Deoria Oxygen Company vs The Commissioner of Income Tax

R.K. Agrawal, J.—In Income Tax Reference No. 46 of 1988, the Income Tax Appellate Tribunal, Allahabad (hereinafter referred to as "the Tribunal"), has referred the following four questions of law u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") for opinion to this Court:

Whether the Tribunal was legally correct in holding that the assessment made by the Income Tax Officer on an ''Association of Persons'', based on the return filed by the partnership firm styled as "Deoria Oxygen Company" was valid?

Whether the Tribunal was legally justified in not following the decision of the Hon''ble High Court in the case of Commissioner of Wealth Tax Vs. J.K. Srivastava and Sons, , as the same had been rendered under the Wealth Tax Act?

Whether the Tribunal was legally correct in holding that framing of assessment on ''Association of Persons'' on the basis of return filed by a different ''person'' was merely a clerical/technical mistake and after correction such a mistake by the first appellate authority who had the powers to do so, a valid assessment order had come into existence?

Whether on a true appreciation of the legal position, the Tribunal should not have held that the assessment order passed on ''Association of Persons'' suffered from a serious jurisdictional error which could not have been corrected or rectified by the first appellate authority?

It appears that in the application filed u/s 256(1) of the Act, the applicant had raised eight questions of law out of which only four questions were referred by the Tribunal. Thereafter, the applicant approached this Court by filing an application u/s 256(2) of the Act and this Court directed the Tribunal to refer the following question of law also:

Whether, in determining the taxable ''income'' of the assessee, the Tribunal should not have given due regard to the legitimate outgoings in the form of entire purchases of gas cylinders but for which the returned income could not have been earned?

Both the references relate to the Assessment Year 1982-83.

Briefly stated, the facts giving rise to the present references are as follow:

The assessee filed the return on 15.10.1982 showing an income of Rs. 50,571/-. It derived the income from its business in welding materials and in oxygen gas. The Income Tax Officer pointed out that the information available indicated that the applicant got printed bill pad of M/s Sardarji & Co., Moulviganj, Lucknow and M/s Asiatic Acetylene Co. Ltd. and gas cylinders obtained in black have been shown as purchases from those parties by preparing bogus purchase vouchers on the bills printed by the assessee. The Income Tax Officer made enquiries from M/s Asiatic Acetylene Co. Ltd. regarding those fake vouchers. It was replied that the Company never supplied any such bills as enquired by the Income Tax Officer and supplies were not made as per those vouchers, copy of which were given by the Income Tax Officer. The said Company, on the other hand, furnished a statement of accounts as per its records regarding the applicant. The Income Tax Officer fixed the hearing under Sections 143(3) and 142(1). The applicant took time. Later on, when the books were produced, such books and vouchers were impounded u/s 131(3). Again, the case was fixed for hearing for which the applicant sought time. The Income Tax Officer made enquiries with M/s Sardarji & Co. and found several discrepancies. The Income Tax Officer pointed out that fake purchase vouchers and printed bills were maintained. Similarly, fake vouchers were issued in the name of M/s Sardarji & Co. also which were placed before the applicant to enable it to prove that purchase vouchers were not fake. After being given some time, the applicant submitted a written contention. The Income Tax Officer pointed out that no efforts were made to establish that the vouchers were fake, but the applicant merely expressed its desire to know the source of information for such claim that the vouchers from the Companies concerned were fake. The Income Tax Officer allowed inspection of those impounded papers. The Income Tax Officer also asked the circumstances in which such cash payment over Rs. 2,500/-were made and requested the applicant to justify the claim. The Income Tax Officer informed the applicant that the above two firms have denied to have issued vouchers or make supplies to the applicant as mentioned by the Income Tax Officer. He also pointed out that no vouchers for payment of freight and cartage was produced for the alleged purchases. He also asked the applicant to explain whether there was any special circumstances, if any, for the purpose of Rule 6DD. The applicant sent reply which was considered and time was allowed to it to do the needful. He, however, noticed that the applicant did not come forward with the correct facts and has been adopting delaying practice. The Income Tax Officer noted that the payments of those fake vouchers and bills were shown either by showing cash payment of partly cash payment and partly by showing fictitious outstanding liability. Correspondingly, fictitious transport freight and cartage were also shown as narrated by him at para 9 of the assessment order. The Income Tax Officer discussed the various items in detail with facts and figures which were reproduced in the assessment order. The Income Tax Officer noted amongst other things that the applicant had also failed to furnish/produce supporting vouchers or explanation in respect of the total sum of Rs. 50,000/- credited in the accounts of M/s Asiatic Oxygen and Acetylene Co. Ltd. which was considered as income from undisclosed sources. In the case of M/s Sardarji & Co., Lucknow the Income Tax Officer brought out various facts and figures in the assessment order itself in order to show that it was beyond doubt that bogus purchase vouchers were made by the applicant which were found to be fictitious as it was in the case of the first Company. The Income Tax Officer accordingly added back Rs. 95,048/- on account of bogus purchases and rental bills Rs. 56,672/- has been added as purchase from the second party. Transport charges to the extent of Rs. 3,000/- were disallowed. In view of the above, the Income Tax Officer made the additions of Rs. 2,63,892 in various heads.

The Income Tax Officer while framing the assessment came to the conclusion that the applicant had not distributed the income earned by preparing fake purchase vouchers and rental bills and also other incorrect means in respect of which additions have been made to the income determined and, therefore, the applicant is not entitled for grant of renewal of registration and the assessment would, therefore, be completed in the status of AOP.

The applicant appealed to the Commissioner of Income Tax (Appeals) who dealt with the issue in paragraphs 2 and 2.2 of his order as below:

In the next four grounds of appeal additions aggregating to Rs. 2,63,892/-alleged to be bogus purchases held by the Income Tax Officer are disputed. Though in the grounds of appeal it had been submitted that the evidence collected by the Income Tax Officer from the two parties M/s Asiatic Oxygen Acetylene Co. Ltd. and M/s Sardarji & Co. had not been confronted nor given an opportunity to examine the two parties, these grounds were withdrawn in writing vide para 5 of the appellant''s letter dated 22.11.1985. It was submitted that the quantum appeal should be decided on merits on the basis of material already available on record and also on the basis of reasonableness of the profits disclosed by the appellant compared to earlier years. It was submitted that the totality of the circumstances must be taken into account before any addition is upheld on this account. It is submitted that the G.P. disclosed in the current year was favourably comparable to the similar G.P. disclosed in the earlier years. The G.P. disclosed in the last three years was as under:

Assessment Year Percentage of G.P. 1980-81 29.1% 1981-82 26.6% 1982-83 28.7% The G.P. disclosed for the year under consideration as such is in consonance and comparable to the G.P. disclosed in the earlier two years. At the same time it must be taken note of that against the purchases disclosed there were matching sales and sales could not have been made without purchases having been made. That in the past the book results had always been accepted. Under the circumstances, it was submitted that there was no justification for the addition.

2.2 I have carefully considered these submissions but find no merit in the same. In this case there was a complaint that the appellant had been indulging in malpractices in connivance with the appellant''s purchasers inasmuch as the original as well as half filled cylinders were being received which were being resupplied at full cost. That bogus purchases were being shown from its principals to match these sales. It was in view of these complaints that the Income Tax Officer has proceeded to make enquiries particularly in respect of purchases from M/s Asiatic Oxygen Acetylene Co. Ltd. and M/s Sardarji & Co., their principals. The Income Tax Officer sent copies of the entire purchase bills produced by the appellant in respect of these parties to the principals for verification and also sought copies of account as appeared in their books of account. The alleged purchases to the extent of Rs. 1,52,020/- in one set and Rs. 1,11,872/- in the other set were not confirmed by the two parties. They authoritatively stated that neither the bills in question had been issued by them nor had they made any sales to the appellant in respect of those bills. Coupled with these facts the appellant had failed to produce any evidence to show that any goods had actually moved by way of purchases from any other party. In fact there was no evidence of any movements of goods in respect of these bogus purchases. It was in the course of the hearing that the appellant was asked to give his opinion if he was really interested to cross-examine the two parties or was just trying to buy times to ward off the evil day, it was after realising that no useful information could be obtained from the two parties in view of their categorical assertions that the appellant withdrew his ground regarding the right to cross examine the two parties. The fact that the G.P. disclosed by the appellant was favourably comparable to the earlier years is of no consequence and the question of matching sales is of no relevance in view of the allegations which were found to be correct. Since the Income Tax Officer has conclusively proved that the appellant did not make purchases to the extent he has shown and the appellant having led no evidence to contradict this finding, I hold that the additions made by the Income Tax Officer were based on positive evidence that the bills produced in support of the same were bogus, the principals having categorically denied having issued the bills and for that matter having made any sales to the appellant. The purchases in this case have conclusively been proved to be bogus and consequently the additions made are found justified and, therefore, confirmed.

Before the Commissioner of Income Tax (Appeals) the applicant had challenged the assessment framed in the status of AOP and it was liable to be annulled in view of the decision of this Court in the case of Commissioner of Wealth Tax Vs. J.K. Srivastava and Sons, The Commissioner of Income Tax (Appeals) repelled the submission on the finding that the Income Tax Officer had only committed an error in allocating the status of AOP while completing the assessment. His intention was to treat the firm as URF which is amply clear from the facts on record and he always intended to refuse registration and to treat the firm as URF. After referring to various paragraphs of the assessment order, the Commissioner of Income Tax (Appeals) had come to the conclusion that neither the show cause notice nor anywhere in the assessment order the Income Tax Officer had discussed and given any reasons for holding the applicant to be an AOP and in the notice issued to the applicant as to why grant of renewal of registration be not denied, the action of the Income Tax Officer point towards renewal of registration and treating the firm as URF. The mistake as such was only technical which would not make the assessment invalid in view of the specific provision of Section 292B of the Act. He accordingly held that the assessment had been made on an unregistered firm.

The applicant appealed before the Tribunal. The Tribunal after taking into account the rival submissions confirmed the additions in question by observing as follows:

We have heard both the sides on this point also, at length and we have perused the orders of the authorities below alongwith other papers placed before us in the paper book. As noted by the Commissioner of Income Tax (Appeals) the grounds of appeal before him regarding opportunity of cross-examining the parties concerned have been withdrawn and only the merit part of the appeal was pressed before the Commissioner of Income Tax (Appeals) as mentioned earlier. In comparison the trading result and the gross profit rate, it is seen that there was not much difference of the gross profit disclosed by the assessee for this year. But the point did not rest here. The case of the Revenue is that the assessee showed purchases which were found to be bogus. This specific finding of the Income Tax Officer was not contradicted before the Commissioner of Income Tax (Appeals). Before us also, we find no material or fresh fact to dislodge that finding. In our opinion, in a situation like this, the gross profit rate disclosed during the earlier years, would not provide a safe guide for coming to a conclusion whether addition was or was not called for during the year under consideration, in the circumstances. The case of the Revenue is that expenditure in the form of purchases were found to be fake and the parties from whom the purchases were claimed to have been made have denied such transactions. The Income Tax Officer had also indicated in the assessment order that he asked the assessee for the reasons why payments were made in cash in respect of different items of the expenses. He pointed out that the assessee failed to state the special circumstances under which even such payment were exempted under Rule 6DD. This finding again has not been dislodged so far.

Having regard to the entirety of the facts and circumstances of the case and after considering the contentions of both the sides, we find nothing wrong in the order of the Commissioner of Income Tax (Appeals) in upholding the additions made on the above account. This part of the order of the Commissioner of Income Tax (Appeals) is sustained.

The Tribunal had agreed with the conclusion of the Commissioner of Income Tax (Appeals) that the status shown in the, assessment order as an AOP was of a technical nature having no remotest link with the facts of the case and on this aspect of the matter, the order of the Commissioner of Income Tax (''Appeals'') was also sustained.

We have heard Sri S.K. Garg, learned Counsel for the applicant, and Sri A.N.Mahajan, learned Standing Counsel appearing for the Revenue.

Sri S.K. Garg, learned Counsel, submitted that the Assessing Authority had not disbelieved the purchases of gas cylinders by the applicant including the transport charges. He has only disallowed/disbelieved the purchase vouchers. The trading account as such had not been disturbed and, therefore, there was no justification for making the additions. The Income Tax Officer had only doubted the sellers. The applicant was entitled for the set off of the purchase price of the gas cylinders while computing the income. According to him, the gross profit disclosed by the applicant was quite reasonable and the addition made was not justified. He further submitted that the applicant had filed its return of income in the status of a registered firm and neither any show cause notice nor any opportunity was given by the Income Tax Officer to show cause as to why the assessment be not made in the status of an AOP. In this view of the matter, the assessment framed on an entirely different status is liable to be annulled. According to him, it is not a case of a technical defect but it goes to the very root of the matter and jurisdiction and, therefore, the Tribunal was not justified in upholding the order of the Commissioner of Income Tax (Appeals) treating the assessment as one having been made in the status of URF instead of AOP. In support of his aforesaid pleas, he has relied upon the following decisions:

(i) Dhakeswari Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal (1954) 26 ITR 775;

(ii) Commissioner of Wealth Tax Vs. J.K. Srivastava and Sons,

(iii) Commissioner of Income Tax Vs. Smt. Phoolmati Devi, ; and

(iv) Commissioner of Income Tax, Vidarbha and Marathwada Vs. Associated Cement and Steel Agencies,

Sri A.N. Mahajan, learned Standing Counsel, on the other hand, submitted that as the renewal of the registration of the applicant firm had been denied by the Income Tax Officer on the ground of not distributing the profits earned by preparing fake vouchers etc., the Income Tax Officer had actually assessed the applicant as URF, i.e., unregistered firm, and it was only an error when he had mentioned the status of an AOP in the assessment order, which mistake has been rectified by the Commissioner of Income Tax (Appeals) who has rightly held that the assessment has, in fact, been made in the status of an unregistered firm and not as an AOP. He further submitted that purchase vouchers had rightly been disbelieved by the authorities and, in fact, for the reasons best known to the applicant, the request for cross-examination of the partners/owners of M/s Sardarji & Sons and M/s Asiatic Oxygen Acetylene Co. Ltd. who have denied to have made any sales of gas cylinders to the applicant, was withdrawn, which goes to show that the purchases of gas cylinders introduced in the books of account was bogus and was a ploy to introduce unaccounted money in the books. According to him, the Income Tax Officer was perfectly justified in making the additions covering the alleged purchases of gas cylinders. Taking recourse to Section 292B of the Act, he submitted that even if there was any defect in the assessment order, it would not be invalid as, in substance and effect, it conforms with the intent and purpose of the Act. He further submitted that the powers of the Commissioner of Income Tax (Appeals) is co-extensive with that of the Assessing Authority and even those matters which have not been raised, can be decided by the appellate authority in view of the provisions of Section 251 of the Act. According to him, the Commissioner of Income Tax (Appeals) was perfectly justified in holding that the assessment has been framed in the status of unregistered firm and not that of an AOP. In support of his aforesaid pleas, he has relied upon the following decisions:

(i) Commissioner of Income Tax, Bombay Vs. Amritlal Bhogilal and Co., and

(ii) Badri Narain Kashi Prasad Vs. Addl. Commissioner of Income Tax,

We have given our anxious consideration to the various pleas raised by the learned Counsel for the parties.

Before adverting to the various submissions made by the learned Counsel for the parties, it would be appropriate to reproduce the various provisions of the Act, as it stood during the relevant period, which have material bearing in the proper adjudication of the issues raised herein:

Definitions. In this Act, unless the context otherwise requires, -

...

(7) "assessee" means a person by whom any tax or any other sum of money is payable under this Act, and includes-

(a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;

(b) every person who is deemed to be an assessee under any provision of this Act;

(c) every person who is deemed to be an assessee in default under any provision of this Act;

(23) "firm", "partner" and "partnership" have the meanings respectively assigned to them in the Indian Partnership Act, 1932 (9 of 1932); but the expression "partner" shall also include any person who, being a minor, has been admitted to the benefits of partnership;

(31) "person" includes-

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.

Charge of Income Tax.

(1) Where any Central Act enacts that Income Tax shall be charged for any assessment year at any rate or rates, Income Tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of this Act, in respect of the total income of the previous year or previous years, as the case may be, of every person:

Provided that where by virtue of any provision of this Act Income Tax is to be charged in respect of the income of a period other than the previous year, Income Tax shall be charged accordingly.

(2) In respect of income chargeable under Sub-section (1), Income Tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.

167A. Charge of tax where shares of members unknown.

(1) Where the individual shares of the members of an association of persons (other than a company or a cooperative society) in the income of such association are indeterminate or unknown, tax shall be charged on the total income of the association at the maximum marginal rate.

Provided that, where the total income of any member of such association or body is chargeable to tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such higher rate.

(2) Where the individual shares of the members of an association of person (other than a company or cooperative society) in any part of the income of such association are indeterminate or unknown, the Income Tax payable by the association shall be the aggregate of-

(i) the amount of Income Tax calculated on the aforesaid part of the total income, at the maximum marginal rate;

(ii) the amount of Income Tax with which it would have been chargeable had the remaining part of the total income been its total income.

Explanation.-For the purposes of this section,

(a) "maximum marginal rate" shall have the meaning assigned to it in Explanation 2 below Sub-section (3) of Section 164;

(b) the individual shares of the members of an association of persons in the income of such association shall be deemed to be indeterminate or unknown if such shares are indeterminate or unknown on the date of formation of such association or body or at any time thereafter.

Assessment of registered firms.

(1) Notwithstanding anything contained in Sections 143 and 144 and subject to the provisions of Sub-section (3), in the case of a registered firm, after assessing the total income of the firm,-

(i) the Income Tax payable by the firm itself shall be determined; and

(ii) the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly.

(2) If such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of Sections 70 to 75.

(3) When any of the partners of a registered firm is a nonresident, the tax on his share in the income of the firm shall be assessed on the firm at the rate or rates which would be applicable if it were assessed on him personally, and the tax so assessed shall be paid by the firm.

(4) A registered firm may retain out of the share of each partner in the income of the firm a sum not exceeding thirty per cent thereof until such time as the tax which may be levied on the partner in respect of that share is paid by him; and where the tax so levied cannot be recovered from the partner, whether wholly or in part, the firm shall be liable to pay the tax, to the extent of the amount retained or could have been so retained.

Assessment of unregistered firms.

In the case of an unregistered firm, the Income Tax Officer-

(a) may determine the tax payable by the firm itself on the basis of the total income of the firm; or

(b) If, in his opinion, the aggregate amount of the tax payable by the firm if it were assessed as a registered firm and the tax payable by the partners individually if the firm were so assessed would be greater than the aggregate amount of the tax payable by the firm under Clause (a) and the tax which would be payable by the partners individually, may proceed to make the assessment under 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 relation to a registered firm.

Powers of the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals).

(1) In disposing of an appeal, the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) shall have the following powers-

(a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment; or he may set aside the assessment and refer the case back to the Income Tax Officer for making a fresh assessment in accordance with the directions given by the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) and after making such further inquiry as may be necessary, and the Income Tax Officer shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax payable on the basis of such fresh assessment;

(b) in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty;

(c) in any other case, he may pass such orders in the appeal as he thinks fit.

(2) The Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction.

Explanation.-In disposing of an appeal, the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) by the appellant.

292B. Return of income, etc., not to be invalid on certain grounds.

No return of income, assessment, notice, summons or other proceeding furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such return of income, assessment, notice, summons or other proceeding if such return of income, assessment, notice, summons or other proceeding is in substance and effect in conformity with or according to the intent and purpose of this Act.

From a conjoint reading of the aforesaid provisions, it is seen that the word "assessee'' has been given an inclusive definition and, inter alia, mean a person by whom any tax or any other sum of money is payable under this Act. For the purposes of the Act the same meaning has been assigned to the words "firm", "partner" and "partnership", which have been assigned to them under the Indian Partnership Act, 1932 with the modification that any minor who has been admitted to the benefit of the partnership, shall also be included in the expression "partner". The word "person" has been given an inclusive definition, It, inter alia, includes a firm, AOP or a body of individual, whether incorporated or not. Therefore, all those who fall within the meaning of the word "person" as defined in Sub-section (31) of Section 2 of the Act would be treated as an assessee provided they are liable to pay any tax or any other money under the Act. Section 4 is the charging section. u/s 167A of the Act, the maximum marginal rate of tax is to be charged on the total income of the AOP where the individual shares of the members are indeterminate or unknown. Section 182 of the Act as it stood during the relevant assessment year provided for the procedure regarding assessment of registered firm whereas Section 183 of the Act provided for the procedure regarding assessment of an unregistered firm. u/s 251 of the Act the appellate authority has been given a very wide power while deciding the appeal. He can confirm, reduce, enhance or annul the assessment proceeding, set aside the assessment and refer the case back to the Assessing Authority for making a fresh assessment. He is also empowered to pass such order in the appeal as he thinks fit. Section 292B provides that no return of income, assessment, notice, summons or other proceeding shall be invalid merely by reason of any mistake, defect or omission if in substance and effect it is in conformity with or according to the intent and purpose of the Act.

What constitutes a partnership firm or an AOP have been the subject matter of discussion by the various Courts.

In the case of Commissioner of Income Tax, West Bengal Vs. A.W. Figgies and Co. and Others, the Apex Court has held as follows:

It is true that under the law of partnership a firm has no legal existence apart from its partners and it is merely a compendious name to describe its partners but it is also equally true that under that law there is no dissolution of the firm by the mere incoming or outgoing of partners. A partner can retire with the consent of the other partners and a person can be introduced in the partnership by the consent of the other partners. The reconstituted firm can carry on its business in the same firm''s name till dissolution. The law with respect to retiring partners as enacted in the Partnership Act is to a certain extent a compromise between the strict doctrine of English Common Law which refuses to see anything in the firm but a collective name for individuals carrying on business in partnership and the mercantile usage which recognizes the firm as a distinct person or quasi corporation. But under the Income Tax Act the position is somewhat different. A firm can be charged as a distinct assessable entity as distinct from its partners who can also be assessed individually.

In the case of SAHU RAJESHWAR NATH Vs. Income Tax OFFICER C-WARD, MEERUT, AND ANOTHER., this Court has held that it is true that under the income tax law a firm is treated as an entity distinct from its partners, but that is so only for the purposes of assessment. The aforesaid view has been approved by the Apex Court in the case of Third Third Income Tax Officer, Circle-I, Salem and Another Vs. Arunagiri Chettiar,

In the case of Commissioner of Income Tax/Excess Profits Tax Vs. Official Liquidator, the Bombay High Court has held that when a partnership comes into existence is provided in Section 4 of the Partnership Act, 1932. A partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Before a partnership is constituted under law, three requirements must be fulfilled, viz., (1) there must be an agreement entered into by all the persons concerned, (2) the agreement must be to share the profits of a business and (3) the business must be carried on by all or any one of the persons concerned acting for all. In view of these ingredients, an agreement inter se between the partners is sine qua non for the constitution of a partnership. It is not necessary that such agreement must be in writing. It can be even implied either from conduct or otherwise.

In the case of D.S. Bist and Sons, Nainital Vs. Commissioner of Income Tax, Delhi Central, New Delhi, the Apex Court has held that under the Indian Income Tax Act, 1922, a firm is a distinct assessable entity. It has held as follows:

But under the I.T. Act, a firm is a distinct assessable entity, Section 3 of the Indian I.T. Act, 1922, treats, it an such, and the entire process of computation, of the income of a firm proceeds on the basis that it is a distinct assessable entity. In that respect it is distinct even from its partners : Commissioner of Income Tax, West Bengal Vs. A.W. Figgies and Co. and Others, . As an assessable entity it is also distinct from a HUF, which in itself is regarded as a separate unit of assessment u/s 3 Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135

In the case of N. Khadervali Saheb and Anr Vs. N. Gudu Sahib (Decd.) and Others, , the Apex Court has held that a partnership firm is not an independent legal entity, the partners are the real owners of the assets of the partnership firm. Actually the firm name is only a compendious name given to the partnership for the sake of convenience. The assets of the partnership belong to and are owned by the partners of the firm. So long as the partnership continues, each partner is interested in all the assets of the partnership firm as each partner is the owner of the assests to the extent of his share in the partnership. On dissolution of the partnership firm, accounts are settled amongst the partners and the assets of the partnership are distributed amongst the partners as per their respective shares in the partnership firm.

In the case of Commissioner of Income Tax, Bombay Vs. Smt. Indira Balkrishna, , the Apex Court after referring to the various decisions, has held that an AOP as used in Section 3 of the Indian Income Tax Act, 1922, means an association in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. The Apex Court has held as follows:

In In re B.N. Elias Derbyshire, C.J., rightly pointed out that the word "associate" means, according to the Oxford Dictionary, "to join in common purpose, or to join in an action." Therefore, an association of persons must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. This was the view expressed by Beaumont, C.J., in Commissioner of Income Tax v. Lakshmidas Devidas at page 589 and also in In re Dwarakanath Harischandra Pitale. In In re B.N. Elias, Costello, J., put the test in more forceful language. He said : "It may well be that the intention of the Legislature was to hit combinations of individuals who were engaged together in some joint enterprise but did not in law constitute partnerships... When we find,...that there is a combination of persons formed for the promotion of a joint enterprise...then I think no difficulty arises whatever in the way of saying that these persons did constitute an association....

We think that the aforesaid decisions correctly lay down the crucial test for determining what is an association of persons within the meaning of Section 3 of the Income Tax Act, and they have been accepted and followed in a number of later decisions of different High Courts to all of which it is unnecessary to call attention. It is, however, necessary to add some words of caution here. There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an association of persons within the meaning of Section 3; it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not.

The aforesaid decision was subsequently followed by the Apex Court in the case of Mohamed Noorullah, Representing The Estate of Late Khan Sahib Mohd. Oomer Sahib Vs. The Commissioner of Income Tax, Madras, Commissioner of Agricultural Income Tax, Hyderabad Vs. Raja Ratan Gopal, and G. Murugesan and Brothers Vs. Commissioner of Income Tax , Madras,

In the case of Deccan Wine and General Stores Vs. Commissioner of Income Tax, , the Andhra Pradesh High Court while considering the expression AOP, after referring to the decision of the Apex Court in the case of Indira Balkrishna (supra), has held as follows:

It is, therefore, clear that an association of persons does not mean any and every combination of persons. It is only when they associate themselves in an income-producing activity that they become an association of persons. They must combine to engage in such an activity; the engagement must be pursuant to the combined will of the persons constituting the association; there must be a meeting of the minds, so to speak. In a nutshell, there must be a common design to produce income. If there is no common design, there is no association. Common interest is not enough. Production of income is not enough. This interpretation of the expression "association of persons" flows from the meaning of the word ''association''.

In the case of Commissioner of Income Tax Vs. Smt. Vimla Lal, this Court after examining the provisions of Sub-section (31) of Section 2 of the Act, has held as follows:

Thus there are seven units of assessment under this Act. It would be seen that the words " body of individuals " are placed in the same sub-clause in juxtaposition with " association of persons ". Such was not the position in the 1922 Act. Evidently the words " body of individuals " would take their colour from the words which precede them. The essence of the concept of an association of persons is, persons joining in common action with the object of producing income. The phrase is of a comprehensive import. u/s 3(42) of, the General Clauses Act "person" includes any company or association or body of individuals, whether incorporated or not. Hence, an association of persons may have as its members, companies, firms, joint families and associations. This phrase is not used in any technical sense and has to be construed in its plain ordinary meaning. Where there is a combination of persons formed for the promotion of a joint enterprise, in other words, when co-adventurers are banded together in common action, they are assessable as an "association of persons" when they do not in law constitute a partnership joining together of the members of the group, out of their volition or free will, for carrying on the business is the sine qua non for the existence of an association of persons. The fact that an association emerges as a result of an order of the court appointing a receiver, or does a business under a scheme evolved and controlled by a Government authority, or is necessitated by quota regulations, is immaterial. The Supreme Court had an occasion to consider the meaning of this expression in the case of Commissioner of Income Tax, Bombay Vs. Smt. Indira Balkrishna, . After reviewing the case-law on the point it was held that in order to constitute an association, persons must join in common purpose or common action and the object of the association must be to produce income. It is not enough that the persons receive the income jointly. It was also observed that there is no formula of universal application as to what facts, how many of them and of what nature are necessary to come to a conclusion that there is an association of persons. It must depend on the particular facts and circumstances of each case as to whether that conclusion can be drawn or not. This case was followed in Mohamed Noorullah, Representing The Estate of Late Khan Sahib Mohd. Oomer Sahib Vs. The Commissioner of Income Tax, Madras, . Also see Commissioner of Income Tax, Poona Vs. Buldana District Main Cloth Importers Group, and G. Murugesan and Brothers Vs. Commissioner of Income Tax , Madras,

It would thus be seen that in order to constitute an association, persons must join in a common purpose or common action with an object to produce income. Such combination should be voluntary and even minors can become members of an association through their guardian if the guardian gives his consent for the said purpose. In the case of co-owners of property if their shares are not definite or ascertainable they may be assessable as an association of persons, but if the shares are definite and ascertainable, mere co-ownership is not sufficient to constitute an association of persons.

From the aforesaid decisions, it is to be seen that a partnership is a relation between the persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Before a partnership is constituted under law, there must be an agreement entered into by all the persons concerned, whether it is oral or in writing. The agreement must be to share the profits of the business and the business must be carried on by all or any of the persons concerned acting for all. Under law, a partnership firm has no legal existence apart from its partners and it is merely a compendious name to describe its partners. However, under the Act, the position is some what different. A firm is treated as a distinct assessable entity as distinct from its partners who can also be assessed individually. An AOP, on the other hand, comes into existence when two or more persons join in a common purpose or in a common action to produce income, not amounting to constituting a partnership.

Under the Act, a firm is an assessable unit. It is immaterial as to whether it has been granted registration or not. If the firm has been granted registration, the computation of tax and liability would be different. The Act has taken care of assessment of registered firms and unregistered firms under Sections 182 and 183 of the Act.

In the case of Seth Badridas Daga and Anr. v. Commissioner of Income Tax, Central and United Provinces (1949) 17 ITR 209, the Privy Council while considering the provision of the Indian Income Tax Act, 1922, has held that after the income of the person is computed, the second step is for determining the sum payable as tax and there the question of liability of the firm arises. It has held as follows:

It will be convenient to begin with Section 23 which deals with assessment. Some confusion arises from the fact that in the Act the words "assessment" and "assessee" are used in different places with different meanings. Section 2(2) defines "assessee" as "a person by whom Income Tax is payable", but the context in Section 23 makes it clear that down at least to the middle of Sub-section (5)(a) "assess" and "assessment" refer primarily to the computation of the amount of income and "assessee" means primarily a person the amount of whose income is being computed. The section requires the Income Tax officer to do two things : first to compute or "assess" a person''s total income, and then to determine the sum payable as tax. Sub-sections (1) to (4) set out alternative methods of computation or "assessment". In the normal case the person whose income is being computed is the person who pays the tax and for that case these Sub-sections also provide for the Income Tax Officer taking the second step and determining the sum payable as tax. But the case of a firm is specially dealt with by Sub-section (5). This sub-section only comes into operation after the total income of the firm has been computed or "assessed" under one of the earlier sub-sections. It draws a distinction between registered and unregistered firms. In the case of a registered firm the firm does not itself pay Income Tax and therefore the sub-section directs that the sum payable by the firm shall not be determined but that each partner''s share of the firm''s income shall be included in the assessment or computation of the total income of that partner. Thereupon the sum payable by that partner as tax is to be determined on the basis of that assessment which includes his share of the firm''s income.

In the case of Commissioner of Income Tax, Bombay Vs. Amritlal Bhogilal and Co., , the Apex Court has held as follows:

Section 26A of the Act lays down the procedure for the registration of firms. An application has to be made by the firm in that behalf specifying the particulars prescribed by the said section and by the material rules framed under the Act. If registration is granted by the Income Tax Officer it enables the Income Tax Officer to adopt the procedure prescribed by Section 23(5)(a) for making assessment orders in respect of the registered firm. If a firm is not registered the Income Tax Officer is required to follow the procedure prescribed by Section 23(5)(b) in making assessment orders in respect of unregistered firms. A firm is an assessee u/s 2(2) whether it is registered u/s 26A or not. The Act does not impose an obligation on firms to apply for and obtain registration. The Act in terms does not purport to define the effect of registration nor does it enumerate the rights of parties on registration of firms. Section 23(5)(a) and (b) provide for the machinery for collecting or recovering the tax and in no sense can they be treated as charging sections. Broadly stated, even if a firm is registered in pursuance of an application made u/s 26A, no difference arises in the liability of the firm or its individual partners to be taxed for the total income as may be determined by the Income Tax Officer under Sections 3 and 4 of the Act. The computation of taxable income is not at all affected by the machinery provided by Section 23(5).

In the case of S. Sankappa and Others Vs. The Income Tax Officer, Central Circle II, Bangalore, the Apex Court, while considering the provision of the Indian Income Tax Act, 1922, has held as follows:

All these provisions clearly show that proceedings for assessment of a firm consist of computation of the income of the firm, determination of tax payable by the firm, apportionment of the income of the firm between its partners in the case of a registered firm and, in appropriate cases, imposition of tax on the firm after including the share of the income of certain partners in the income of the firm, even though the firm is registered.

This Court in the case of Badri Narain Kashi Prasad Vs. Addl. Commissioner of Income Tax, , has held that under the Act a firm is an assessee u/s 2(31), whether it is registered or not. It has held as follows:

Under the I.T. Act, a firm is an assessee, u/s 2(31), whether it is registered or not. The I.T. Act does not impose an obligation on firms to apply for and obtain registration. Even if a firm is registered in pursuance of an application made by it, no difference arises in the liability of the firm or its individual partners to be taxed for the total income as may be determined by the ITO. The computation of taxable income is not at all affected by the registration or otherwise of the firm. The only effect of registration is that the determination of the tax payable and making the demand for the tax so found due, changes according as the firm is registered or unregistered-vide Sections 152 and 153 of the Act.

The Karnataka High Court in the case of Commissioner of Income Tax Vs. Angadi Bros., has held that there is an essential difference between a registered firm and an unregistered firm for the purpose of taxation under the Act. An unregistered firm is a distinct assessable entity quite different from a registered firm for the purposes of the Act. The registration of a firm affects the assessment procedure. It makes a difference for the purpose of determination of the tax payable and the demand for the tax so found due.

From the aforesaid decisions, it is absolutely clear that the Act draws a distinction between a registered and unregistered firm after the total income of the firm has been computed or assessed. The registration of the firm only affects the assessment procedure and it makes a difference for the purpose of determination of the tax payable and the demand of the tax so found due.

Applying the principles laid down in the aforesaid cases to the facts of the present case, we find that the applicant is a partnership firm duly constituted under the provisions of the Indian Partnership Act, 1932. The registration, under the Act, has been refused by the Assessing Authority on the ground that the income which has been earned by preparing fake purchase vouchers and rental bills and also other incorrect means, have not been distributed by the applicant. The existence of the firm has neither been doubted nor disputed by the authorities. Only the registration has been refused. Thus, for the purposes of assessment the provisions of Section 183 of the Act would be applicable. Even in the assessment order we find that the Assessing Authority had loosely described the applicant to be an AOP only on the ground that the registration has been refused.

Coming to the question regarding notice to the AOP, the law in this regard has been well settled.

In the case of Commissioner of Wealth Tax Vs. J.K. Srivastava and Sons, this Court has held as follows:

Hence, when a voluntary return was filed in the status of an association of persons, it could not be treated as if a voluntary return had been filed in the status of an individual. If the WTO thought that the correct status in which the assessee could be charged with wealth-tax was that of an individual, he should have issued a notice u/s 14(2) of the W.T. Act, to the assessee, and should have required it to file a return. Admittedly, this was not done. The limitation for issuing such a notice is prescribed in Section 17 of that Act. It is four years in certain circumstances and eight years in other cases. Admittedly, the period of limitation by now has expired. It is, therefore, unnecessary to send the case back, as submitted by the learned Counsel for the Revenue, for the issuance of a requisite notice.

In the case of Commissioner of Income Tax, Vidarbha and Marathwada Vs. Associated Cement and Steel Agencies, , the Bombay High Court has held as follows:

That a " firm " and an " association of persons " are two different "persons ", and, indeed, independent units of assessment, cannot be disputed, considering the whole scheme of the I.T. Act, 1961. The mode of their taxing and process (sic) of liability are also different. Thus, even if the identity of the members of the alleged firm and the association of persons is established, there cannot be a valid assessment altering the status declared in the return. Mandatory requirement of issuing of a notice u/s 143(2) before making assessment u/s 143(3) cannot be lost sight of. In this case, notice was given to the firm in relation to the return filed as firm, and no notice to the association of persons was issued. Therefore, even if it is correct to make assessment in certain status, such assessment cannot be made in relation to proceedings in an incorrect status. This, in our view, is the root of the controversy. Our opinion, therefore, is that the Tribunal was correct in quashing the assessment made by the ITO in the status of an association of persons under the circumstances.

In the case of Commissioner of Income Tax Vs. Smt. Phoolmati Devi, this Court has held as follows:

Relying upon Section 292B of the I.T. Act inserted by the Taxation Laws (Amendment) Act of 1975 learned Counsel submitted that the defect of non-service of notice was fairly a technical objection and as such the same should not come in the way of the validity of the acquisition. We are unable to agree. Section 292B may apply to a case where service has already been effected, but there is a technical mistake in the notice. But where, as here, no notice has been served, this section will not come to the rescue of the Department. Moreover, this section came into force with effect from 1st October, 1975, whereas the proceedings in the instant case has been initiated earlier. For this reason also this section will not apply.

The principles laid down in the aforesaid cases would not be applicable to the facts of in the present case. The Income Tax Officer while making the assessment had proceeded to compute the income of the applicant treating it to be a firm. However, the status of AOP has been mentioned only because the registration of the firm has been refused. In fact, the assessment has been made in accordance with Section 183 of the Act. The Commissioner of Income Tax (Appeals) has rightly corrected the status from that of AOP to URF as it was only an error. It is to be remembered that u/s 251 of the Act the appellate authority has been conferred a very wide power while deciding the appeal. It includes power to correct all the errors which may have crept in the order under appeal. The Apex Court while dealing with the scope and powers of the Appellate Authority in the case of Kapurchand Shrimal Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, has held as follows:

It is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh unless forbidden from doing so by the statute.

Following the aforesaid decision, the Calcutta High Court, in the case of Sewdutroy Rambullav and Sons v. Commissioner of Income Tax (1992) 204 ITR 580, has held as follows:

We also refer in this connection to the decision of the Supreme Court in Kapurchand Shrimal Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, In this case, the Supreme Court held that, where the Income Tax Officer commits an error in the course of completing the assessment proceeding after having duly assumed jurisdiction, it is the duty of the appellate authority to remove the particular defect or irregularity occurring in the course of the proceeding.

In the present case we are of the considered opinion that the Income Tax Officer had only committed an error in mentioning the wrong status of AOP instead of URF in the assessment order which error has rightly been corrected by the Commissioner of Income Tax (Appeals).

This leaves us to the question as to whether the Tribunal should have given due regard to the legitimate outgoings in the form of the entire purchases of gas cylinders or not. The principle regarding making of a best judgment assessment has been well settled by the Apex Court in the case of Dhakeswari Cotton Mills Ltd. v. Commissioner of Income Tax, west Bengal (1954) 26 ITR 775 wherein the Apex Court has held as follows:

As regards the second contention, we are in entire agreement with the learned Solicitor-General when he says that the Income Tax Officer is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a court of law, but there the agreement ends; because it is equally clear that in making the assessment under Sub-section (3) of Section 23 of the Act, the Income Tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment u/s 23(3). The rule of law on this subject has, in our opinion, been fairly and rightly stated by the Lahore High Court in the case of (1944) 12 ITR 393

In the present case we find that the Commissioner of Income Tax (Appeals) as also the Tribunal has recorded a categorical,finding of fact that the applicant did not make purchases to the extent he has shown. The purchases in question have conclusively been provided to be bogus. If the purchases of the gas cylinders have not been made and on the other hand have been found to be bogus by all the authorities including the Tribunal, the question of legitimate outgoings in the form of purchases of the gas cylinders would not arise. Therefore, the Tribunal was justified in not giving benefit of the alleged amount spent towards the purchases of gas cylinders.

In view of the foregoing discussions, we answer all the questions except the first two questions referred to us in Income Tax Reference No. 46 of 1988, referred to us, in both the Income Tax References, in favour of the Revenue and against the assessee. In view of our aforesaid opinion, the remaining questions have become academic and are returned unanswered. However, on the facts and in the circumstances of the case, the parties are left to bear their own costs.