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Judgment
S.H. Kapadia, J.—By this petition, the petitioner is challenging the validity of notice under s. 148 of the IT Act, 1961, dt. 31st March, 1987, by which the ITO purported to commence reassessment proceedings for the asst. yr. 1978-79. The previous year of the petitioner for the said asst. yr. 1978-79 was the year ending on 31st March, 1978.
The facts giving rise to this petition, briefly, are as follows :
During the relevant previous year, the petitioner was a partner in a firm known as Kosan Gas Company. The firm was established in 1957 for carrying on the business of bottling and distribution of liquid petroleum gas. The previous year of the firm for the purpose of Income Tax was 30th June. Up to 31st May, 1977, the firm consisted of nine partners including the petitioner and the petitioner''s share in the said firm was 34.2 per cent. On 31st May, 1977, it was decided by the partners of the said firm to revalue the assets. On such revaluation, the value of the assets in the books of the firm increased and correspondingly, the current accounts of the partners came to be credited in the proportion of their shares in the said firm. Thereafter, on 1st June, 1977, the said firm was reconstituted and a private limited company by the name Gokul Gas Pvt. Ltd. came top be admitted as a partner with a ten per cent share in the said firm and on reconstruction, the petitioner''s share came to be reduced. By his order dt. 30th June, 1981, the ITO completed the assessment for the asst. yr. 1978-79. By the said order, the ITO determined the loss which was apportioned into two periods, commencing from 1st July, 1976, to 31st May, 1977, and 1st June, 1977, to 30th June, 1977. The said firm came to be dissolved on 5th Sept., 1977. By a memorandum dt 5th Sept., 1977, the said company took over the shares, right, title and interest of the outgoing partners in the said business together with all assets and properties of the said business. At this stage, it may be mentioned that in the course of the assessment of the firm for the asst. yr. 1979-80, the ITO found that the revaluation of the assets of the firm, and dissolution of the firm had taken place with the intention of transferring the assets to the company. He passed a draft assessment order under s. 144B adding Rs. 7,78,919 by way of capital gains. Objections were thereafter filed to the draft order. Ultimately, for the subsequent asst. yr. 1979-80, the IAC issued directions under s. 144B. By the said order dt. 15th March, 1983, the IAC came to the conclusion that the dissolution of the firm was genuine and bona fide and the addition on account of capital gain and profit was not called for. She, accordingly, directed the ITO to delete the addition on account of capital gains and profits under s. 41(2) of the said Act and on the basis of the said directions issued by the IAC, the ITO in fact deleted the additions on account of capital gains and profits for the subsequent asst. yr. 1979-80, vide order dt 19th March, 1983. In the said order, the ITO expressly deleted the additions on account of capital gains and profits under s. 41(2) in respect of the said firm. This subsequent order of the ITO dt. 19th March, 1983, passed pursuant to the directions of the IAC dt. 15th March, 1983, in respect of the assessment of the firm for the year 1979-80 is very material for the purpose of deciding this writ petition, particularly, in view of the fact that for the asst. yr. 1978-79, the partner of the said firm whose assessment was completed in June, 1981, as stated hereinabove, has been served with notice under s. 148 which is impugned in this petition. The reasons recorded in the order sheet dt. 31 March, 1987, for issuing the said notice under s. 148 proceed on the footing that the dissolution of the firm was not bona fide and that there was a capital gain which had resulted to the partner on account of the dissolution.
Mr. Pardiwala, learned counsel appearing on behalf of the petitioner, contended that the petitioner was a partner in the said firm. He pointed out that the relevant accounting year with which we are concerned ended on 31st March, 1978, and the corresponding assessment year with which we are concerned is 1978-79. Mr. Pardiwala contended that by reason of the impugned notice, the assessment which is duly completed on 30th June, 1981, is sought to be reopened on the ground that capital gain had resulted to the partner which was not disclosed and that the said gain was on the basis of the dissolution of the firm which was not bona fide and genuine. Mr. Pardiwala pointed out that the impugned notice dt. 31st March, 1987, under s. 148 of the Act, 1961, ignores the order passed by the IAC on 15th March, 1983, under s. 144B in which a categorical finding has been recorded that addition on account of capital gains and profits cannot be made particularly because the dissolution of the firm was not a sham or a subterfuge and in view of the said finding, it is not open to the Department to reopen the assessment completed on 30th June, 1981. Mr. Jetly, appearing on behalf of the Department, contended that in the present case, we are concerned with reopening of the assessment of an individual partner. The findings given by the IAC on 15th March, 1983, and the subsequent order passed by the ITO on 19th March, 1983, deleting addition on account of capital gains and profits under s. 41(2) was in respect of the assessment of the firm and, therefore, the findings given with regard to the firm cannot be made applicable to the individual assessment/reassessment. Mr. Jetly contended that in the present case, the ITO is entitled to examine this aspect in detail and since the petition is filed at the stage of notice under s. 148, the Court should not interfere under Art. 226 of the Constitution.
We find considerable merit in the contention advanced on behalf of the petitioners. Two conditions precedent which are required to be satisfied before an ITO can acquire jurisdiction to proceed under s. 147(a) r/w s. 148 and s. 149 of the IT Act, 1961 (as it then stood). The ITO must have reason to believe that the income, profits or gains chargeable to tax had either been under assessed or escaped assessment and that the ITO must have reason to believe that such escapement or underassessment was occasioned by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts. Both these conditions must co-exist in order to confer jurisdiction on the ITO. In the present case, the ITO issued notice on 31st March, 1987; the grounds given in support of the impugned notice proceed on the footing that the dissolution of the firm was not bona fide and has resulted in capital gains and profits which ought to be added back in the individual assessment of the partner. This impugned notice fails to take into consideration the order passed by the IAC on 15th March, 1983, holding that the dissolution of the firm was genuine and the addition on account of capital gain and profit was not called for. In the above circumstances, the conditions precedent to the exercise of the power which are required to be satisfied by the ITO for acquiring jurisdiction to proceed under s. 147 r/w ss. 148 and 149 are not fulfilled. It is well-settled that once a firm is assessed, the assessment of the partner cannot be reopened for taxing his share of the escaped income without such income being first assessed in the hands of a firm. In the circumstances, the impugned notice is without jurisdiction and must be set aside.
In the above circumstances, we find merit in the petition. Rule is made absolute in terms of prayer (a) with no order as to costs.