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High Court of Allahabad
C.S.P. Singh, R.R. Rastogi, JJ.
Gupta Traders – Appellant
Versus
Commissioner of Income-Tax – Respondent
Income-tax Reference 884 of 1976
Decided On : Dec 15, 1981
INCOME TAX - Reopening of assessment - Limitation - Opportunity of hearing - Section 150(1) read with Section 153(3)(ii), Expln. 3 - Firm and its partners are distinct entities - Notice to one does not amount to notice to the other - Assessment of firm cannot be reopened on the basis of an order passed in the appeal of one of its partners without giving notice to the firm.
Fact of the Case:
The assessee, a partnership firm, filed its return of income on September 27, 1965. The ITO found that the assessee-firm had not carried on any business and the business actually belonged to one of the partners, Deo Prakash Gupta. The ITO included the entire income of the assessee-firm in the assessment of Deo Prakash Gupta. The assessee filed an appeal against the order of the ITO, which was allowed by the AAC. The ITO then made the assessment on the assessee-firm on November 30, 1970. The assessee filed an appeal before the AAC, which was dismissed. The assessee then filed a further appeal before the Appellate Tribunal, which referred the following questions of law to the High Court: (1) Whether the proceedings pursuant to the return filed on September 27, 1965, were closed on March 16, 1970? (2) Whether the proceedings under Section 147 were bad in law? (3) Whether the provisions of Section 150(1) and Explanation 3 to Section 153 are attracted and the Tribunal was correct in holding that Sri Deo Prakash Gupta, one of the partners having 10 annas share in the firm, could be said to have been given opportunity entitling the assessment of the firm within the meaning of Explanation 3 of Section 153?
Finding of the Court:
The High Court held that the assessee-firm was not given an opportunity of hearing by the AAC while disposing of the appeal filed by Deo Prakash Gupta and that in the order made in that appeal no direction was given by the AAC to include the income, which had been included in the assessment of Deo Prakash Gupta, in the case of the assessee-firm. The High Court further held that the revenue could not take advantage of the provisions contained in Section 150(1) read with Section 153(3)(ii), Expln. 3, and the initiation of proceedings in the case of the assessee-firm under Section 147(b) was barred by limitation.
Issues: 1. Whether the assessee-firm was given an opportunity of hearing by the AAC while disposing of the appeal filed by Deo Prakash Gupta? 2. Whether the order passed by the AAC in the appeal of Deo Prakash Gupta contained any direction for the inclusion of any income in the firm's case? 3. Whether the revenue could take advantage of the provisions contained in Section 150(1) read with Section 153(3)(ii), Expln. 3?
Ratio Decidendi: 1. A partnership firm has got its own entity independent from that of the partners constituting it. 2. In the case of Deo Prakash Gupta before making an order that a part of the income which had been assessed in his case was the income of the assessee-firm, it was necessary to give an opportunity of a hearing to the assessee-firm. 3. The mere examination of a director of the petitioner-company in the proceedings of the firm as a result of which the assessment of the petitioner-company was sought to be reopened, could not be equated with an opportunity of being heard given to the petitioner-company. 4. Even Expln. 3 to Section 153(3) cannot assist the department as the AAC had not recorded a finding that the sum which was excluded from the total income of the firm was the income of the three partners and the partners of the firm had no opportunity of being heard when the AAC made his direction.
Final Decision: The High Court answered question No. 3 in the negative, in favour of the assessee and against the department. Questions Nos. 1 and 2 were returned unanswered. The assessee was awarded costs of Rs. 250.
Rastogi, J.
1. THIS is a reference under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as "the Act"), It relates to the assessment year 1965-66, the previous year ended on March 31, 1964. The assessee, M/s. Gupta Traders Kanpur, a partnership firm, had filed its return of income on September 27, 1965. The assessee-firm was constituted of two partners. Deo Prakash Gupta with a 10 annas share and his son, Sheo Autar Gupta, with 6 annas share. In his order made under Section 185(1)(b) of the Act on March 16, 1970, the ITO found that the assessee-firm had not carried on any business in the status of the firm and the business actually belonged to Deo Prakash Gupta, As such the proceedings in the case of the firm were filed (sic). The income shown in the return filed by the firm was to be considered in the case of Deo Prakash Gupta in his individual capacity. Deo Prakash Gupta in his individual return, had disclosed an income of Rs. 20,100. However, the assessment was framed in his case on a total income of Rs. 48,801. In other words, the entire income of the assessee-firm was included in the case of Deo Prakash Gupta, individual.
2. THE assessee filed an appeal against the order made under Section 185(1)(b) of the Act. THE AAC allowed that appeal and held that the assessee-firm was a genuine firm. Thereafter, the ITO made the assessment on the assessee-firm on 30th November, 1970. From that order the assessee filed an appeal before the AAC and it was contended that since no assessment had been made on the assessee-firm on the basis of the return filed by it within the period of four years from the end of the relevant assessment year and also as no action had been taken under Section 147 of the Act, the assessment having been made beyond the period of limitation, was not legal and valid. That contention found favour with the AAC and the assessment was cancelled.
The ITO thereafter initiated proceedings under Section 147 of the Act and issued a notice under Section 148 on January 18, 1972. In response to that notice the assessee filed a return with a forwarding letter dated February 25, 1972. It was contended by the assessee in that letter that the initiation of the proceedings was bad inasmuch as these proceedings were barred by time. The ITO did not accept that contention and completed the assessment on January 25, 1973, determining the total income at Rs. 48,861.
3. THE assessee filed an appeal. THE AAC dismissed the appeal by order dated February 16, 1974. THE reason given was that in the appeal filed by Deo Prakash Gupta, who had 10 annas share in the firm, it will be presumed that the assessee had full knowledge of the proceedings and hence the present proceedings did not suffer from any legal defect. THE assessee then took up the matter in further appeal before the Appellate Tribunal, THE Appellate Tribunal on a consideration of the provisions contained in Section 150(1) read with Expln. 3 to Sub-section (3) of Section 153 posed the question as to whether in the instant case the AAC can be said to have allowed the, assessee-firm an opportunity of hearing while disposing of the appeal filed by Deo Prakash Gupta ? THE Tribunal found that technically no notice had been given to the assessee-firm, but since "it was the case of the firm itself that it was genuine and Sri Deo Prakash Gupta was a 10 annas partner in the firm and the other partner was his son only, we are inclined to hold that the assessee-firm was virtually given an opportunity if not technically". In this view of the matter, the Tribunal held that the assessment made in pursuance of the notice under Section 148 was not barred by limitation.
4. AT the instance of the assessee, the Appellate Tribunal has referred the following questions of law for our opinion :
"1. Whether, on the facts and in the circumstances of the case, it can lawfully be said that the proceedings pursuant to the return filed on September 27, 1966 (sic), September 27, 1965, w
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