TaxTMI 
TaxTMI 
2006 (11) TMI 650
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....was legally correct in holding that framing of assessment on 'Association of Persons' on the basis of return filed by a different 'person' was merely a clerical/technical mistake and after correction such a mistake by the first appellate authority who had the powers to do so, a valid assessment order had come into existence? 4. Whether on a true appreciation of the legal position, the Tribunal should not have held that the assessment order passed on 'Association of Persons' suffered from a serious jurisdictional error which could not have been corrected or rectified by the first appellate authority?" 2. It appears that in the application filed under section 256(1) of the Act, the applicant had raised eight questions of law out of which only four questions were referred by the Tribunal. Thereafter, the applicant approached this Court by filing an application under section 256(2) of the Act and this Court directed the Tribunal to refer the following question of law also:- "Whether, in determining the taxable 'income' of the assessee, the Tribunal should not have given due regard to the legitimate outgoings in the form of entire purchases of gas cylinders but for ....
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.... the above two firms have denied to have issued vouchers or make supplies to the applicant as mentioned by the Income-tax Officer. He also pointed out that no vouchers for payment of freight and cartage was produced for the alleged purchases. He also asked the applicant to explain whether there was any special circumstances, if any, for the purpose of rule 6DD. The applicant sent reply which was considered and time was allowed to it to do the needful. He, however, noticed that the applicant did not come forward with the correct facts and has been adopting delaying practice. The Income-tax Officer noted that the payments of those fake vouchers and bills were shown either by showing cash payment of partly cash payment and partly by showing fictitious outstanding liability. Correspondingly, fictitious transport freight and cartage were also shown as narrated by him at para 9 of the assessment order. The Income-tax Officer discussed the various items in detail with facts and figures which were reproduced in the assessment order. The Income-tax Officer noted amongst other things that the applicant had also failed to furnish/produce supporting vouchers or explanation in respect of the to....
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....ier years. The G.P. disclosed in the last three years was as under:- Assessment year Percentage of G.P. 1980-81 29.1 per cent 1981-82 26.6 per cent 1982-83 28.7 per cent The G.P. disclosed for the year under consideration as such is in consonance and comparable to the G.P. disclosed in the earlier two years. At the same time it must be taken note of that against the purchases disclosed there were matching sales and sales could not have been made without purchases having been made. That in the past the book results had always been accepted. Under the circumstances, it was submitted that there was no justification for the addition. 2.2 I have carefully considered these submissions but find no merit in the same. In this case there was a complaint that the appellant had been indulging in malpractices in connivance with the appellant's purchasers inasmuch as the original as well as half filled cylinders were being received which were being resupplied at full cost. That bogus purchases were being shown from its principals to match these sales. It was in view of these complaints that the Income-tax Officer has proceeded to make enquiries....
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....vastava & Sons [1983] 142 ITR 183 1. The Commissioner of Income-tax (Appeals) repelled the submission on the finding that the Income-tax Officer had only committed an error in allocating the status of AOP while completing the assessment. His intention was to treat the firm as URF which is amply clear from the facts on record and he always intended to refuse registration and to treat the firm as URF. After referring to various paragraphs of the assessment order, the Commissioner of Income-tax (Appeals) had come to the conclusion that neither the show-cause notice nor anywhere in the assessment order the Income-tax Officer had discussed and given any reasons for holding the applicant to be an AOP and in the notice issued to the applicant as to why grant of renewal of registration be not denied, the action of the Income-tax Officer point towards renewal of registration and treating the firm as URF. The mistake as such was only technical which would not make the assessment invalid in view of the specific provision of section 292B of the Act. He accordingly held that the assessment had been made on an unregistered firm. 8. The applicant appealed before the Tribunal. The Tribunal afte....
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....OP was of a technical nature having no remotest link with the facts of the case and on this aspect of the matter, the order of the Commissioner of Income-tax (Appeals) was also sustained. 10. We have heard Sri S.K. Garg, learned counsel for the applicant, and Sri A.N. Mahajan, learned standing counsel appearing for the revenue. 11. Sri S.K. Garg, learned counsel, submitted that the Assessing Authority had not disbelieved the purchases of gas cylinders by the applicant including the transport charges. He has only disallowed/disbelieved the purchase vouchers. The trading account as such had not been disturbed and, therefore, there was no justification for making the additions. The Income-tax Officer had only doubted the sellers. The applicant was entitled for the set off of the purchase price of the gas cylinders while computing the income. According to him, the gross profit disclosed by the applicant was quite reasonable and the addition made was not justified. He further submitted that the applicant had filed its return of income in the status of a registered firm and neither any show-cause notice nor any opportunity was given by the Income-tax Officer to show cause as to why....
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....and purpose of the Act. He further submitted that the powers of the Commissioner of Income-tax (Appeals) is co-extensive with that of the Assessing Authority and even those matters which have not been raised, can be decided by the appellate authority in view of the provisions of section 251 of the Act. According to him, the Commissioner of Income-tax (Appeals) was perfectly justified in holding that the assessment has been framed in the status of unregistered firm and not that of an AOP. In support of his aforesaid pleas, he has relied upon the following decisions:- (i) CIT v. Amritlal Bhogilal & Co. [1958] 34 ITR 130 (SC); and (ii) Badri Narain Kashi Prasad v. Addl. CIT [1981] 128 ITR 663 4 (All.). 13. We have given our anxious consideration to the various pleas raised by the learned counsel for the parties. 14. Before adverting to the various submissions made by the learned counsel for the parties, it would be appropriate to reproduce the various provisions of the Act, as it stood during the relevant period, which have material bearing in the proper adjudication of the issues raised herein :- "2. Definitions.-In this Act, unless the co....
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....a co-operative society) in the income of such association are indeterminate or unknown, tax shall be charged on the total income of the association at the maximum marginal rate : Provided that, where the total income of any member of such association or body is chargeable to tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such higher rate. (2) Where the individual shares of the members of an association of person (other than a company or co-operative society) in any part of the income of such association are indeterminate or unknown, the income-tax payable by the association shall be the aggregate of- (i )the amount of income-tax calculated on the aforesaid part of the total income, at the maximum marginal rate; and (ii)the amount of income-tax with which it would have been chargeable had the remaining part of the total income been its total income. Explanation.-For the purposes of this section, (a )'maximum marginal rate' shall have the meaning assigned to it in Explanation 2 below sub-section (3) of section 164; ....
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....and, where the procedure specified in this clause is applied to any unregistered firm, the provisions of sub-sections (2), (3) and (4) of section 182 shall apply thereto as they apply in relation to a registered firm." "251. Powers of the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals).-(1) In disposing of an appeal, the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) shall have the following powers- (a )in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment; or he may set aside the assessment and refer the case back to the Income-tax Officer for making a fresh assessment in accordance with the directions given by the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) and after making such further inquiry as may be necessary, and the Income-tax Officer shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax payable on the basis of such fresh assessment; (b)in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary....
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....o pay any tax or any other money under the Act. Section 4 is the charging section. Under section 167A of the Act, the maximum marginal rate of tax is to be charged on the total income of the AOP where the individual shares of the members are indeterminate or unknown. Section 182 of the Act as it stood during the relevant assessment year provided for the procedure regarding assessment of registered firm whereas section 183 of the Act provided for the procedure regarding assessment of an unregistered firm. Under section 251 of the Act the appellate authority has been given a very wide power while deciding the appeal. He can confirm, reduce, enhance or annul the assessment proceeding, set aside the assessment and refer the case back to the Assessing Authority for making a fresh assessment. He is also empowered to pass such order in the appeal as he thinks fit. Section 292B provides that no return of income, assessment, notice, summons or other proceeding shall be invalid merely by reason of any mistake, defect or omission if in substance and effect it is in conformity with or according to the intent and purpose of the Act. 16. What constitutes a partnership firm or an AOP have been....
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....ine qua non for the constitution of a partnership. It is not necessary that such agreement must be in writing. It can be even implied either from conduct or otherwise. 20. In the case of Bist & Sons v. CIT [1979] 116 ITR 131 , the Apex Court has held that under the Indian Income-tax Act, 1922, a firm is a distinct assessable entity. It has held as follows :- ". . . But under the Income-tax Act, a firm is a distinct assessable entity. Section 3 of the Indian Income-tax Act, 1922, treats, it an such, and the entire process of computation of the income of a firm proceeds on the basis that it is a distinct assessable entity. In that respect it is distinct even from its partners : CIT v. A.W. Figgies & Co. [1953] 24 ITR 405 (SC). As an assessable entity it is also distinct from a HUF, which in itself is regarded as a separate unit of assessment under section 3 Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 (PC). . . ." (p. 134) In the case of N. Khadervali Saheb v. N. Gudu Sahib [2003] 261 ITR 1 1 the Apex Court has held that a partnership firm is not an independent legal entity, the partners are the real owners of the assets of the partnership firm. Actually the firm ....
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....f the Income-tax Act, and they have been accepted and followed in a number of later decisions of different High Courts to all of which it is unnecessary to call attention. It is, however, necessary to add some words of caution here. There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an association of persons within the meaning of section 3; it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not." (p. 551) 21. The aforesaid decision was subsequently followed by the Apex Court in the case of Mohamed Noorullah v. CIT [1961] 42 ITR 115 ; CAIT v. Raja Ratan Gopal [1966] 59 ITR 728 and G. Murugesan & Bros. v. CIT [1973] 88 ITR 432. 22. In the case of Deccan Wine & General Stores v. CIT [1977] 106 ITR 111 , the Andhra Pradesh High Court while considering the expression AOP, after referring to the decision of the Apex Court in the case of Indira Balkrishna (supra), has held as follows :- "It is, therefore, clear that an association of persons does not mean any and every combination of persons. It is only when the....
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....his expression in the case of CIT v. Indira Balkrishna [1960] 39 ITR 546 (SC). After reviewing the case-law on the point it was held that in order to constitute an association, persons must join in common purpose or common action and the object of the association must be to produce income. It is not enough that the persons receive the income jointly. It was also observed that there is no formula of universal application as to what facts, how many of them and of what nature are necessary to come to a conclusion that there is an association of persons. It must depend on the particular facts and circumstances of each case as to whether that conclusion can be drawn or not. This case was followed in Mohamed Noorullah v. CIT [1961] 42 ITR 115 (SC). Also see CIT v. Buldana District Main Cloth Importers Group [1961] 42 ITR 172 (SC) and G. Murugesan & Bros. v. CIT [1973] 88 ITR 432 (SC). It would thus be seen that in order to constitute an association, persons must join in a common purpose or common action with an object to produce income. Such combination should be voluntary and even minors can become members of an association through their guardian if the guardian gives his conse....
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....b-section (5)(a) 'assess' and 'assessment' refer primarily to the computation of the amount of income and 'assessee' means primarily a person the amount of whose income is being computed. The section requires the Income-tax Officer to do two things : first to compute or 'assess' a person's total income, and then to determine the sum payable as tax. Sub-sections (1) to (4) set out alternative methods of computation or 'assessment'. In the normal case the person whose income is being computed is the person who pays the tax and for that case these sub-sections also provide for the Income-tax Officer taking the second step and determining the sum payable as tax. But the case of a firm is specially dealt with by sub-section (5). This sub-section only comes into operation after the total income of the firm has been computed or 'assessed' under one of the earlier sub-sections. It draws a distinction between registered and unregistered firms. In the case of a registered firm the firm does not itself pay income-tax and therefore the sub-section directs that the sum payable by the firm shall not be determined, but that each partner's share of the firm's income shall be included in the assess....
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....in the income of the firm, even though the firm is registered. . .". (p. 767) 29. This Court in the case of Badri Narain Kashi Prasad v. Addl. CIT [1981] 128 ITR 6631 , has held that under the Act a firm is an assessee under section 2(31), whether it is registered or not. It has held as follows :- "Under the Income-tax Act, a firm is an assessee, under section 2(31), whether it is registered or not. The Income-tax Act does not impose an obligation on firms to apply for and obtain registration. Even if a firm is registered in pursuance of an application made by it, no difference arises in the liability of the firm or its individual partners to be taxed for the total income as may be determined by the ITO. The computation of taxable income is not at all affected by the registration or otherwise of the firm. The only effect of registration is that the determination of the tax payable and making the demand for the tax so found due, changes according as the firm is registered or unregistered-vide sections 152 and 153 of the Act." (p. 667) 30. The Karnataka High Court in the case of CIT v. Angadi Bros. [1986] 157 ITR 4262, has held that there is an essential difference bet....
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....escribed in section 17 of that Act. It is four years in certain circumstances and eight years in other cases. Admittedly, the period of limitation by now has expired. It is, therefore, unnecessary to send the case back, as submitted by the learned counsel for the revenue, for the issuance of a requisite notice." (p. 185) 35. In the case of CIT v. Associated Cement & Steel Agencies [1984] 147 ITR 7762 the Bombay High Court has held as follows :- "That a 'firm' and an 'association of persons' are two different 'persons', and, indeed, independent units of assessment, cannot be disputed, considering the whole scheme of the Income-tax Act, 1961. The mode of their taxing and process (sic) of liability are also different. Thus, even if the identity of the members of the alleged firm and the association of persons is established, there cannot be a valid assessment altering the status declared in the return. Mandatory requirement of issuing of a notice under section 143(2) before making assessment under section 143(3) cannot be lost sight of. In this case, notice was given to the firm in relation to the return filed as firm, and no notice to the association of persons was issued....
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.... to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh unless forbidden from doing so by the statute...." (p. 460) 38. Following the aforesaid decision, the Calcutta High Court, in the case of Sewduttroy Rambullav & Sons v. CIT [1993] 204 ITR 580 1, has held as follows :- ". . .We also refer in this connection to the decision of the Supreme Court in Kapurchand Shrimal v. CIT [1981] 131 ITR 451 . In this case, the Supreme Court held that, where the Income-tax Officer commits an error in the course of completing the assessment proceeding after having duly assumed jurisdiction, it is the duty of the appellate authority to remove the particular defect or irregularity occurring in the course of the proceeding." (p.586) 39. In the present case we are of the considered opinion that the Income-tax Officer had only committed an error in mentioning the wrong status of AOP instead of URF in the assessment order which error has rightly been corrected by the Commissioner of Income-tax (Appeals). 40. This leaves us to the question as to whether the Tribunal should have given due regard to the legitimate outgoing....