MUKAND LAL MALIK Vs. UNION OF INDIA

JUDGEMENT

(1.) THE petitioner is a legal practitioner. On April 1, 1973, the petitioner and another advocate, Shri Har Gopal Malik, constituted a partnership firm, M/s. Malik and Company, Thaparnagar, Meerut, to carry on legal profession. THE share of the petitioner was 40 per cent, and that of Sri Har Gopal Malik 60 per cent. THE firm was registered under the I.T. Act (hereinafter referred to as "the Act") and continued till March 31, 1978. For the assessment years 1974-75 to 1978-79 (five years) the ITO assessed the firm and the share of the partners in the firm was separately assessed to tax. THE petitioner filed applications before the ITO under Section 154 of the Act for the years 1974-75 to 1977-78 for rectification of the assessments. It was pleaded that excess tax had been recovered from the petitioner inasmuch as tax had been recovered from the registered firm as well as from him individually on the same income. THE assessment for 1978-79 was sought to be revised by the Commissioner under Section 264 of the Act. THE ITO rejected the four applications under Section 154 of the Act. THE petitioner filed revisions under Section 264 of the Act. THE Commissioner, however, dismissed the revisions by his order, dated February 2, 1982, on the ground that the matter did not fall within the ambit of Section 264 of the Act, since it challenged the constitutional validity of a statute.

(2.) THE stand taken by the petitioner is that the firm was not a legal person. It is only a forum for the partners to function. For the sake of convenience the Legislature decided to make the firm provisionally, and the partners finally the assessees. THE income of the registered firm when allocated in the hands of the partners was nothing but receipt of distributed income and not income within the meaning of Section 2(24) of the Act, and when the income of a registered firm was by operation of law diverted towards the partners, nothing was left in the hands of the firm and the firm as such had no income. THE tax recovered from the firm had to be refunded to the partners and the petitioner was entitled to credit thereof to the extent of his share in the firm, i.e., 40 per cent. Income is always taken in its ultimate and not in its proximate stage. THE allocation of the firm's income in the hands of the partners as taxable income is thus void. It is also asserted that double assessment is not possible. THE provisions of Sections 67 and 182 warranting assessment of partners' share income in the firm are void being violative of Articles 14, 19(1)(f) and 19(1)(g) of the Constitution. In this connection it was stressed that Sections 67 and 182 of the Act create obvious discrimination between members of registered partnership firms and members of Hindu undivided families, partners of unregistered firms and associations of persons. It is unjust, unreasonable and against the fundamental concept of justice and fair play. THE petitioner has prayed for quashing the order of the Commissioner of Income-tax, dated February 2, 1982 and to declare that Sections 67 and 182 of the Act and the related provisions are ultra vires the Constitution being violative of the petitioner's right under Articles 14, 19(1)(f) and 19(1)(g) of the Constitution. It has also been prayed that the I.T. authorities be directed to compute the tax payable by the petitioner after deducting the amount paid by the partnership firm to the extent of 40 per cent.

(3.) LEARNED counsel placed reliance on the decision of this court in Joti Prasad Agarwal v. ITO [1959] 37 ITR 107 (All). That case related to an association which was formed under a scheme formulated by the District Collector for distribution of khandsari sugar at controlled rates. The members contributed varying amounts towards the working capital of the association. Out of the 30 members of the association, 23 were assessed to income-tax and in their individual assessments their respective shares of the profits earned by the association during that period were included and the tax levied thereon was paid by them. Later, the ITO initiated assessment proceedings and assessed the income of the association in its hands. Some of the members thereupon applied to the High Court for relief against the order of assessment on the association. This court held that once the income of the association was charged to income-tax in the hands of the members individually and the assessments of the members remained valid assessments, there could be no fresh assessment of the income in the hands of the association. It was observed (p. 111):