M/S. Sarupchand Hukamchand and Co vs Union of India and Others

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 172 of 1955

Decision Date: 5 May, 1959

Coram: M. Hidayatullah, Natwarlal H. Bhagwati

In the case titled M/S. Sarupchand Hukamchand & Co. versus Union of India and Others, the Supreme Court delivered its judgment on 5 May 1959. The Bench that heard the petition comprised Justice M. Hidayatullah, Justice Natwar Lal H. Bhagwati and a third Justice, and the matter was recorded in the law reports as 1959 AIR 1207 and 1959 SCR Supl. (2) 986. The petitioner in the proceedings was the firm M/S. Sarupchand Hukamchand & Co., while the respondents were the Union of India together with other interested parties. The dispute concerned the assessment of income tax under the Indian Income‑tax Act, 1922 (XI of 1922), specifically the provisions contained in sections 23(5)(b), 24(2)(d) and 31(4). The central issue arose from the Income‑tax Officer’s treatment of the firm, which was unregistered, as if it were a registered entity for the assessment year 1940‑41, thereby attributing profit to the partners and making no direct demand on the firm itself.

According to the facts, the Income‑tax Officer had originally found that the unregistered firm had earned a profit in the assessment year 1940‑41. Invoking section 23(5)(b) of the Act, the Officer classified the firm as a registered one, assessed the individual partners on the basis of that profit and refrained from levying any demand against the firm. For the two subsequent assessment years, the Officer reverted to treating the firm as an unregistered entity, yet continued to regard it as resident and ordinarily resident for tax purposes in all three years. The firm challenged each of these assessments, and the appeals were consolidated before the Appellate Assistant Commissioner. The Commissioner concluded that the firm was in fact non‑resident, that the earlier computation of income was erroneous, that a loss had occurred in the year 1940‑41, and that profits were present in the following years. Accordingly, the Commissioner directed the Income‑tax Officer to amend the assessments, leading the Officer to grant relief to the partners for 1940‑41 and to order refunds. Dissatisfied, the firm appealed both to the Income‑tax Officer and to the Appellate Assistant Commissioner, arguing that the loss in the first year should permit the firm to carry the loss forward, and that the initial treatment as a registered firm could not stand after the reversal of the profit finding. The higher authorities, including the Commissioner and the Central Board of Revenue, declined to interfere, prompting the firm to approach the High Court under Article 226 of the Constitution. The single judge of the High Court refused to set aside the assessment, a decision upheld by a Division Bench on appeal. Finally, the firm appealed to the Supreme Court, raising the question of whether the Income‑tax Officer’s original decision to treat the unregistered firm as registered under section 23(5)(b) could remain effective after the Appellate Assistant Commissioner had altered the profit determination to a loss.

In this matter the Court observed that the power of an Income‑tax Officer to treat an unregistered firm as a registered one under section 23(5)(b) of the Indian Income‑tax Act could be exercised only when the firm showed a profit. Consequently, when the Appellate Assistant Commissioner reversed the Officer’s original finding of profit, that reversal automatically removed the Officer’s jurisdiction to act under the said provision, and the order issued by the Officer under section 23(5)(b) became ineffective. The Court further held that it was irrelevant whether the Appellate Assistant Commissioner’s order was issued under clause (a) of section 31(3) or under clause (b) of the same section, because in either circumstance the legal effect of the order was identical: the assessment was annulled and the matter was restored to its original position. The Court rejected the argument that, on the basis of proviso (d) to section 24(2) of the Act, the losses of an unregistered firm could be transferred to the partners’ accounts as if the firm were registered. That proviso, the Court explained, was not intended to permit the Income‑tax Officer to evade the duty imposed on him by clause (b) of section 23(5), namely the duty to ascertain the revenue interest and to give effect to the words “during any year” in the proviso. Reading sections 23(5)(b) and proviso (d) to 24(2) together, the Court concluded that the proviso could be invoked only subject to the conditions laid down in section 23(5)(b), with the aim of securing greater revenue for the State by applying section 23(5)(a). Although the Appellate Assistant Commissioner, under section 31(4), could not interfere with an order made by the Income‑tax Officer under section 23(5)(b) when the officer’s order itself was under appeal, the situation changed when the assessment as a whole was appealed under section 31 of the Act. In such a case the Appellate Assistant Commissioner was authorised to direct the Income‑tax Officer to modify the assessment in accordance with his direction. Accordingly, the Court held that the Income‑tax Officer was obligated to reconsider, anew and de novo, whether the provisions of section 23(5)(b) could still be applied in the altered factual circumstances. The Court referred to the authorities Commissioner of Income‑tax v. Tribune Trust, Lahore, [1948] 16 I.T.R. 214; Commissioner of Income‑tax v. McMillan & Co., [1958] 33 I.T.R. 182; and Commissioner of Income‑tax v. Amritlal Bhogilal & Co., [1958] 34 I.T.R. 130 in supporting its reasoning. The judgment was delivered in Civil Appeal No. 172 of 1955, an appeal by special leave from the Bombay High Court judgment dated 26 February 1953 in Appeal No. 108 of 1952, which arose out of the High Court order dated 8 July 1952 in Miscellaneous No. 48 of 1952. The appellant was represented by counsel, as were the respondents, and the judgment was pronounced on 5 May 1959.

By special leave of the Court, the present appeal was filed against the judgment and order of the High Court of Judicature at Bombay dated 26 February 1953 in Appeal No 108 of 1952. The Divisional Bench, consisting of Chief Justice Chagla and Justice Shah, had declined to interfere, in a Letters Patent Appeal, with the judgment of Justice Tendolkar dated 8 July 1952 in Miscellaneous Application No 48 of 1952. The original petition to the High Court had been instituted under Article 226 of the Constitution, seeking a writ of mandamus against the Union of India and two Income‑tax Officers. The purpose of the writ was to compel the respondents to give effect to the appellate order of the Appellate Assistant Commissioner of the Income‑Tax (Finance) Range, Bombay, dated 29 April 1949. Both judgments of the High Court dismissed the writ application.

The appellant, Messrs Sarupchand and Hukamchand and Co., is hereinafter referred to as the assessee firm. The firm carried on business, among other activities, as shroffs, merchants and commission agents at Bombay, Indore, Ujjain and Calcutta. During the years under consideration the firm had two partners, Sir Sarupchand Hukamchand and Sri Hiralal Kalyanmal. Each partner was separately liable to income‑tax: the former in his capacity as a Hindu undivided family and the latter as an individual. The matters before the Court concerned the assessment years 1940‑41, 1941‑42 and 1942‑43, which correspond to the Samvat account years 1995‑1996 through 1997‑1998.

When the assessment of the firm was made, the Income‑tax Officer of Section VIII (Central), Bombay, treated the firm as “resident and ordinarily resident.” For the assessment year 1940‑41 the Officer found that the firm had earned a profit of Rs 80,358. Applying section 23(5)(b) of the Indian Income‑tax Act, he treated the unregistered firm as if it were registered for the purpose of assessment. Consequently, on 15 March 1945 the Officer assessed the two partners individually, transferring the profit to their personal returns and making no demand upon the firm itself. An application for registration under section 26A of the Act had earlier been filed before the Officer, but it was correctly rejected because the partnership deed had not been produced; that rejection was also dated 15 March 1945.

For the subsequent assessment years 1941‑42 and 1942‑43 the Officer again treated the firm as resident and ordinarily resident, despite its unregistered status. By orders dated 31 July 1945 and 31 October 1945 respectively, he assessed the firm for the year 1941‑42 on a total income of Rs 2,30,798 for income‑tax and super‑tax. For the year 1942‑43 he took the British Indian income as Rs 2,62,827 and the total income as Rs 7,00,116, and assessed the firm accordingly. The assessee firm challenged these assessments before the appellate authority.

The Appellate Assistant Commissioner, in the consolidated appeals order dated 29 April 1949, held that the firm was non‑resident and therefore excluded from the assessment any income earned outside British India. He further directed the Income‑tax Officer to modify the assessments in accordance with this finding.

The Appellate Assistant Commissioner observed that the computation of income made by the Income‑tax Officer contained an error; consequently, he held that for the assessment year 1940‑41 the assessee firm incurred a loss of Rs 1,61,084 in its total world income. For the succeeding assessment years he noted minor variations in the amounts determined by the Income‑tax Officer but concluded that the firm earned profits in those years. He recorded his findings in a table, indicating that for 1940‑41 the firm had a total world loss of Rs 1,61,084, with British India income of Rs 2,26,028 and income outside British India of Rs 74,944. For 1941‑42 he listed a British India income of Rs 1,27,062, income outside British India of Rs 1,08,236, giving a total world income of Rs 2,35,298. For 1942‑43 he recorded a British India income of Rs 2,62,827 and income outside British India of Rs 4,41,789, resulting in a total world income of Rs 7,04,616. In addition to these determinations, the Appellate Assistant Commissioner issued a direction stating that the Income‑tax Officer should modify the assessments accordingly.

When the matter returned to the Income‑tax Officer, he acted upon the Appellate Assistant Commissioner’s direction under section 31 of the Act. He carried forward the loss of the first assessment year to the partners’ individual assessments for 1940‑41 and granted a refund of Rs 16,977‑11‑0 to Sir Sarupchand Hukamchand and Rs 68,339 to Sri Hiralal Kalyanmal. The assessee firm remained dissatisfied and initiated a series of correspondences, beginning with a letter dated September 10, 1949. In that letter the firm argued that because it had been shown to have incurred a loss in the first of the three assessment years, it could not be treated as a registered firm for that year, and that, as an unregistered firm, it was entitled to carry forward that loss to the subsequent years.

Subsequently, the firm filed applications before both the Income‑tax Officer and the Appellate Assistant Commissioner under section 35 of the Act, seeking rectification of the assessment on the same ground. Both officers declined to interfere, contending that the direction issued by the Income‑tax Officer under section 23(5)(b) was not appealable and had become final. They further observed that the four‑year period within which the original order of the Income‑tax Officer could be rectified had already elapsed, rendering the petitions time‑barred. The firm then approached the Commissioner as well as the Central Board of Revenue, but obtained no order in its favour.

After receiving the order of the Central Board of Revenue, the assessee firm filed an application on July 16, 1951, with the Additional Income‑tax Officer, Section VIII (Central). The application requested that the Additional Income‑tax Officer give effect to the earlier order of the Appellate Assistant Commissioner, which, at the firm’s request, had directed the Income‑tax Officer to credit the loss of the first assessment year to the partners’ accounts. This request sought to implement the directive that the loss should be borne by the partners, a direction that the Appellate Assistant Commissioner had identified as omitted in the original assessment.

According to the Appellate Assistant Commissioner, his predecessor had failed to give the direction that the partners should be allowed to set off the losses of the first assessment year against their personal accounts; the Commissioner therefore issued that direction. After this direction was given, new assessment forms were prepared and a refund was calculated. It should be noted that the partners actually drew down the refund amount, even though, when the assessee firm applied to the Additional Income‑tax Officer, it expressly reserved the right “to move further in the matter as may be advised” and stated that its action was taken without prejudice to any such further rights. Having been unable to obtain any relief from the Department, from the appellate authorities and from the Central Board of Revenue, the assessee firm resorted to filing a petition under Article 226 of the Constitution before the High Court of Judicature at Bombay.

The petition was heard by Justice Tendolkar, who declined to interfere. He explained that the case could be viewed in two different ways: one view was that, after the profit assessment had been altered to a loss assessment by the Appellate Assistant Commissioner, the original order of the Income‑tax Officer made under section 23(5)(b) might still be pending; the other view was that the original order might be considered discharged. Justice Tendolkar held that because of this dual possibility, the matter was not suitable for the issuance of a writ of mandamus by the High Court. On appeal, Chief Justice Chagla examined proviso (d) to section 24(2) and arrived at the same conclusion that the question admitted two plausible interpretations, and therefore the learned single judge was correct in refusing to interfere. Justice Shah, in a judgment that concurred with Chief Justice Chagla, explained his understanding of section 23(5)(b) read together with section 24(2), proviso (d), but he also expressed the view that this was not a case in which a writ could be claimed against the Union of India or the Income‑tax Officers. Nevertheless, Chief Justice Chagla expressed the hope that the taxing authorities would not deny the assessee firm its statutory rights on any technical ground such as limitation or a procedural defect.

Consequently, the Divisional Bench upheld Justice Tendolkar’s order dismissing the petition. On 3 May 1954, this Court granted special leave to appeal against the judgment of the Divisional Bench. Before the merits of the appeal were addressed, the learned Additional Solicitor‑General, and subsequently Mr Rajagopala Sastri who took over the argument, raised three objections to the appeal. They contended that the High Court petition was directed against the Union of India and the two Income‑tax Officers who had dealt with the matter, and that none of those respondents could grant the relief claimed. They further argued that a writ of mandamus was an inappropriate remedy because the order passed by the Income‑tax Officer under section 23(5)(b) was not appealable and the Appellate Assistant Commissioner had no power to alter that order in the appeal concerning the assessment amount. They also stated that the relief asked for in the petition could

The objections raised by the respondents were that the relief claimed could not be granted by the High Court and consequently the jurisdiction of this Court was limited; the Court said it would consider those objections after it had clarified the core issue of the case. It then explained that, under section 23(5)(b) of the Income-tax Act, the Income‑tax Officer is authorized to treat an unregistered partnership as a registered one when, in his judgment, such treatment would result in a larger amount of tax and super‑tax being recoverable from the individual partners than would be obtained by assessing the firm itself. For convenience, the Court reproduced the full wording of the provision, which states that notwithstanding any earlier sub‑sections, if the assessee is a firm whose total income has been assessed under sub‑section (1), (3) or (4), then, in the case of an unregistered firm, the Officer may, instead of fixing the liability on the firm, apply the procedure applicable to a registered firm, provided that he is satisfied that the aggregate tax, including any super‑tax, payable by the partners under that procedure would exceed the aggregate amount payable if the firm and the partners were assessed separately as an unregistered firm. The assessee firm argued that the Officer’s power to re‑classify an unregistered firm as a registered one is exercised solely for the benefit of the Revenue, and that the Officer may invoke this power only when it would increase revenue, not when it would create a loss for the State. The firm further observed that when an unregistered partnership incurs a loss, the loss may be carried forward for several years and, if eventually absorbed by future profits, the loss may be allocated to the individual partners, thereby reducing their personal tax liability and causing a loss of revenue to the Government. Consequently, the firm maintained that such allocation of loss lies beyond the Officer’s jurisdiction because his authority is conditioned on the prospect of greater revenue and not on the creation of a fiscal loss. Counsel for the Department conceded that in an assessment year in which an unregistered firm suffers a loss, the revenue may indeed be reduced if the loss is transferred to the partners, but argued that there is no legal prohibition against the Officer’s action. They referred to proviso (d) to section 24(2) of the Act, contending that this provision demonstrates that the practice is permissible. The assessee firm further contended that the moment the Appellate Assistant Commissioner determined the loss, the earlier order issued by the Income‑tax Officer under section 23(5)(b) ceased to have any effect, and that the loss could be carried forward only in subsequent assessments of the unregistered firm itself, not in the accounts of the individual partners. Finally, the firm argued that the direction issued by the Appellate Assistant Commissioner to modify the assessments of the three years under consideration revived the entire question of whether the unregistered firm could be treated as a registered firm for assessment purposes in the first year.

In this case the Court observed that the direction issued by the Appellate Assistant Commissioner to modify the assessments for the three assessment years effectively reopened the entire issue of whether the unregistered firm could be treated as a registered firm for assessment purposes in the first year. The Department, however, relied on the provisions of section 30 of the Income‑Tax Act to argue that an appeal to the Appellate Assistant Commissioner could be made only on the specific grounds enumerated in that section and on no other basis. The Department further contended that the matter before the Court was not one of those enumerated grounds, and therefore the Act could not be interpreted as implicitly granting the Appellate Assistant Commissioner a power that the statute did not expressly confer. Consequently, the Court held that the Income‑Tax Officer’s order to deem the unregistered firm as a registered firm should be regarded as still outstanding, and that the subsequent proceedings merely carried that order to its logical conclusion in view of the loss assessed against the firm for the three years under consideration. The Court noted that this question had been argued before it in great detail, as it also had been before the lower court. While acknowledging the inherent complexity of the issue, the Court expressed the view that only one correct interpretation was possible and that the High Court had made only a limited attempt to resolve the matter. The Court then set out to interpret the relevant statutory provisions. Section 23(5)(b) was quoted, showing that the Income‑Tax Officer is authorised to apply the procedure laid down in clause (a) to an unregistered firm if, in his judgment, the total tax liability—including any super‑tax—that would be payable by the partners under that procedure exceeds the total tax that would be payable by the firm and the partners individually if the firm were assessed as unregistered. Clause (a) provides that the tax payable by the firm shall not be determined; instead, the total income of each partner, including his share of the firm’s income, profits and gains for the previous year, shall be assessed and the tax payable by each partner on the basis of that assessment shall be determined. In simple terms, for a registered firm the assessable income is first ascertained but is not further processed to compute tax at the firm level; rather, the partners’ shares of that assessable income are allocated according to the particulars they furnish, the resulting amounts are placed in each partner’s return, included in his total income, and the tax on that total is then calculated. By contrast, for an unregistered firm the assessable income is determined, the tax payable by the firm is computed and a demand note issued; if the firm incurs a loss, that loss is carried

The legislation allowed a loss to be carried forward to succeeding years until it was absorbed, or for six years, now increased to eight years, but not beyond that period. Earlier, the statutory provision permitted a range of one to six years, although the exact wording of the provision need not be reproduced here. In the matter before the Court, for the assessment year 1940‑41, the Income‑Tax Officer fixed the assessable income of the unregistered firm at Rs 80,358. The Officer believed that a higher tax liability would result if the partners were assessed individually rather than the firm as a whole, and consequently he elected to apply the procedure prescribed in section 23(5)(b) to the firm. In his order he stated: “The firm is an unregistered one but the aggregate amount of tax payable by the partners would be greater by applying the procedure laid down in Sec. 23(5)(a) of the Act than the aggregate amount which would be payable by the firm and the partners individually if the firm were assessed as an unregistered one. I therefore order under Sec. 23(5)(b) of the Act that the procedure laid down in Sec. 23(5)(a) should be applied and the firm declared N. D. for the assessment year 1940‑41.” It was undisputed that had the Income‑Tax Officer originally found a loss, he could not, and probably would not, have issued such an order, because it would have caused an immediate loss to the Revenue of the sums later ordered to be refunded to the partners of the unregistered firm. The Department, however, contended that the assessment for 1940‑41, except to the extent that profit was later converted into loss, had become final and could not be set aside. The Department relied on the decisions in Commissioner of Income‑Tax, Bombay and Aden v. Khemchand Ramdas (1) and Commissioner of Income‑Tax v. Tribune Trust, Lahore (1). While it is true that an assessment, once made, becomes final subject only to the powers conferred by sections 34 and 35 of the Act, the situation differs where the assessment is under appeal and the Appellate Assistant Commissioner issues an order converting the profit into a loss and directs the Income‑Tax Officer to modify the assessment accordingly. In that scenario the Income‑Tax Officer had originally exercised his powers under section 23(5)(b) on the basis that there was a profit. When the Appellate Assistant Commissioner subsequently found a loss, it became evident that the Income‑Tax Officer, by mistakenly concluding that there was a profit, had assumed jurisdiction to act under section 23(5)(b). The reversal of the profit finding destroyed the foundation of his jurisdiction under that clause, causing his order to automatically fall away. The Department’s argument that the order fell within clause (a) of section 31(3) and did not involve setting aside the earlier order under section 23(5)(b) was therefore incorrect. It is also clear that the right of appeal granted to the assessee under section 30 is limited.

In this case, the Court observed that the right of appeal granted to the assessee under section 30 is confined to the matters expressly mentioned in the appeal, while the relief that the appellate authority may grant is located in section 31(3). Once the assessment order was placed before the Appellate Assistant Commissioner, that officer possessed, under clause (a) of section 31(3), the power to confirm, reduce, enhance or annul the assessment. Under clause (b) of the same provision, the officer could set aside the assessment and order the Income‑tax Officer to carry out a fresh assessment, after any further inquiries that the Income‑tax Officer considered appropriate or that the Appellate Assistant Commissioner directed. Upon such a direction, the Income‑tax Officer was required to proceed with the fresh assessment and to determine the tax payable based on that new assessment. The Department contended that the order issued by the Appellate Assistant Commissioner was made under clause (a) and not under clause (b). Because no fresh assessment had been ordered, the Department argued that the only permissible action for the Income‑tax Officer was to recompute the tax within the confines of his own power under section 23(5)(b) of the Act, applying clause (a) of that subsection to the present facts. The Court disagreed with this approach. Even if the order were classified as being made under clause (a) of section 31(3), the legal effect was the annulment of the original assessment, and the consequent requirement to determine the loss within the assessable income remained. The Income‑tax Officer addressed this requirement by carrying the losses forward to the partners’ tax returns. Such a step could be taken only under section 23(5)(b); there was no authority under section 31(4) and the second proviso to section 24 left the matter clear. Consequently, the Income‑tax Officer was again required to consider, in light of the interests of the Revenue, whether to proceed with the loss. The Court noted that, if the officer had truly acted in the interests of the Revenue as the law demands, he would not have ordered that the firm’s loss be immediately transferred to the partners’ accounts for that assessment year. Although counsel for the Department conceded that ordinarily an Income‑tax Officer would not grant relief to partners on account of a firm’s loss, the Department maintained that such an order was not illegal because of the special provision contained in proviso (d) to section 24(2) of the Act. The Court therefore examined the effect of that proviso, which states: “Provided that—(d) where an unregistered firm is assessed as a registered firm under clause (b) of sub‑section (5) of Section 23, during any year, its losses shall also be carried forward and set off under this section as if it were a registered firm.” The Department, relying on the High Court’s reasoning, argued that this language permitted even the losses of an

In this passage the Court observed that, according to the wording of proviso (d), even an unregistered firm could have its losses transferred to the partners’ accounts as if the firm were a registered one. The Court noted that, while an overly expansive reading of the proviso might seem to support that result, a careful and precise reading showed that the provision was not intended to allow the Income‑tax Officer to abandon the duty imposed on him by clause (b) of section 23(5), namely the duty to protect the interests of the Revenue. To interpret the proviso as permitting the Officer to disregard that clause would render the phrase “during any year” meaningless. The Court emphasized that those words are a material part of the provision because the sense of the provision changes completely depending on whether those words are included. Without the words “during any year,” the provision would confer a general power to shift losses to the partners’ accounts. With the words however, the provision only creates a situation in which an unregistered firm that had been treated as unregistered in earlier years may, in a particular year, be treated as a registered firm, and because it had incurred business losses in the past, an arrangement for the forward‑carrying and set‑off of those losses must be made for the year in which it is treated as registered. In that circumstance, the proviso allows its losses to be carried to the partners’ accounts as if the firm were registered. The Court found it inconceivable that a firm bearing heavy business losses would suddenly be treated as a registered firm in a year of assessment merely so that its losses could relieve the partners without producing revenue for the State. The proviso, the Court explained, would be invoked only when, despite allocating the losses to the partners’ accounts, the State would still obtain more revenue. Consequently, the proviso is an enabling provision. An unregistered firm that had been treated as such in previous years may, in any given year, be treated as a registered firm if such treatment would benefit the Revenue. The firm might have incurred a loss in that year or might be carrying forward losses from earlier years, but if treating it as registered would increase revenue, the proviso could be applied. However, there is no blanket power to use the provision in a manner that harms the Revenue. To give any other meaning to the proviso would effectively strip the words “during any year” of significance and would imply that the Income‑tax Officer is not required to consider the Revenue’s interests as mandated by clause (b) of section 23(5). The Court held that the two provisions must be read harmoniously, and when read together they lead to the conclusion that provision (d) may be invoked only subject to the conditions of section 23(5)(b) and with the purpose of securing additional revenue for the State by applying section 23(5)(a). Accordingly, the Court concluded that, in light of the losses involved, the Income‑tax Officer was bound by these interpretative limits.

In this case the Court observed that the Appellate Assistant Commissioner, having determined the matter, was obligated to reconsider the issue anew, that is, to apply his mind de novo, when he relied upon section 23(5)(b) of the Act. The Court noted that it was conceded that, had the question been entirely clear to the officer, he would not, if he performed his duty correctly under the said provision, have transferred the losses to the partners’ accounts. Accordingly, the only issue that remained for determination was whether the order passed by the Appellate Assistant Commissioner released the Income‑tax Officer from the effect of his earlier order and whether the Income‑tax Officer was thereafter bound to revisit the position under section 23(5)(b). The Court pointed out that, once the basis for computing a profit disappeared, it became evident that only a loss remained to be carried forward to the partners’ accounts. Because the assessment collapsed in this way, the necessity of invoking the special provisions of clause (b) of section 23(5) vanished. In fact, the Court held that the duty of the Income‑tax Officer would have required a contrary course had he attempted to act under section 23(5)(b) at all. The order of the Appellate Assistant Commissioner dealt with the assessment of three years and was issued as a consolidated order. In that order he displayed, in parallel columns, the income and losses of the firm itself rather than those of the individual partners, and he directed the Income‑tax Officer to modify the assessments in accordance with those figures. The Court explained that the apparent purpose of that order was to bring the matter to the point where the assessable income of the assembled firm could be ascertained before the tax liability was calculated. To compute the tax, the Income‑tax Officer had to decide whether the loss incurred in the first year should be carried forward to the assessable firm in the subsequent year, and he could not give full effect to the Appellate Assistant Commissioner’s order unless he again resolved the question under section 23(5)(b). In other words, the implication of the appellate order was to revert the matter to the stage preceding the decision on the treatment of the unregistered firm as a registered firm, and, by necessity, that earlier order could no longer stand as having been passed beyond that stage. The Court then addressed the contention raised on the basis of the Privy Council decision in Commissioner of Income‑tax v. The Tribune Trust, Lahore, which holds that once an assessment becomes final and valid it remains so until it is set aside, and that a final assessment may be altered only under sections 34 and 35. While the Court acknowledged that the Privy Council’s statement of law is correct, it rejected the analogy that the order treating the unregistered firm as a registered firm had likewise become final and closed to further consideration. Finally, the Court noted that counsel for the Department relied on the authorities Commissioner of Income‑tax v. McMillan & Co. and Commissioner of Income‑tax v. Amritlal Bhogilal & Co., arguing that…

In this case, the Court examined the scope of the powers of the Appellate Assistant Commissioner. It held that those powers did not include a review of the determination made by the Income‑tax Officer under section 23(5)(b); consequently, the result could not be inferred indirectly. The Court acknowledged that the Appellate Assistant Commissioner could not have interfered if the matter had been brought before him on appeal against the order made under that section. However, the Court observed that the Appellate Assistant Commissioner was exercising his authority under section 31 of the Act when he annulled the assessment of the first year and converted the profit for that year into a loss, citing the authorities (1) [1948] 16 I.T.R. 214, (2) [1958] 33 I.T.R. 182 and (3) [1958] 34 I.T.R. 13o. The Court stated that none could deny that he possessed such power in the appeal that was before him. Section 31(4) of the Act, the Court explained, provides that when an appeal results in any change to the assessment of a firm, the Appellate Assistant Commissioner may authorise the Income‑tax Officer to amend, accordingly, any assessment made on any partner of the firm. This authority was implicit in the order passed by the Appellate Assistant Commissioner, which declared a loss in the assessment year in question and required modification of the assessments for the three years. Accordingly, the Income‑tax Officer was placed under a duty to modify the partners’ assessments in line with that order and to resume the matter from the point at which the Appellate Assistant Commissioner’s order had positioned it. The Officer had to determine once again whether, in the altered circumstances, section 23(5)(b) applied to the case. The Court opined that the Income‑tax Officers concerned had failed to perform this duty as required by law, and therefore, they should be compelled by a writ to do so. Regarding the contention that the petition was directed against the wrong persons and sought an inappropriate relief, the Court rejected that view. Although the petition sought relief against the Union of India, which was not actually concerned with the matter and was incorrectly joined, the two Income‑tax Officers who handled the case were statutorily required to revisit the application of section 23(5)(b) of the Act. Their failure to properly consider the issue, based on a mistaken understanding of the law, was evident, and they did not give effect to the Appellate Assistant Commissioner’s orders. Since the assessee firm had been unable to obtain the relief from the higher authorities, the Court held that the High Court could, by way of a writ, direct the concerned Income‑tax Officer to hear and determine the matter according to law. That relief had been claimed before the High Court and was now sought in the present appeal. The Court concluded, with respect, that the High Court should, on a correct appraisal of the legal position, have ordered such relief, and accordingly, after explaining the applicable law, ordered the appropriate Income‑tax Officer to act.

The Court directed that the Income‑tax Officer should hear and determine the present matter in accordance with the observations made by the Court. It recorded that the two partners of the firm, who had previously obtained relief in the form of a refund after the order of the Appellate Assistant Commissioner, had undertaken unconditionally to return the refunded amounts before the Income‑tax Officer proceeded to consider the issue. Accordingly, the Court ordered that the two partners must return the amounts in the manner that the Income‑tax Officer shall prescribe, and that such return must be completed before any further action is taken to determine the substantive questions. The Court further held that the appeal was to be allowed and that the costs of the proceedings were to be awarded against respondents identified as number two and number three on a full‑costs basis. It stipulated that the Union of India should bear only its own costs, noting that the Union had incurred no separate costs in either the present Court or the lower Court. The Court observed that the Union of India had joined respondents two and three in the statement of case filed before this Court and had been represented by the same counsel in both the present and the lower proceedings. In view of these findings, the Court allowed the appeal.