Kishan Gopal Prabhu Dayal vs Additional Commissioner of Income Tax

The following question of law has been referred for the opinion of this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that once an assessee is assessed as an unregistered firm u/s 144 of the income tax Act, 1961, and that order has become final, it is not open to the income tax Officer to consider and decide the question of continuation of registration of the firm during reassessment proceedings initiated u/s 147(a) of the income tax Act, 1961?"

Necessary facts of the case are that Kishan Gopal Prabhu Dayal (''the assessee) filed a return in the status of registered firm. The ITO completed the assessment u/s 144 of the income tax Act, 1961 (''the Act''), on 21-1-1971 on a total income of Rs. 10,000 in the status of an unregistered firm. The assessee filed an application u/s 146 of the -Act. After hearing the assessee, the application was rejected. Thereafter the ITO took recourse to the provisions of section 147 of the Act and issued a notice to the assessee u/s 148 of the Act. Before such notice was issued by the ITO, the assessee filed a revised return declaring his income of Rs. 19,801. The assessee''s counsel also stated in writing by his letter dated 30-11-1971 that the return already filed on 26-3-1971 may be treated as return, submitted in compliance with the notice issued u/s 148. The ITO accepted the request of the assessee. The assessee also filed a declaration u/s 184(7) of the Act in Form No. 12. The ITO took the view that originally the status of the assessee was taken that of an unregistered firm and since that issue was not reopened u/s 148, the question of grant of benefit of registration to the assessee did not arise. The ITO as such held that the assessee was not entitled to the benefits of continuation of the registration and also held that the correct status of the assessee would be as that of unregistered firm.

The assesses filed an appeal before the AAC. The AAC allowed the appeal and held that while dealing with assessment in pursuance of service of notice u/s 148, the old assessment stood cancelled as a whole. The Assistant Commissioner also held that the question of satisfying the requirements for granting benefits of continuation of registration not having been gone into by the ITO, the order u/s 185 of the Act was cancelled and the ITO was directed to pass fresh order u/s 185 by taking into account the facts and the circumstances of the case.

The department then went in appeal before the Tribunal. The Tribunal allowed the appeal by order dated 12-3-1974. The Tribunal held that section 147(a) had a very limited scope as far as assumption of jurisdiction by the ITO is concerned. It was further held that if there is escapement of incomes-tax, for which the ITO has reasons to believe, he has the right to assume jurisdiction. But his reasons to believe have to be for escapement of income only. Once the assumption of jurisdiction is proper within section 147, the whole assessment is open and the ITO can go beyond the reasons to believe to rope in more income. But if he is satisfied that the income to be reassessed is lesser than recorded in the reasons to believe he can assess the lesser amount in reassessment proceedings. All these situations are only in regard to the escapement of income. The Tribunal observed that the question in the instant case where the assessee accepted the status of an unregistered firm in the original assessment can it claim that it should be granted registration in the reassessment proceedings?

The answer of the Tribunal to the above question was in the negative.

In view of the above circumstances, the above question of law has been referred by the Tribunal under sub-section (1) of section 256 of the Act. We have heard Mr. Jain, the learned counsel for the assessee, and Mr. Surolia on behalf of the department. In V. Jaganmohan Rao and Others Vs. Commissioner of Income Tax and Excess Profits Tax, Andhra Pradesh, their Lordships of the Supreme Court have observed as under:

"...It is, therefore, manifest that once assessment is reopened by issuing a notice under sub-section (2) of section 22 the previous underassessment is set aside and the whole assessment proceedings start a fresh...." (p. 380)

In M.K. Dar Vs. Commissioner of Income Tax, facts were that one Mr. M.K. Dar was assessed to income tax in the status of individual in respect of a half share of the income from Jeewan Cinema. Similarly, Mr. D.K. Dar and Mr. R.K. Dar were assessed to income tax as individuals for the aforesaid years in respect of their one-fourth share each of that income. Subsequently, on 5-3-1966, the ITO, Special Survey Circle, Agra issued notices u/s 148 in respect of these years seeking to assess them in the status of an ''association of persons'' in respect of the income from Jeewan Cinema. The assessee contested the matter. The ITO, however, repelled their objections and assessed them in the status of an ''association of persons''. The assessee went up in appeal. The AAC by an order of 30-4-1969 annulled the assessments on the ground that when individual members had already been assessed on their individual shares, the same income could not be assessed as an ''association of persons''. It is not necessary to give other facts of the case. One of the questions which was referred to the High Court was in the following manner;

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessments of the assessee in the status of an ''association of persons'' could be effected for the present year?"

The High Court held as under:

"We have hence no hesitation in holding that the finding of the authorities below that the members of this group could be taxed in the status of an ''association of persons'' is correct." (p. 805)

Mr. Surolia, the learned counsel for the revenue placed reliance on Commissioner of Income Tax, Assam, Tripura, Manipur and Nagaland Vs. Rameshwarlal Sanwarmal, In this case for the assessment year 1955-56 a notice u/s 22(2) of the Indian income tax Act, 1922 (''the 1922 Act''), was issued to S in his individual status. He submitted a return of his HUF on 29-2-1960. The ITO passed an ex parte assessment on S as an individual. S thereupon filed an application u/s 27 of the 1922 Act to cancel the ex parte assessment. In December 1960 the ITO set aside that order. Thereafter on 6-2-1961 the ITO made an assessment on the HUP on the basis of the return submitted by S. It was held that the return submitted by S was in his capacity as karta of his. He filed no return in his status as individual. The ex parte order which was set aside u/s 27 was the assessment made on him in the status of an individual. There was no assessment against the family. The assessment made against the HUF was not, therefore, an assessment u/s 27. That assessment was clearly barred by time and limitation was not saved by the second proviso to section 34(3) of the 1922 Act. It was also held that the same person can be taxed both as an individual, as well as the karta of his family. The two capacities are totally different. The individuals and the HUF are totally different unions of taxation, they are two different assessees.

The above case does not deal with the controversy whether in proceedings initiated u/s 147(a), the questions of status of the assessee can be gone into or not. We are clearly of the view that once proceedings are initiated u/s 147(a), these are fresh proceedings and whole assessment proceedings start afresh. Thus, it is open for the assessee to get the question of status determined in such proceedings. The AAC has already observed that the question of satisfying the requirements for granting benefits of continuation of registration had not been gone into by the ITO and as such the order passed by the ITO u/s 185 was cancelled and the ITO was directed to pass fresh order u/s 185 by taking into account the facts and circumstances of the case. In our view such order passed by the AAC was quite correct and the Tribunal was not right in holding that the question regarding granting registration of the firm cannot be reopened in assessment proceedings initiated u/s 147. In the result, this reference application is allowed and the question of law referred to above is answered in the negative and in favour of the assessee.