THAKKAR J C Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) A rather unusual question arises on this reference. On the findings of fact to which we shall presently draw attention the assessee has been found to be a partner of an unregistered firm, and he has been assessed to tax on his share of profits in that firm. The unregistered firm has not been assessed and the contention of the assessee is that his assessment is illegal inasmuch as the unregistered firm of which he is a partner was not assessed to tax.

(2.) NOW , it appears that the assessee at the relevant time was a director of the International Bank of India Ltd. The accounting year was from the 1st of April, 1944, to the 31st of March, 1945, and the assessment year 1945 -46, and in this year of account he and two others Nanjibhai Khalidas Mehta and Chunilal Khushaldas engaged in a joint venture to operated on the Stock Exchange, and as a result of this joint venture the persons made a profit of Rs. 2,73,130. The assessee's share out of this profit was Rs. 1,16,543. It appears that Nanjibhai had an account in this bank, and as a director of this bank the assessee withdrew from that account a sum of Rs. 1,30,000 and credited out of this sum a sum of Rs. 1,16,543 to his account as his share of the joint venture. The case of the assessee was that there was no joint venture, that he was not partner, that the amount that he had received, viz., Rs. 1,30,000, he had repaid to Nanjibhai and therefore he had made no profit which can be subjected to tax. On all these allegations put forward by the assessee he was disbelieved and the Tribunal found as a fact that there was a joint venture consisting of here three partners, that the partnership made a profit, that the share of the assessee was Rs. 1,16,543, that the assessee received the share and that the assessee was telling an untruth when he put forward the case that he had refunded the amount to Nanjibhai. Therefore, it is important to note that on these findings these is no dispute that the unregistered firm in which the assessee was a partner has made a profit, nor is there any dispute as to what his share in the profit is, nor is it disputed that he had received that amount. There is also no suggestion that in the assessment he has been deprived of any deductions to which he would be entitled under the provisions of the Income -tax Act. He is not challenging the mode of assessment in the sense that any rights of which the taxing department. His only contention is that the assessment is illegal because a partner in an unregistered firm cannot be assessed to tax unless and until the unregistered firm of which he is a partner has first been assessed to tax, and it is that contention that we have to examine in the light of the Income -tax Act.

(3.) MR . Palkhivala has emphasised the fact that the assessment to tax upon any one of these entities must be in accordance with and subject to the provisions of the Act. Therefore, not only must there be no prohibition in the Act against any one of these assessees being assessed to tax in any particular case but also the assessment must be in accordance with the provisions of the Act. But all that we wish to point out is that in the charging section itself, far from there being a prohibition against a partner of a firm assessed to tax, there is a legislative fiat as it were in favour of the Income -tax department if they chose to assess a partner and not the firm of which he was a partner. Mr. Palkhivala says that section 3 merely enumerates a class of possible assessees, and from that it is not possible to urge that in a particular case a partner is the proper assessee and not the firm. But if the intention of the legislature was that whenever there is a firm, the firm should be assessed with regard to its profits and not the individual partners, we should have expected some indication to that effect either in section 3 or in some other provision of the Income -tax Act, and, as we shall presently point out, there is absolutely no prohibition in any provision of the Income -tax Act prohibiting the assessment of a partner until the firm of which he is a partner has been assessed.