COMMISSIONER OF INCOME TAX Vs. DOLWANI T C

JUDGEMENT

(1.) THIS is a reference by the Income -tax Appellate Tribunal under section 66(1) of the Indian Income -tax Act, 1922, made at the instance of the Commissioner. A few facts may be stated :

(2.) THE assessee is an individual. The reference pertains to the assessment year 1957 -58, the accounting year being the year ended on 31st March, 1957. The original assessment for this year of the assessee was completed on 27th January, 1959, in the sum of Rs. 80,119. Subsequently, the said assessment was reopened under section 34(1)(b) on the ground that incomes derived by the assessee's wife and a minor son as partners of a firm called M/s. Standard Garage were liable for inclusion in the total income of the assessee under sections 16(3)(a)(iii) and 16(3)(a)(iv) of the Act of 1922. The reason why the Income -tax Officer considered that these provisions for clubbing were applicable was that the entire capital of Rs.80,000 contributed by the assessee's wife and minor son came from the assessee himself. The assessee, prior to 1947, had been carrying on extensive business in his individual capacity in various places which subsequently became part of Pakistan. After partition he came down to Indian and in December, 1947, he started a business in Bombay in motor spare -parts in the name of Standard Garage. The assessee's family joined him in Bombay some time in 1948. On 1st April, 1949, the business of Standard Garage was taken over by a partnership consisting of the assessee's major son, Jaidev Tekchand Dolwani (who is the assessee's son by the first wife who died in 1935) and Smt. Haribai, the assessee's second wife, whom he married in 1936. To the benefits of this partnership the assessee's minor son, Vishindas (by his second wife) was admitted. The share of Jaidev was 5 annas 6 pies in a rupee, while the shares of Haribai and Vishindas were 5 annas 3 pies each. The latter two parties invested Rs. 40,000 each in the partnership. This firm of Standard Garage was assessed as a registered firm from 1950 -51 itself. The first assessment of the firm was made on 15th October, 1951, by the Income -tax Officer, Special Survey Circle III, after which the case was transferred to the territorial ward, i.e., Ward D -II. At the time of completing this first assessment of the firm for 1950 -51, the Income -tax Officer prepared a note regarding the conversion of the business of Standard Garage into a firm. The other facts relating to the formation of the firm as ascertained by him were also recorded in the note. This note has been extracted in full in the Tribunal's order and we shall have occasion to refer to the same in extenso later on. After the file of the registered firm of Standard Garage was transferred to D -II Ward, all its assessment up to and including the assessment for 1957 -58, were handle by the 4th Income -tax Officer, D -II Ward. The assessee's case, where also the first assessment was for 1950 -51, was handled by various Income -tax Officers, D -II Ward. For the assessment year in question, viz., 1957 -58, the original assessment was made by the 4th Income -tax Officer, one Shri Bhagwat, on 27th January, 1959. Thus, for the material year the original assessment of the assessee as well as the assessment of the firm of Standard Garage in which his wife and minor son were interested were handled by the same Income -tax Officer. But that Income -tax Officer, Shri Bhagwat, did not include in the assessee's income the shares of the assessee's wife and the minor son in the firm. Later on, the assessee's case came to be transferred to the 1st Income -tax Officer, D -II Ward, who as stated earlier, purported to re -open the assessment under section 34(1)(b) of the Act. He rejected all the contentions of the assessee and completed the reassessment on 31st December, 1962. The assessee contested the reassessment before the Appellate Assistant Commissioner both on the question of jurisdiction of the Income -tax Officer to act under section 34(1)(b) as well as the merits of the addition. Both the contentions were rejected by the Appellate Assistant Commissioner. Thereafter, the assessee went in second appeal to the Tribunal, where the reassessment was challenged on the following grounds :

(3.) THE following question has been referred to us :