COMMISSIONER OF INCOME TAX Vs. HIMATLAL BHAGUBHAI

JUDGEMENT

(1.) THIS reference arises out of a proceeding for reassessment of the income of the assessee for the asst. year 1960 61. The assessee is an HUF. It was at all material times a partner in four firms through its manager and Karta. The original assessment of the assessee for the asst. year 1960 61 was completed by the ITO on 16th December, 1960. It seems that at that time only one of the four firms had been assessed, and, therefore, the share income of the assessee from that firm as determined by the ITO assessing that firm was included in the assessment of the assessee. So far as other three firms were concerned, their assessments were pending and the ITO assessing the assessee, therefore, accepted the share income of the assessee in those firms as declared in the return filed by the assessee and completed the assessment on the basis of the share income so disclosed by the assessee. It was expressly stated by the ITO in the order of assessment that the share of the assessee in these firms was being "taken as declared subject to rectification under s. 35 of the Act". The assessment of the three firms was thereafter completed by the respective ITOs having jurisdiction over them and the ITO dealing with the case of the assessee received allocation reports from these ITOs stating the share income of the assessee as determined in the assessment of those firms. On receipt of the allocation reports the ITO could have rectified the assessment of the assessee by correcting the share income of the assessee in the three firms under S. 35(5) of the Indian IT Act, 1922 (hereinafter referred to as "the old Act"), but the ITO failed to do so within the period limited by the section, viz., four years from the date of the final orders passed in the case of the firms. The result was that the rectification proceedings under S. 35(5) became time barred. But, the time for taking action under S. 147(b) of the IT Act, 1961 (hereinafter referred to as " the new Act") that being the section applicable for reopening the assessment of the assessee by reason of section 297(2)(d)(ii) of that Act was still available since the return of income was filed by the assessee subsequent to the commencement of the new Act ; and the ITO, therefore, issued a notice for reopening the assessment of the assessee under S. 147(b) and served it on the assessee on 29th March, 1965. The ground on which the ITO sought to reopen the assessment was that in consequence of information contained in the allocation reports received by him subsequent to the original assessment, he had reason to believe that the share income of the assessee from the three firms to the extent to which it was not declared in the return had escaped assessment. The ITO accordingly reopened the assessment and brought the share income of the assessee in the firms to tax on the basis of allocation reports received from the ITOs having jurisdiction over the firms. The assessee appealed against the order of assessment to the AAC ; and in the appeal the main contention taken up by the assessee was that the only power of the ITO to disturb the assessment already made was by way of rectification under S. 35(5) ; and if the time limited by s. 35(5) for making rectification was passed, the ITO could not resort to S. 147(b) in order to achieve that which he was prohibited from doing by reason of lapse of time under S. 35(5). The assessee also urged that the conditions requisite for applicability of S. 147(b) were not satisfied and the ITO had, therefore, no jurisdiction to reopen the assessment. Both these contentions were negatived by the AAC, who took the view that S. 35(5) and S. 147(b) were not mutually exclusive and action could be taken under either section provided the conditions of that section were satisfied and since the conditions prescribed in S. 147(b) were satisfied, the ITO was entitled to initiate action under that section despite the fact that action could also be taken under S. 35(5) and such action was barred by lapse of time limited by that section. The assessee thereupon preferred an appeal to the Tribunal. In that appeal the assessee was successful in persuading the Tribunal to hold that ss. 35 (5) and 147(b) were mutually exclusive ; and if a case falls within S. 35(5), action can be taken only under that section and if the time limit prescribed by that section for taking action has expired, the ITO cannot circumvent the bar of limitation by taking resort to S. 147(b). The Tribunal observed :

(2.) THIS question, widely framed as it is, takes in both the aspects of the controversy between the parties. One is whether S. 35(5) excludes the applicability of S. 147(b) in a case where action by way of rectification could be taken under S. 35(5) but it has become barred by lapse of time ; and the other is whether the conditions requisite for the applicability of S. 147(b) are satisfied on the facts of the present case. Both these aspects of the question were keenly debated before us and, for reasons which we shall presently state, our decision must be in favour of the Revenue.

(3.) IT is true that at the date when this decision was given, S. 35(5) was not on the statute book ; but the observations made in regard to the inter relation between ss. 34 and 35 must apply equally when we consider the impact of S. 35(5) on the scope and ambit of S. 147(b), which is equivalent to S. 34(b) of the old Act. The same view has been taken by the Madras High Court in two decisions, namely, Salem Provident Fund Society vs. CIT (1961) 42 ITR 547 (Mad) and V. S. Arulanandam vs. ITO (1961) 43 ITR 511 (Mad) as also by the Allahabad High Court in A. H. Wheeler and Co. P. Ltd. vs. ITO (1964) 51 ITR 92 (All). There is also a later decision of the Allahabad High Court in Hira Lal Sutwala vs. CIT (1965) 56 ITR 339 (All), which is more directly in point. The case there was very much similar to the present case before us with only this difference that the position was the reverse. There the assessment of a partner was sought to be rectified by the ITO under S. 35(1) on completion of the assessment of the firm. The argument advanced on behalf of the assessee was that action for including the correct share of the assessee could be taken by the ITO only under S. 34(1) since the provisions of that section were applicable and that section excluded the applicability of S. 35(1). The High Court of Allahabad negatived this contention of the assessee observing :