Venkatakrishna Rice Company vs Commissioner of Income Tax

Balasubrahmanyan, J.—The question referred to us by the Income Tax Appellate Tribunal in this reference reads as follows :

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in uphlding the order of the commissioner of Income Tax ?

The question does not indicate what the order of the Commissioner of Income Tax was, on what basis the Tribunal upheld it as correct, and

what was nature of the controversy raised by the assessee on it. A perusal of the sated case, however, tell us what the question is all about, a

mercy for which we must be thankful. The assessee is a partnership firm carrying on A business of its own. It also indulged in a joint venture in

sugar in association with certain other firms. While returning its income for 1969-70, the assessee displayed therein its share income from the joint

venture. The Income Tax Officer accepted the return as he found it, and made an assessment on the basis of the return, charging to tax the total

income income from the joint venture. Subsequently, the Commissioner of Income Tax initiated proceedings for suo moturevision u/s 263 of the

Income Tax Act, 1961, on the score that the Income Tax officer action in so far as he brought to charge the assessee''s share income from the joint

venture was prejudicial to the interest of the Revenue. Accounting to the Commissioner of Income Tax Officer should have considered assessing

the joint venture income in the hands of the association of persons as a whole. By assessing the share income in the individual assessment of this

assessee, the Income Tax Officer had put it out of his reach to get at the association of persons as a body and as a taxable entity. It was apparently

the view of the Commissioner of Income Tax that the average rate of tax appertaining to the total income of the association of persons was higher

than the average rate of tax at which the share income was taxed appertaining to the members of the association of persons. He accordingly set

aside the assessment in this case and directed Income Tax Officer to first make an assessment on the association of persons as such and then

follow it up with the assessment of the share income of the assessee as member of that association.

This order of the Commissioner of Income Tax was confirmed by the Tribunal in appeal. The order of the Tribunal has given raise to the present

reference. Two questions were debated before us on the the tax treatment of the association of persons vis-a-vis the individual members thereof.

The other question was about the powers of the Commissioner of Income Tax to interfere with the orders of the Income Tax Officer as prejudicial

to the interest of the Revenue.

On the first question, it may be said that the position is now fairly well settled. Over a period of years, courts have held that when once an

Income Tax officer makes an assessment of the share income of a member of an association, thereafter he could not proceed to asses the income

of association of person as such. All that would remain to be done in such a case would be for the Income Tax officer to proceed to deal with the

other members shares of income in their respective individual assessments. This position has been laid down as the pattern of assessment in all

cases where an association of persons as such earn income in which the members thereof would be entitle to their aliquot shares. It may be

conceived that this position regarding the modes of assessment of the association of persons on the one hand and on the members of the

association on the other was somewhat clear under the Indian Income Tax Act, 1922, than they are under the present Income Tax Act, 1961.

However, it can be taken as fairly well settled now that the position is the same even under the present statute, to this effect, there is a ruling of

Bench of our court in COMMISSIONER OF Income Tax, MADRAS Vs. R. DHANDAYUTHAM AND OTHERS., . To the same effect are

the decision of Andhra Pradesh and Calcutta High Courts, vide Income Tax Officer, J-Ward Vs. Khalid Mehdi Khan (represented by father and

guardian), and Hindusthan Mill Stores Supply Co. Vs. Commissioner of Income Tax, .

The rationale behind the view of courts is variously described. It is sometimes said that an association of persons and a member of such an

association are two distinct entities. It is also said that under the scheme of the Income Tax Act,the Income Tax Officer has choice of alternatives,

either to assess the association of persons as a whole, on its total income or,in the alternative, to proceed to assess the respective share income of

the individual members thereof. From this conception of the pattern of assessments of the two entities involving an option or an election, it was but

a natural step for the court to proceed to hold that when once an Income Tax Officer had taken a particular course of assessment, then not only,

does he, as an assessing officer, commits himself to making an assessment in that mode but also commits the Income Tax Department as a whole

to the course of action. In other words, if an officer having charge of the assessment of an association of persons makes an assessment for any

given assessment year on the total income of the association, there cannot be an assessment thereafter of the individual shares of the members

separately. Contrary-wise where an Income Tax Officer having jurisdiction to assess an individual member of an association, proceeds to make an

assessment of the share income as part and parcel of that member''s total income, then, thereby he renders the department incapable of proceeding

to assess to assess the total income of the association of person as a unit.

Mr. S. Swaminathan, learned counsel for the assessee-firm, advanced another plausible consideration as being the rationale behind ruling of the

court in this regard. He submitted that association of persons is an abstraction and it merely represents and denotes a group of persons who join

together for the purpose of carrying on any transaction or business enabling each one of them to earn a share in the general profits obtained by the

association as such. In this sense, what is regarded as the income of the association of persons is nothing but the aggegation of the individual shares

of profit of the constituent can be spoken of as an entity in itself really and truly, there is only one income or one combination of income which is

produced by the association, viz., the aggregate income of all the constituent members. In such a situation, if an Income Tax officer were to bring to

charge the share income of a member of anassociation, thereby what the officer does is not merely to get at the income of the particular member

concerned, but also to get at a portion of what undoubtedly is the income of the association itself. In this sense, therefor, the moment the member if

an association is taxed in respect of his share income, that very moment a part of the association''s income also gets taxed. In this situation, to

permit the same Income Tax officer or any other officer having jurisdiction over the association of persons to bring to charge the income of the

association as a whole, would be to bring about double taxation of the same income or part of it. The objection against double taxation is a

principal, unless there are express provisions ought to be construed as negating double taxation.

Both in the Indian Income Tax Act, 1922, and in the Income Tax Act of 1961, while there may be no express provision prohibiting double

taxation of both of the association and of the members thereof, there is no provision which expressly permits the Income Tax Officer to tax one

and the same income both in the assessment of the association of members and of the constituent members thereafter proceed to assess the

association of person, as a whole, as a unit of assessment.

Mrs. Nalini Chidambaram, learned junior standing counsel for the Income Tax Department, submitted that in order that the Income Tax officer

may be interdicted from proceeding to make an assessment on the association of person following his assessment of the share income of a member

thereof,there must be a conscious choice made by the Income Tax officer of the alternatives before him. The suggestion in this argument, was that

if, in any given case, the Income Tax officer is said to have made the assessment in a member without an intelligent exercise of his discretion or in a

fir of absent-mindedness, as as it were, this argument at first blush seems to be attractive and look like being based on some principal, it really is an

argument of inconvenience. All that the learned counsel for the Department suggests is that where an Income Tax Officer, for some reason or

other, had taken a false step in making an assessment of a member, rather than being the process by making an assessment on the association,

such an act on the part of the Income Tax Officer would be deleterious to the interest of the Revenue, and in that sense, the fate of the assessment

and collection of Income Tax revenue cannot be made to depend purely on the accidental circumstance of the Income Tax Officer taking an initial

wrong plunge,as it were, in the stream of assessment. Similar argument have been addressed before courts on the basis of inconvenience and loss

that may be caused to the Income Tax Department if it should be held that any step taken by the Income Tax officer in the choice of alternatives

would block further action in the other modes available under the Act, more productive of tax revenue. In some of the cases in the books, we find

the Department putting forward the contention that the interest of the Department would suffer if it were asked to abide by the assessment by an

individual Income Tax Officer on a member of the association where that officer had charged only one of the members of the association, when the

jurisdiction for the assessments of the other members and for the assessment of the association of persons as such happens to reside in other

Income Tax Officers in different charges and far-flung places. In such a situation, it was urged on behalf of the Department that it would prejudice

the Department if the Income Tax Officer assessing the share income of one of the members of the association should be held thereby to commit

irretrievably the entire department to that course, blocking any other venue of assessment as against the association as a whole. This kind of

argument did not find favour of acceptance at the hands of the court, vide the following observations of this courts, in COMMISSIONER OF

Income Tax, MADRAS Vs. R. DHANDAYUTHAM AND OTHERS., :

In one view, there can be no exercise of option by the Income Tax officer who assessed the individual, when he had no jurisdiction to assess the

association as such. However, the point adverted to before us is that the choice is by the department as such and not by the individual. In other

words, the point sought to be made out is that all the Income Tax Officers are functioning under Income Tax Act to assess the income of any

person liable to tax and that thought, for convenience, they are invested with the jurisdiction over particular cases territorially or otherwise, still as

all of them are discharging the same function, when one of them is exercising a choice, then he in a way forceloses the power available to the

Department to assess the association.

We do not, therefore, accept the argument of the learned counsel for the Department that whenever an Income Tax officer has taken the step to

assess an individual member of the association in respect of his aliquot share, then the correctness of his choice of assessment is open to question

on an inquiry as to whether he had consciously made that choice, having before him all the relevant data therefor, or did so accidentally or without

an application of his mind.

We may sum up this part of our discussion by observing that whether or not modus operandi in the tax treatment of an association of member

vis-a-vis the members thereof can be called an option or a choice or an election, the courts have uniformly held that when once the officer has

followed a particular mode of reaching the income to be taxed, then that perse puts the entire Department out of reach of the other mode of

making an assessment on the self-same income. It may be observed that this position has not been controverted by the Commissioner of Income

Tax when he sought to interfere with the assessment made by the Income Tax officer in this case. Indeed, in the order passed by Commissioner of

Income Tax u/s 263 of the Act, the Commissioner in so many words had stated :

......that the order of the Income Tax officer cannot be said to be not in accordance with the law....

This was the conclusion of the Commissioner of Income Tax notwithstanding his earlier observation that when the Income Tax Officer made an

assessment of the assessee''s share from the joint venture, he had done so ""apparently without considering whether the four concerns together

could be treated as having formed an association of persons for the purpose of the transaction.

The next question, therefore, is whether on the footing that the officer''s assessment of the assessee-firm with respect to its share income from

the joint venture is not only final but also is valid and in accordance with law, the action of the Commissioner of Income Tax u/s 263 of the Income

Tax Act can be sustained.

Section 263 of the Act empowers the Commissioner to call for and examine the record of any proceeding under the Act and if he considers

that any order passed therein by the Income Tax Officer us erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after

giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary, pass such order

thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and

directing a fresh assessment. The Commissioner of Income Tax, in the present case, had purported to act in exercise of this power on the ground

that the order of the Income Tax Officer, although in accordance with the law, was, in his view, prejudicial to the interests of the Revenue. This

view of the Commissioner of Income Tax that the order passed by the Income Tax Officer was erroneous and prejudicial to the interests of the

Revenue, was endorsed by the Tribunal in their order. The question is whether the view expressed by the Commissioner of Income Tax and the

Tribunal are based on a correct understanding of the enabling provisions of section 263 of the Income Tax Act and of the nature of the order of

assessment passed by the Income Tax Officer.

Section 263 of the Income Tax Act is a provision in sub-chapter E of Charter XX of the Income Tax Act. This Chapter deals with appeals

and revision. Section 246 provides a right of appeal to an assessee, against order passed by the Income Tax Officer, to the Appellate Assistant

Commissioner. Section 252 provides a further appeal to the Tribunal against the orders passed by the Appellate Assistant Commissioner in

appeal. In the sub-chapter XX relating to revision by the Commissioner apart from section 263, there is yet another provision u/s 264 which

confers revisional power on the Commissioner of Income Tax. This latter revisional power u/s 264 enables the Commissioner, either suo motu or

on application by assessee, to interfere in revision with the orders passed by the authorities subordinate to him. The expression ""authorities

subordinate to him"" would include not only the Income Tax Officer, but also the Appellate Assistant Commissioner and the Inspecting Assistant

Commissioner. It is, however, specifically stated in section 264 that this power of revision u/s 264 is available only against an order other than an

order which is subject to revision u/s 263.

In the context of the above provisions, the power of the Commissioner of Income Tax u/s 263 has to be judged on the words employed

therein. The language used by the legislature in section 263 is to the effect that the Commissioner may interfere in revision if considers that the order

passed by the Income Tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. It is quite clear from the above phrasing

that two things must co-exist in order to give jurisdiction to the Commissioner to interfere in revision. The order of the Income Tax officer in

question must not only be erroneous but also the error in the Income Tax officer''s order must be of such a kind that it can be said of it that it is

prejudicial to the interests of the Revenue. In other words, merely because the officer''s order is erroneous, the Commissioner cannot interfere.

Again, merely because the order of the officer is prejudicial to the interests of the Revenue, then again, that is not enough to confer jurisdiction on

the Commissioner to interfere in revision. These two elements must co-exist. This construction of the section has been stated and evolved from the

statutory language by a decision of the Karnataka High Court in Commissioner of Income Tax, Mysore Vs. T. Narayana Pai, .

The learned counsel for the Department submitted that the order of the Income Tax Officer in the present case was prejudicial to the interests

of the Revenue since by taxing first the share income of the assessee who was a member of the association the officer thereby disabled the

Department from getting at the total income of the association of persons as such for being taxed at the higher rate appropriate thereto, resulting

thereby in loss of revenue. We find it hard to accept this argument for more than one reason. In the first place, there are no materials started in the

order of the Commissioner of Income Tax to suggest in what way there is any prejudice to the interests of the Revenue. Even if prejudice to the

Revenue is to be reckoned in terms of the actual loss to the exchequer, no figures have been given in the order of the Commissioner of Income Tax

to suggest that the average rate of Income Tax on the total income of the association of persons would be far higher than the average rate of

Income Tax applied to the share income from the joint venture in this assessment year in so far as the present assessee is concerned and in so far

as the other members of the association are concerned. Indeed, in one portion of the order, the Commissioner had dealt with the argument

advanced on behalf of the assessee to the effect that even if the joint venture is to be assessed as such, the tax effect may not necessarily be more.

While noticing this contention of the assessee, the Commissioner had observed that this question as to whether the tax effect would be more or less

may be raised when the assessment of the association of persons is taken up. This is an indication that the Commissioner had not, as on that date,

any clear idea as to what the difference in tax effect would have been if, instead of taxing the share income of all the members in their respective

hands, the Department had first made an assessment on the total income of the association, as such, in respect of the joint venture business. We

cannot, therefore, readily accept the thesis that the Income Tax Officer''s order shown to be prejudicial to the interests of the Revenue, by

reference to any acceptable materials.

Even otherwise, the argument of the Department''s learned counsel is unsound as a matter of construction of section 263. As we earlier

observed, it is essential for the Commissioner to find not only that the order of the Income Tax Officer in question proposed to be revised is

prejudicial to the interests of the Revenue but also that it is erroneous and, therefore, prejudicial in that sense. We have earlier pointed out how the

Commissioner himself had clearly conceded the position that the order of assessment made by the Income Tax Officer is in accordance with the

law. We fail to understand how an assessment, which is in accordance with the law, can at all be regarded as erroneous, let alone prejudicial to the

interests of the Revenue. We think it is axiomatic that any assessment, which is in accordance with the law cannot, at the same breath, be regarded

as erroneous, and if the assessment is not erroneous it cannot be prejudicial to the interests of the Revenue or for that matter to the interests of the

assessee as well. This is on the principle that nothing can be prejudicial either to the Department or to the assessee if it is in accordance with the

law, unless it be that the law itself is being questioned on some ground or other, which objection is available under some provision or other of the

Constitution. In this case, when the Commissioner had accepted the position that the Income Tax Officer was at liberty to tax the share income

from the joint venture in the hands of the assessee as a member of the association, then it follows that that can be regarded as prejudicial to the

interests of the Revenue.

In our judgment, the expression ""prejudicial to the interests of the Revenue"" is not to be construed in a petty-fogging manner, but must be given

a dignified construction. It may be noted that the use of the expression ""Revenue"", in our opinion, is significant. It denotes some kind of abstraction

or symbol in the same sense in which the expression ""crown"" is used to distinguish it from any person enthroned. The interests of the Revenue is not

to be equated to rupees and paise, merely. There is a biblical saying that we do not live by bread alone. Varying this saying, it may be said that the

Revenue does not live by tax alone. In this sense, therefore, the interests of the Revenue are not tied up merely with realising as much Revenue as

possible, willy nilly, merely looking to the productivity aspect of taxation. The jurisdiction of the Commissioner u/s 263 is undoubtedly a

supervisory jurisdiction. It is intended for interference in special cases to counteract orders which are erroneous as well as prejudicial to the

interests of the Revenue. In this context, therefore, the expression ""prejudicial to the interests of the Revenue"" must be regarded as involving a

conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the

Income Tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to

be prejudicial to the interests of Revenue administration. There might be cases where the Commissioner might wish to interfere with an order of the

Income Tax Officer in order to safeguard the fair name and reputation of the Income Tax Department without any thought of going into the

particular aspect of the assessment. Assessments which are mala fide, politically and communally motivated may be, however set aside as being

prejudicial to the interests of the Revenue. It is unnecessary, for us to illustrate the point any further. All that we wish to observe is that the scope of

the interference under this section is not to set aside merely unfavourable orders and bring to tax some more money to the treasury. Nor is the

section meant to get at sheer escapement of revenue which, as is well known, is taken care of by provisions elsewhere in the Act such, for

instance, as section 147 of the Act. The prejudice must be prejudice to the revenue administration.

The mainspring of action for the Commissioner of Income Tax in the present case would seem to be really to circumvent the position of law

which has become will-settled in the matter of assessment of an association and/or the members thereof. Since the Income Tax Officer''s order

makes it difficult for the Department to get at the total income of the association of persons, it had to be removed out of the way. If it is removed

out of the way, the resulting position would be as though there had been no such order even in the first instance, and the field may be clear for the

exercise of option once more, as though the Department can begin from the very beginning. This intention to circumvent the clear consequence of

the law, as laid down by the courts, is not definitely a purpose which could actuate the Commissioner of Income Tax u/s 263 of the Act. This is

because, far from the Income Tax u/s Officer''s order being prejudicial to the interests of the Revenue, the present action of the Commissioner in

seeking to set aside that order is really prejudicial to the Revenue since it is prejudicial to the law laid down by the courts.

The learned counsel for the Department referred to a decision of the Supreme Court in Rampyari Devi Saraogi Vs. Commissioner of Income

Tax, West Bengal and Others, . That was a case which arose u/s 33B of the Indian Income Tax Officer offering for assessment some incoome.

Without investigating into the source of the income disclosed, the Income Tax Officer hurried with the assessment and completed it. The

Commissioner of Income Tax took action u/s 33B of the Indian Income Tax Act, 1922, and set aside the assessment for the reason that the

income, which was offered for assessment by the assessee in that case, really had to be considered as part of the income of some other taxpayer in

a higher income bracket. Before the Supreme Court, it was urged that on the Commissioner''s view that no income was assessable in the hands of

the person who filed the return, the Commissioner could not regard the order of assessment as prejudicial to the interests of the Revenue. The

Supreme Court rejected this contention and upheld the Commissioner''s interference u/s 33B. One way of understanding the reasoning of the

Supreme Court in this case is to say that the Commissioner is not confined to have regard to the particular assessement order before him for the

purpose of drawing a inference that order is prejudicial to the interests of the Revenue, but he can have regard to the repercussions of that order

generally in other assessments as well. Another way of understanding the basis of the Supreme Court''s decision which commends itself to us is to

interpret the power of the Commissioner as based on the substantial interests of the Revenue and not merely the particular element which might be

spotted in the order of the Income Tax Officer as erroneous.

Before closing the discussion, we might refer to a decision of the Supreme Court Commissioner of Income Tax, U.P.,Lucknow Vs. Kanpur

Coal Syndicate, . This case was one in which there was an initial assessment made by an Income Tax Officer on an association of persons. He

made the assessment on the assocition brushing aside the objection of the members who urged that the income of the association must be assessed

in separate shares in the hands of the constituent members. They raised the same contention in an appeal against the assessment. The Appellate

Tribunal accepted that contention, set aside the assessment on the association and directed the Income Tax Officer to assess the share incomes

from the association in the respective individual assessments of the members. Before the Supreme Court, the Department questioned the powers of

the Appellate Tribunal to cancel the assessment on the association and direct the Income Tax Officer to make an assessment of the shares of

income in the hands of the members. The contention was that option to assess either the association or the members thereof was only with the

Income Tax Officer and when once he had exercised that option, that cannot be interfered with in appeal. This Supreme Court rejected this

contention on the principal that the appellate authorities under the Income Tax Act had plenary powers in disposing of the appeal and the scope of

the appellate power is co-terminous with that of the assessing power of the Income Tax Officer, and, in that sense, the choice of alternatives

between assessing the association, as such, and assessing the shares of the members apart, was equally open to the appellate authority, in the same

manner as it was open to the Income Tax Officer.

The principle laid down in this judgment of the Supreme Court cannot, however, be adopted for the purpose of clothing the Commissioner of

Income Tax with a power of interference with the exercise of the option made by the Income Tax Officer in the matter of assessment of the

members of an association in preference to an assessment to be made on the association itself. In the first place, the basis of the Supreme Court''s

ruling was that an appeal was but a rehearing and the powers of the appellate authority are so equal with those of the assessing authority, in the first

instance. In coming to this conclusion, the Supreme Court were only adopting the general law relating to the powers of the appellate authorities

under the Civil Procedure Code, and other enactments dealing with the powers of appellate courts. The Commissioner of Income Tax acting u/s

263 is not, however, an appellate authority, by any means. As we had earlier observed, the power conferred on him by this section is in the nature

of a supervisory power. We have referred to another revisional power u/s 264 which might be regarded as a regular revision. Section 263,

however, is a special power, which, so far as we know, has no parallel in any other statute or legal system. It is an extraordinary revisional power.

It is also sui generis, in its nature, and in the occasion for its exercise, it is to be employed not as a jurisdictional corrective or as a review of a

subordinate''s order in exercise of supervisory power. It is, on the contrary, to one invoked and employed only for the purpose of setting right

distortions and prejudices to the Revenue, which, as we havbe endeavoured to point out earlier, is a unique conception which has got to be

understood in the context of and in the interests of revenue administration. The power, as we conceive it, is intended to maintain the tone of the

revenue administration and the moral of the Officers manning it. Such a power cannot,in any manner, be equated to, or regarded as approaching in

any way the appellate jurisdiction or even the ordinary revisional power conferred on the Commissioner u/s 264 of the Act.

For all the above reasons, we hold that the Commissioner of Income Tax, in this case, was not justified in interfering with the order of the

Income Tax Office u/s 263 of the Act. The Tribunal''s order, confirming the Commissioner''s decision, was based on a misconception of the

provision of section 263 and the nature and finality of the order passed by the Income Tax Officer. On this basis, our answer to the question of law

is in the negative and in favour of the assessee. The assessee will have its costs. Counsel''s fee Rs.500.