The Income-tax Officer has the implied power to determine who the partners of an unregistered firm are during the assessment proceedings under Section 23 of the Income-tax Act.

Headnote:
INCOME TAX - Assessment of unregistered firm - Determination of partners - Jurisdiction of Income-tax Officer - Appeal against assessment order - Maintainability - Tribunal's jurisdiction to examine and decide the question of partnership.
Fact of the Case:

The assessee, an unregistered firm, filed a return for the assessment years 1945-46 and 1946-47. The Income-tax Officer (ITO) completed the assessments and accepted a Deed of Partnership produced by one of the partners, Gokuldas. Gokuldas later applied to the ITO to amend the return or be permitted to submit a revised return, stating that the partners had denied their involvement in the business. The ITO rejected the request and made two assessment orders against the unregistered firm. Gokuldas appealed to the Appellate Assistant Commissioner (AAC), who dismissed the appeals. Kikabhai, one of the alleged partners, whose property was attached for the payment of tax, filed an appeal before the Appellate Tribunal (Tribunal) against the AAC's order. The Tribunal raised a preliminary question regarding Kikabhai's competence to file the appeal and held that he was competent. The Tribunal then remanded the matter for further inquiry into the question of Kikabhai's partnership. Kikabhai filed a Reference Application, and the Tribunal referred two questions to the High Court: (1) whether Kikabhai was competent to appeal to the Tribunal against the AAC's orders, and (2) whether the Tribunal was competent to examine and decide the question of Kikabhai's partnership in the firm.
Finding of the Court:

The High Court held that the ITO had the implied power to determine who the partners of an unregistered firm were during the assessment proceedings under Section 23 of the Income-tax Act. The Court also held that the Tribunal had the jurisdiction to examine and decide the question of Kikabhai's partnership in the firm. The Court further held that Kikabhai was competent to appeal to the Tribunal against the AAC's orders, as he was aggrieved by the assessment order that held him to be a partner of the unregistered firm.
Issues: 1. Whether the ITO had the jurisdiction to determine who the partners of an unregistered firm were during the assessment proceedings? 2. Whether the Tribunal had the jurisdiction to examine and decide the question of Kikabhai's partnership in the firm? 3. Whether Kikabhai was competent to appeal to the Tribunal against the AAC's orders?
Ratio Decidendi: 1. The Court held that the ITO had the implied power to determine who the partners of an unregistered firm were during the assessment proceedings under Section 23 of the Income-tax Act. The Court reasoned that this power was necessary for the ITO to properly assess the firm's income and to determine the liability of the partners. The Court also held that the ITO had an implied obligation to give notice to the alleged partners before making such a determination, in order to ensure that they had an opportunity to be heard. 2. The Court held that the Tribunal had the jurisdiction to examine and decide the question of Kikabhai's partnership in the firm. The Court reasoned that the Tribunal had the power to hear appeals from the AAC's orders, and that this power included the authority to review the ITO's determination of Kikabhai's partnership status. 3. The Court held that Kikabhai was competent to appeal to the Tribunal against the AAC's orders, as he was aggrieved by the assessment order that held him to be a partner of the unregistered firm. The Court reasoned that Kikabhai had a direct and substantial interest in the outcome of the appeal, as a finding that he was not a partner would relieve him of the tax liability.
Final Decision: The Court answered both questions referred to it in the affirmative, holding that Kikabhai was competent to appeal to the Tribunal against the AAC's orders and that the Tribunal had the jurisdiction to examine and decide the question of Kikabhai's partnership in the firm.

Judgment -

1. This Reference which arises out of some extremely unusual facts has brought to light the difficulty of finding within the framework of the Indian Income-tax Act machinery for determining the liability of an alleged partner in an unregistered firm.

2. The assessee in this case was an unregistered firm, and one Gokuldas made a Return for the assessment years 1945-46 and 1946-47. The Income-tax Officer completed the assessments on 24-7-1947. Gokuldas had produced before the X. T. O. what purported to be a Deed of Partnership and in this Deed one Kikabhai was shown to be one of the partners. The X. T. O. accepted the Deed and passed an assessment order, but before this order was made on 6-7-1947 Gokuldas had made an application to the I. T. O. in, the following terms :

"I went to the partners for obtaining their signatures on the application for registration. They say that the profit or loss is mine and that they have nothing to do with the business. I am willing to pay income-tax on this business. The return which I submitted may be allowed to be amended or I may be permitted to submit a revised return".

This request of the assessee was not accepted by the I.T.O., and he made two assessment orders one in respect of each assessment year --against the unregistered firm.

3. Against these orders of the I.T.O. appeals were filed by Gokuldas before the Appellate Assistant Commissioner; and one of the grounds of appeal was as follows :

"Having regard to circumstances of the case status be taken as individual, and not U. R. F. (unregistered firm) and the concern may be taxed as proprietary concern."

The A.A.C. dismissed the appeals on 9-12-1947. Thereaiter on 3-3-1948 Kikabhais property was attached for the payment of the tax levied on the unregistered firm, and Kikabhai filed an appeal before the Appellate Tribunal against the order of the A.A.C. in the assessment for both the years. In this appeal he made only the I.T.O. as the respondent and Gokuldas was not a respondent in that appeal. The Tribunal raised a preliminary question as to whether Kikabhai was competent to file this appeal and held that he was. The Tribunal then on 19-8-1949 made a remand order directing a further enquiry to be made into the question whether or not Kikabhai was a partner. It must be mentioned that Kikabhais appeals to the Tribunal did not concern themselves with the quantum of assessment of the firm in respect of either of these years, but were merely confined to the question as to whether Kikabhai was a partner of the unregistered firm. The prayer in his Memorandum of Appeal was that the Tribunal should hold that Kikabhai was not a partner. At the stage of remand, it appears that Gokuldas appeared before the I.T.O. There was a protracted hearing, and when the matter came back to the Tribunal Counsel for Gokuldas appeared before the Tribunal, although Gokuldas was not a party to the appeal. The Tribunal describes the hearing as having been very hotly contested before them and after considering all the evidence before them, the Tribunal came to the decision that Kikabhai was not a partner. Gokuldas filed a Reference Application and made the Commissioner of Income-tax as the Respondent. On this application the Tribunal has referred to us two questions, but before doing so the Tribunal asked for the directions of this Court as to who should be the respondents to this Reference and in pursuance of the directions given the Tribunal has made in addition to the Commissioner of Income-tax, Kikabhai as well as the unregistered firm Gokuldas Dayalji and Co., as party respondents to this Reference. The questions referred to us are:

1. Whether Kikabhai was competent to appeal to the Tribunal against the orders of the Appellate Asst. Commissioner dismissing the appeals filed by Gokuldas? And

2. Whether the Tribunal was competent to examine and decide the question whether Kikabhai Abdulali was a partner in the firm of Gokuldas Dayalji and Co?

4. Now, the contention

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1957 Supreme(Bom) 141

The Income-tax Officer has the implied power to determine who the partners of an unregistered firm are during the assessment proceedings under Section 23 of the Income-tax Act.

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