparent that a mistake had been made in stating that no super‑tax was leviable." Here, no question arises of cancellation of the registration of the firm. The law at that time appears to have been that super‑tax was payable only by non‑registered firms, whereas at the time when the present matter of assessment arose, the position was to the contrary effect, and here it has been plain throughout the proceedings that under law super‑tax was payable by the firm. The case, however, is clearly an authority to the effect that failure, whether by mere omission or by expression, to assess to super‑tax, when super‑tax was leviable is to be treated as a mistake for the purposes of the application of section 35 of the Income‑tax Act. The second ground of attack taken in the writ petition was that under section 44 of the Income‑tax Act as it stood on the Ist April 1955, that being the law applicable to the case, no assessment could legally be made on the dissolved firm as such for the reason that super‑tax was leviable on the firm only, and at the time that it was levied in this case, there was no firm in existence. Before the High Court, strength was sought to be derived for this contention by reference to the terms of section 44 in its shape after the amendment of 1959. It will be convenient here to reproduce the original and the amended forms of that section. "Liability in case of discontinued firm or association.‑Where any business, profession or vocation carried on by a firm or association of persons has been discontinued or where an association of persons is dissolved, every person who was at the time of such. discontinuance or dissolution a partner of such firm or a member of such association shall in respect of the income, profits and gains of the firm or association be jointly and severally reliable to assessment under Chapter IV and for the amount of tax payable and all the provisions of Chapter IV shall, so far as may be, apply to any such assessment." "Where any, business, profession or vocation carried on by a firm or an association of persons has been discontinued or where a firm or an association of persons is dissolved,' assessment shall be made on the firm, the partners of the firm, the association of persons or the members thereof, as the case may be, as if no . such discontinuance or dissolution had taken place, and every person who was at the time of such discontinuance or dissolution a partner of such firm or member of such association shall in respect of the income, profits and gains of the firm or association be jointly and severally liable for the amount of tax payable by the firm or association of persons or the partners of the firm or members of the association of persons, and all the provisions of this Act, as fax as may be, shall apply accordingly." Noting that the later amendment "makes clear provisions in this behalf," the learned Judges in the High Court observed that "the intention all along has been that a firm should not be released from any of its obligations in respect of taxation, or in respect of the process of taxation by reason of its dissolution." They declined to raise the inference that the clarification effected by the amendment involved any departure from the intention of the section as it stood previous to the amendment. This question has been argued at length before us by Mr. Aftab Hussain for the appellant, who has also raised the point of adequacy of notice, by delivery to only one of the four ex‑partners, for the purpose of making each of them separately liable and all of them jointly liable for the new charge. He relied to a considerable extent on an exposition of section 44 contained in the judgment of a Division Bench of the Calcutta High Court in the case, R. N. Bose v. Manindra Lal Goswami (33 I T R 435). We do not propose to set out in detail the argument in this judgment, with reference to the resolution of the question‑which is the party to be pursued for the purpose of recovery under section 44 ? But it is important to point out that the case before the Calcutta High Court was one of attempted assessment on the income, profits, etc. of a dissolved firm in which the notice issued was to and in the name of one of the ex‑partners, who was described not as ex‑partner, but as partner of the firm in question. The notice said that the income which had escaped assessment was the income of the named ex‑partner, and he was called upon to deliver to the Income‑tax Officer a return of his "total income or part income assessable" for the year in question. A similar notice was sent to one of the other partners, but none was sent to the third partner. The learned Judges of the High Court observed that it was "quite impossible to see how such a notice could be understood by anybody as relating to any income other than the personal income of the individual who was being addressed." In the result, the assessment was held by the High Court to be invalid in law. Here, the factual position is different. The notice is addressed, to the firm, Sheikh Muhammad Saeed Friends & Co., but it was served on an ex‑partner, Sheikh Muhammad Izharul Haq. Mr. Aftab Hussain attempted to argue that at the time when the notice was sent out, the firm was no longer in existence, and therefore tire notice had no validity. The section itself makes it clear that the tax in such a case is to be "in respect, of the income, profits and gains of the firm or association," and evidently the reference is to the dissolved firm or association, so that the intention of the law is to impose .the tax on the income, etc.., earned while the firm was in existence. Now, a reference to the definition of the word "assessee" in section 2 of the Income‑tax Act will show that the term "includes every person in respect of whom any proceeding under this Act has been taken for the assessment of his income". It is obvious that within this particular meaning, the firm although not in existence is in a real sense the assessee in the case. Some indication of the different meanings in which the word "assessment" is used in the income‑tax Act will be found in the judgment of the Privy Council in the case already cited, from which we extract the following passage:‑ "One of the peculiarities .of most Income‑tax Acts is that the word 'assessment' is used as meaning sometimes the computation of income, sometimes the determination of the amount of tax payable, and sometimes the whole procedure laid down in the Act for imposing liability upon the tax‑payer." There are also variations in the meaning of the word "assessee," and there need be no difficulty in holding that the purport and intention of section 44 is to provide for assessment of the income of the dis solved firm as an assessee, and thereafter to render the tax so assessed payable by the ex‑partners of the firm jointly and severally. There would naturally be variations in respect of the income‑tax payable according as the dissolved firm was either registered or unregistered during the accounting year, and in the case of a registered firm, there is to be a computation of the income earned by the firm (which would thus be an "assessee" within the definition), followed by assessment to income‑tax, by a fresh process, in respect of the total income of each partner or ex‑partner, in which his share of the income of the dissolved firm would be included. But in respect of super‑tax, there would be no need for any fresh assessment, since the tax would be levied on the firm as such, and the liability of the partners to meet the claim would be joint and several. For the recovery of super‑tax it would be unnecessary to take into account their respective shares in the firm, and of course no account of their other income would require to be taken. This being a. case of a registered firm, the income‑tax on the profits, etc., was appropriately passed into the separate income‑tax accounts of the partners in 1958, but as to the super‑tax, if it had been assessed at the same time, it would have been recoverable from the partners jointly and severally as indicated above. The words in section 44 "every person who was at the time of such dissolution a partner of such firm shall in respect of the income, profits and gains of the firm be jointly and severally liable to assessment for the amount of tax payable" must be understood in this sense in relation to the simplest case, viz., of super‑tax payable by a firm. It is sufficient to assess the super‑tax and thereafter the whole amount could be recovered from any one member or from them all, as the income tax authorities might find convenient, irrespective of their particular shares in the income assessed to super‑tax, adjustment in this respect being left to be made by the ex‑partners among themselves, on the basis of contribution. The case would be otherwise, of course, if no super‑tax were chargeable, i.e., in the circumstances of this case, if the income of the firm had been above the lower limit but less than Rs. 25,000 and through inadvertence, no order for charging of income‑tax had been made, for then‑income‑tax alone would have been leviable, and it being a registered firm, only in the separate accounts of the income of the partners as assessed. Section 44 would enable such action to be taken by way of correction of the mistake. These results follow perhaps more clearly and directly from the terminology adopted in the amended form of section 44 but we agree with the High Court that the amendment does not make any difference in substance, and that both before as well as after the amendment, the expressions used in the section were designed to apply tax in relation to the income, etc., of a dissolved and discontinued firm as if these incidents had not taken place. On the view that the assessee in the first instance was the firm itself, albeit dissolved, the law of section 44 must be understood to be applicable to such a firm as if it were deemed still to exist, and on that basis, the description used in the notice in this case, namely, Sheikh Muhammad Saeed Friends & Co., may be regarded as appropriate, that is in a deemed sense. This might have been made clearer by the addition of the words and brackets "(now dissolved)" following the description of the firm, but that is a mere matter of nomenclature and cannot affect the substantial position. On the point that notice to one partner of a dissolved firm cannot be adequate to render all of them liable for tax imposed on a date after the dissolution of the firm, the answer must be that since the intention of the law of section 44 is that far the purpose of assessment of the income, etc., of the dissolved firm, it is deemed to be in existence at the date of the assessment, the provisions of section 63 of the Income‑tax Act must be held to apply by which notice served upon any member of a firm is adequate notice in relation to any proceeding in respect of that firm, at any rate for imposition of super‑tax. We accordingly agree with the conclusion reached by the High Court on each of the two questions which were raised in the writ petition and that in consequence it was liable to be dismissed. This appeal is hereby dismissed with costs. S. Q. Appeal dismissed.