NARSINGDAS BANGUR Vs. INCOME TAX OFFICER CENTRAL

JUDGEMENT

(1.) By this application under Article 226 of the Constitution of India the jurisdiction of the respondent-Income-tax Officer to issue a notice under Section 154 of the Income-tax Act, 1961, and to take proceedings thereunder are challenged. The petitioner, Narsingdas Bangur, was a partner of Magniram Bangur & Co., a firm which was assessed as a registered firm under the Indian Income-tax Act, 1922, until the time hereinafter mentioned. For the assessment year 1961-62, the accounting year of the said firm was the Sambat year 2016, ending on the 20th October, 1960. By an agreement between the partners of the said firm it was decided that a company under the name of Magniram Bangur & Co. (P.) Ltd. would be incorporated and all the assets and liabilities of the firm would be transferred to the said company. In accordance with the said agreement the memorandum and articles of association of the proposed company were executed on October 18, 1960, and the said company was registered under the Companies Act on October 21, 1960. For the assessment year 1961-62, for which the accounting year was the Sambat year 2016, the aforesaid firm claimed before the Income-tax Officer that its income for that year was exempt from taxation under the provisions of Section 25(4) of the Income-tax Act, 1922 (hereinafter referred to as the old Act). The Income-tax Officer rejected the contention and made an assessment on the firm for the said year determining the total income at Rs. 6,92,508. In the appeal by the firm against the aforesaid order of assessment the Appellate Assistant Commissioner by his order dated the 31st March, 1967, held, inter alia, that the entire income of the firm was entitled to exemption from tax under Section 25(4) of the old Act, and similar relief should also be allowed to the partners of the firm on their share of income from the firm, both in respect of income-tax and super-tax. The regular assessment of the petitioner for the year 1961-62 was completed by the respondent-Income-tax Officer on the 30th September, 1963, including therein his share income from the said firm and also giving him credit for the proportionate share of the amount by which the dividends recovered by the firm had been grossed up. After the aforesaid order of the Appellate Assistant Commissioner in the appeal by the firm, the petitioner's assessment was rectified under Section 154 of the Income-tax Act, 1961, by an order dated the 14th September, 1967, and the share of income from the firm of Messrs. Magniram Bangur & Co. was deleted from the assessee's total income but the tax credit in respect of the dividends and interest on securities and for payments of advance tax under Section 18 of the old Act and Section 151 of the 1961 Act were allowed and in consequence a sum of Rs. 85,705.77 was determined as refundable to the petitioner.

(2.) Thereafter by a notice, No. CCI/67-68/644, dated the 18th November, 1967, the respondent-Income-tax Officer notified the petitioner that the credit for tax under Section 18(5) in respect of the dividends grossed up under Section 16(2) of the Income-tax Act, 1922, in the assessment of M/s. Mugniram Bangur & Company had been allowed to the petitioner but as the entire income of that firm for the assessment year 1961-62 was exempt from tax, such dividends should not have been grossed up under Section 16(2) and no tax credit under Section 18(5) should have been allowed as the said dividends were not includible in the total income of the firm. The allowance of the credit was a mistake apparent from the record which the respondent proposed to rectify under Section 154 of the 1961 Act. The petitioner was further notified that the above letter might be treated as a notice of the proposed rectification and the petitioner's objection, if any, might be lodged within 15 days of the receipt thereof. If the petitioner desired to be heard in person he might attend before the respondent on the 8th December, 1967, at 3 p.m.

(3.) In response to the said purported notice, the petitioner by his letter dated the 28th November, 1967, pointed out that the fact that the firm's income was exempt from assessment to tax did not debar it from the benefit of grossing up under Sections 16(2) and 18(5) of the old Act and that the assessee was also entitled to his proportionate share of the tax deemed to have been paid on behalf of the firm on the said grossing up. Further, the petitioner challenged the jurisdiction of the respondent-Income-tax Officer to issue the purported notice under Section 154 as i't was contended that there was no error apparent on the face of the record which could give the respondent-Income-tax Officer the jurisdiction to issue such a notice. This application was moved on the 7th December, 1967, and a rule obtained on the respondent-Income-tax Officer, the Commissioner of Income-tax and the Union of India to show cause why the impugned notice and all the proceedings taken thereunder should not be quashed. An interim injunction was granted restraining the respondent from taking any proceedings under the impugned notice.