Commissioner Of Income-Tax, Andhra... vs Raja Reddy Mallaram

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 20 November, 1963

Coram: SHAH J.

In this case the Court recorded that Baba Gowd, P. V. Rajareddy and Rajareddy Mallaram had created an association of persons that was named “Nizamabad Group Liquor Shops”, hereinafter referred to as the Group. For the Fasli year 1358, which ran from 1 October 1948 to 30 September 1949, the Group conducted business in liquor contracts that it obtained from the former State of Hyderabad. When the Fasli year ended, those contracts terminated, the business was halted and the Group was dissolved. The Group never filed an income‑tax return in accordance with the general notice issued under section 22(1) of the Indian Income‑Tax Act. Consequently the Income‑Tax Officer of the Nizamabad Circle issued a notice under section 34 of the Act, directing Baba Gowd, one of the members, to file a return on behalf of the Group. Baba Gowd did not file the return by the prescribed date, and the Officer then assessed the Group’s taxable income under section 23(4) at a sum of Rs 51,000, fixing the tax payable at Rs 8,826‑14‑0. After several unsuccessful attempts to recover the tax from Baba Gowd, the Officer issued, on 13 March 1954, a notice of demand addressed to Rajareddy Mallaram, another member of the Group. Rajareddy Mallaram applied for cancellation of the assessment under section 27 of the Act, but the Officer rejected the application. On appeal, the Appellate Assistant Commissioner set aside the Officer’s order and directed the Officer to cancel the assessment made under section 23(4) and to make a fresh assessment, after providing Rajareddy Mallaram an opportunity to file the Group’s return and to produce the books of account of the dissolved Group. The Income‑Tax Appellate Tribunal, Hyderabad Bench, modified the Assistant Commissioner’s order, holding that because a valid assessment under section 23(4) had already been made, there was no justification for issuing a fresh notice to Rajareddy Mallaram or for making a new assessment. Nevertheless, the Tribunal inconsistently instructed the Assistant Commissioner to consider whether Rajareddy Mallaram had been prevented by sufficient cause from filing the return. At Rajareddy Mallaram’s request, the Tribunal referred two questions to the High Court of Andhra Pradesh: first, whether, on the facts and circumstances, the assessment order made by the Income‑Tax Officer on 30 September 1953 under section 23(4) was legally defective; and second, assuming the first answer was negative, whether the applicant was liable for the tax amount determined in that assessment by operation of section 44 of the Act. The High Court answered the first question affirmatively, holding that the assessment order was indeed bad in law because the Officer had assessed the association rather than the individual members who were alive at the time of dissolution, and because notices under sections 34 and 22(4) had not been served to all members. Accordingly, the assessment was not binding on the petitioner, as no notice under section 22 had been issued to him and he had not been assessed jointly or severally with the other members. The Court further found that the applicant was not liable for the assessed amount.

The High Court was asked to consider two questions that had been referred by the Tribunal. The first question asked whether, on the facts and circumstances of the case, the order of assessment issued by the Income‑tax Officer under section 23(4) on 30 September 1953 was bad in law. The second question, contingent on a negative answer to the first, inquired whether the applicant was liable for the amount of tax assessed under the terms of section 44 of the Income‑tax Act. The Court answered the first question affirmatively, holding that the order of assessment was indeed bad in law, and held that the second question did not require determination.

In reaching its conclusion, the Court set out several findings. First, it observed that the assessment order was bad in law for two reasons. The assessment had been made against the association as a whole, rather than against the individual members who were members of the association at the time of its dissolution, and therefore it should have been made jointly and severally against those members. Moreover, the assessment was defective because notices required under sections 34 and 22(4) had not been served on certain members. Because no notice under section 22 had been issued to the petitioner and because he had not been assessed jointly or severally with the other members, the assessment could not bind him.

Second, the Court held that the applicant was not liable for the amount of tax shown in the assessment dated 30 September 1953, since that assessment had not been made in accordance with the provisions of section 44 of the Income‑tax Act.

The only issue that remained for the taxing authorities to decide was whether an assessment order issued by the Income‑tax Officer after the dissolution of the Group, and issued after a notice had been served on only one member of the Group and not on all members, could be enforced against those members who had not received a notice.

To address this issue, the Court quoted the material part of section 44 of the Indian Income‑tax Act as it stood before amendment by section 11 of the Finance Act (XI of 1958), effective from 1 April 1958. The provision stated: “Where any business, profession or vocation carried on by an association of persons has been discontinued, or where an association of persons is dissolved, every person who was at the time of such discontinuance or dissolution a member of such association shall, in respect of the income, profits and gains of the association, be jointly and severally liable to assessment under Chapter IV and for the amount of tax payable, and all the provisions of Chapter IV shall, so far as may be, apply to any such assessment.” This section therefore imposed joint and several liability on members of a discontinued or dissolved association for assessment under Chapter IV and for the tax due.

The Court noted that the Group had indeed discontinued its business at the end of Fasli year 1358 and had also been dissolved. Consequently, every person who was a member of the Group at the time of that discontinuance or dissolution was, by the express terms of section 44, liable to be assessed jointly and severally with respect to the income, profits and gains of the Group and was also liable for the amount of tax payable.

The Court noted that the tax liability referred to in the preceding discussion related to the amount of tax payable. It then examined the purpose and effect of section 44 as it existed before the amendment of 1958, particularly in relation to a firm whose business had been discontinued. In doing so, the Court cited the earlier decision in C A Abraham versus the Income‑tax Officer, Kottayam. In that decision the Court explained that, by virtue of section 44, the law permits assessment proceedings to be started and to continue against a firm even though the firm’s business has been discontinued, as if the discontinuance had never occurred. The Court clarified that the provision was enacted expressly to preserve the continuity of the tax‑assessment machinery and to impose tax liability despite the cessation of the firm’s business. The Court described this as a legal fiction whereby, for assessment purposes under Chapter IV, the firm is deemed to continue to exist after its actual discontinuance.

In the Abraham case the matter before the Court concerned the assessment of a firm whose business had been terminated because the firm was dissolved following the death of one of its partners. The Court observed that the version of section 44 then in force, having been amended by Act 7 of 1939, extended not only to firms but also to associations of persons. The specific issue that required determination was whether a penalty for concealment of income particulars or for deliberately furnishing inaccurate income details in a return could be lawfully imposed after the business had been discontinued. Although the order assessing the firm had not been expressly challenged, the fact remained that at the time the assessment order was made the firm was already dissolved and its business discontinued. The Court held that it could not decide on the validity of the penalty order without first deciding whether a valid assessment existed, because the imposition of a penalty presupposes a valid assessment.

The respondent’s counsel argued that, even assuming the assessment made after the Group’s dissolution was valid, it should bind only those individuals who had been served with the notice calling for a return. To support this contention, the counsel relied on the statutory language that “every person who was at the time of such … dissolution … a member of such association shall, in respect of the income … of the association, be jointly and severally liable to assessment.” The counsel maintained that the phrase “every person” should be read to mean all persons in the absolute sense and that the statutory requirement that such persons be liable “jointly and severally” indicated that, after dissolution, only the members who existed on the date of dissolution could be assessed for the association’s income. As a further extension of this argument, the counsel submitted that each member sought to be assessed must be individually served with a notice of assessment, and any member who had not received such a notice could not be bound by the assessment.

The Court found this line of argument to be plainly inconsistent with the observations made in the Abraham decision. The Court reiterated that if section 44 is intended to ensure the continuity of the firm or association solely for the purpose of assessment, then the question of assessing individual members does not arise. The provision creates a legal fiction whereby the entity, whether a firm or an association, is treated as if it continues to exist for assessment purposes, rendering any separate assessment of individual members unnecessary and contrary to the statutory scheme.

In this case, the Court observed that under Chapter IV of the Income‑tax Act an association of persons may be taxed either as a single unit or through separate assessment of each member in proportion to his share of the income. However, the Act provides no mechanism for assessing the income that the association receives collectively in the hands of its members. Consequently, the unit of assessment for the association’s income is either the association itself or each individual member in respect of his own share, whether the association is presently existing or already dissolved. No partial assessment can be made that limits the tax to only those members who have actually been served with a notice of assessment. For tax purposes the Income‑tax Act confers a separate legal personality on an association, distinct from its members, and this personality persists for the purposes of Chapter IV even after dissolution. Therefore a theory that assessment binds only those members who received a notice cannot be sustained, because the statute’s language refers to tax payable by the association as a whole. Section 44 primarily aims to bring the association’s income within tax after the association is dissolved or its business discontinued, and it does not contemplate assessing only a fraction of that income. Thus the effect of section 44 is merely to ensure that the assessment machinery of Chapter IV continues to operate and that tax liability can be imposed despite the association’s discontinuance. By virtue of section 44 the association’s personality is deemed to continue for assessment, so the income earned before dissolution can be taxed and the members are jointly and severally liable as members of that association. Accordingly, the procedural rule that a notice under section 63(2) be sent to the appropriate person suffices to enable the authority to assess tax on the association. The respondent’s argument that he should not be liable because he personally did not receive the notice of assessment therefore cannot be sustained. Counsel for the respondent further contended that the original assessment made under section 23(4) was invalid because the notice of assessment was not served upon the Group in the manner required by section 63(2).

The respondent argued that the notice of assessment had been served on an individual who was not the principal officer authorised to receive such notice on behalf of the Group, namely Baba Gowd. However, the respondent never presented this contention before the Tribunal, and consequently it did not form part of the issues raised in the Tribunal’s order. Because the matter did not arise from the Tribunal’s decision, and because the question that the Tribunal referred to the High Court does not provide a basis for entertaining this plea, the Court held that the respondent could not be allowed to raise a new question that was neither raised before the Tribunal nor included in the referral. Accordingly, the case had to be decided on the premise that the notice of assessment had been duly served upon Baba Gowd and that the assessment had been correctly made by the Income‑tax Officer pursuant to section 23(4) of the Act. The Court then answered the first question in the negative, concluding that the assessment order was valid. As a result, the respondent’s application to set aside the assessment on the ground that he had not been served with the notice of assessment must fail. Turning to the second question, the Court answered that the applicant was liable to pay the amount of tax specified in the order of assessment. In view of these findings, the appeal was allowed, and the respondent was ordered to pay the costs of this appeal both in this Court and in the High Court. The appeal was therefore allowed.