1. Rectification of partner's assessment under Section 35(5), Income-tax Act, 1922, following enhancement of firm's income — dispute over applicability to assessments completed before the provision's enactment. (Para 1 , 2 , 5 , 13 )
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1967 Supreme(SC) 302
SUPREME COURT OF INDIA
K.N. WANCHOO, C.J.I., R.S. BACHAWAT, V. RAMASWAMI, G.K. MITTER AND K.S. HEGDE, JJ.
Income Tax Officer, Tuticorin (In all the Appeals), Appellant
Versus
T.S. Devinatha Nadar etc., Respondents.
Civil Appeals Nos. 2154 to 2158 of 1966,
D/-25-10-1967.
Advocates Appeared
M/s. S. K. Aiyer and R. N. Sachthey, Advocates, for Appellant (In all the Appeals); Mr. T. A. Ramachandran, Advocate, for Respondents (In all the Appeals).
Section 35(5) of the Income-tax Act, 1922, allows rectification of a partner's assessment if the discrepancy is found during the firm's assessment after April 1, 1952, regardless of whether the partner's individual assessment was completed before that date.
Headnote:(A) Income-tax Act, 1922 - Section 35(1) and 35(5) - Rectification of mistake - Assessment of partner in a firm - Power to rectify partner's assessment based on firm's assessment - Whether applicable to assessments completed before the introduction of Section 35(5) - The power to rectify is triggered by the finding on the assessment or re-assessment of the firm - If such finding is made after the provision came into force on 1st April, 1952, the rectification can be made to the completed assessment of the partner, even if such assessment was completed prior to the commencement of the provision. (Paras 7, 10)
(B) Interpretation of Taxing Statutes - Retrospective operation - The aim of the legislation was to align the assessment of the individual partner with that of the firm - The finding must be made after the section comes into force, but the subject matter of the rectification (the completed assessment) may have preceded that date. (Paras 7, 11)
(C) Dissenting Opinion - Argument that the provision is not procedural but affects vested rights and therefore should not apply to assessments that became final before the amendment date. (Paras 19, 35)
Facts of the case:
A firm and its partners were assessed in 1946. The firm's assessment was later reopened and enhanced in 1959. The tax authorities attempted to rectify the partners' individual assessments under Section 35(5) to reflect the increased share of profits. The High Court quashed these orders, ruling that the provision did not apply to assessments completed before April 1, 1952.
Findings of Court:
The rectification orders passed by the tax officer are held to be effective and binding on the partners.
Issues: Whether Section 35(5) of the Income-tax Act, 1922, permits the rectification of a partner's assessment completed before April 1, 1952, if the finding of incorrect profit share was made during the firm's assessment after that date.
Ratio Decidendi: The court reasoned that the "completed assessment" of the partner is the object of rectification, while the "finding" in the firm's assessment is the trigger. Since the trigger occurs after the section's commencement, the power can be exercised on any completed assessment of the partner, regardless of its completion date.
Result: Appeals allowed.
Legal Category Hierarchy
Table of Contents
2. Whether Section 35(5) applies to partner assessments completed before April 1, 1952, provided the firm's assessment or re-assessment occurred after that date. (Para 6 , 14 , 15 )
3. The provision aims to align partner and firm assessments; the power of rectification is triggered by a finding made after the provision's commencement, regardless of the partner's assessment date. (Para 7 , 10 , 11 )
4. Section 35(5) allows rectification of a partner's completed assessment if the finding of incorrect profit share is made during a firm's assessment after the provision's enactment. (Para 7 , 10 )
5. Appeals allowed — High Court order set aside — rectification orders of the Income-tax Officer held effective and binding. (Para 12 , 40 )
6. Does Section 35(5) of the Income-tax Act, 1922, apply to a partner's assessment completed before April 1, 1952?
Yes, provided the finding regarding the incorrect share of profit or loss is made during the assessment or re-assessment of the firm after April 1, 1952. The date of the partner's completed assessment does not control the operation of the sub-section. (Para 7 , 10 )
7. What event triggers the power of rectification under Section 35(5) of the Income-tax Act, 1922?
The power is triggered when it is found, during the assessment or re-assessment of the firm or upon reduction or enhancement of the firm's income, that the partner's share was not included in the assessment of the partner or was incorrect. (Para 5 , 7 , 10 )
8. How is the four-year limitation period for rectification computed under Section 35(5)?
Unlike Section 35(1), where the period is computed from the date of the assessment order, under Section 35(5), the four-year period is computed from the date of the final order passed in the case of the firm. (Para 5 )
9. What is the general rule for interpreting taxing statutes when the language is ambiguous?
Taxing statutes must receive strict construction. If the words of the statute fail or are ambiguous, the construction most beneficial to the subject should be adopted, as no tax can be imposed by inference, analogy, or by probing the intentions of the legislature. (Para 23 , 24 , 25 , 26 , 27 , 28 , 29 )
10. Under what circumstances should the Supreme Court overrule its own previous decisions?
Previous decisions should not be lightly overruled and should only be departed from when the court is convinced the decision is manifestly wrong or that public interest of a substantial character would be jeopardized. (Para 37 , 38 )
Judgement
MITTER, J. : This group of five appeals by special leave arises out of a common order made under Art. 226 of the Constitution of the High Court of Judicature at Madras. The appeals involve the interpretation of S. 35 (5) of the Income-tax Act, l922.
2. The facts in Civil Appeal No. 2154 of 1966 - relevant for the disposal of the appeal, taken by way of sample, are as follows. The respondent along with his four brothers were partners of a registered firm carrying on business in gunnies. The assessment of the firm for the year l943-44 was completed on January 22, 1946 and the share Income of each partner was determined at Rs. 8,265. The assessment of the respondent as individual was completed on January 24, 1946 wherein was included his income from the partnership just noted. Subsequently, the assessment of the firm was reopened by proceedings under S. 34 (1) (a) of the Act and a sum of Rs. 90,000 was added to the income of the firm liable to be brought to tax. The notice under S. 34 was issued on September 11, 1952 and the reassessment of the firm took place of May 30, 1959. On July 24, 1959 notice under S. 35 (5) of the Act was served on the respondent for rectification of his assessment as an individual. The rectification was ultimately ordered to be made on August 31, 1959. The respondent applied to the High Court for quashing the said order.
3. When the matter came to be beard by the High Court of Madras, there were already three reported decisions of this Court bearing on the interpretation of S. 35 (5) of the Act. In the last of these decisions, a doubt had been cast as to the correctness of the two earlier decisions but the High Court felt that the decision in Second Addl. Income-tax Officer v. Atmala Nagaraj , 1962-46 ITR 609 (SC)being, the second decision of this Court in point of time, was fully applicable to the cases before it and in view of the matter the order of rectification was quashed. Hence these appeals.
4. Before talking note of the earlier decisions of this Court, it would be appropriate to consider the relevant provisions of the Income-tax Act and interpret the m as if the matter were res integra. If the result leads to a, conflict of decisions, we will have to examine the question as to whether the view taken in an earlier case should be adhered to. It is only when this Court finds itself unable to accept the earlier view that it would be justified in deciding these appeals in a different way.
5. The two sub-section of S. 35 which call for interpretation are transcribed as follows :
"35. Rectification of mistake.- (1) The Commissioner or Appellate Assistant Commissioner may, at any time within four years from the date of any order Passed by him in appeal or, in the case of the Commissioner, in revision under Section 33-A and the Income-tax Officer may, at any time within four years from the date of any assessment order or refund order passed by him on his own motion rectify any mistake apparent from the record of the appeal, revision, assessment or refund as the case may be, and shall within the like period rectify any such mistake which has been brought to his notice by an assessee :
Provided that no such rectification shall be made, having the effect of enhancing an assessment or reducing a refund unless the Commissioner, the Appellate Assistant Commissioner or the Income-tax Officer, as the case may be, has given notice to the assessee of his intention so to do and has allowed him a reasonable opportunity of being heard :
Provided further that no such rectification shall be made of any mistake in any order passed more than one year before the commencement of the Indian Income-tax (Amendment) Act, 1939.
(2) to (4) * * * * *
(5) Where in respect of any completed assessment of a partner In a firm it is found on the assessment or re-assessment of the firm or on-any reduction or enhancement made in the income of the firm under Section 31, S. 33, S. 33-A. Section 33-B, Section 66 or Section 66-A that the s
