Commissioner Of Income-Tax, U.P vs Kanpur Coal Syndicate

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 673 of 1963

Decision Date: 30 April 1964

Coram: J.C. Shah, S.M. Sikri, K. Subbarao, Subba Rao

In this matter, the Supreme Court of India delivered its judgment on 30 April 1964 in the case titled Commissioner of Income‑Tax, U.P., Lucknow versus Kanpur Coal Syndicate. The petition was brought by the Commissioner of Income‑Tax, Uttar Pradesh, and the respondent was the Kanpur Coal Syndicate. The bench that heard the appeal comprised Justice Subba Rao, Justice J.C. Shah and Justice S.M. Sikri. The decision was reported in 1965 AIR 325 and 1964 SCR (6) 85, and it has been cited in several later decisions. The case involved the provisions of the Income‑Tax Act, 1922 (specifically sections xi. 3, 14(2)(b), 30, 31 and 33), dealing with the assessment of income for an association of persons or for its individual members, the option available to the assessing authority, the right of appeal, and the powers of the Appellate Assistant Commissioner and the Income‑Tax Appellate Tribunal.

The factual background revealed that the respondent, an association of several persons formed to purchase coal and supply it to customers for domestic use and small‑scale industries, was assessed for income tax on the total income of the association for the assessment year 1948‑49. The association contended that the tax should not be levied on the association as a whole; instead, each member’s share of the income should be assessed individually. The Income‑Tax Officer rejected this contention, and the association’s appeal to the Appellate Assistant Commissioner was dismissed. On further appeal, the Income‑Tax Appellate Tribunal held that while the Officer possessed the power to assess either the association as a whole or its members proportionally, the Tribunal itself did not have the authority under the Act to direct the Officer to choose one method over the other. However, a reference to a decision of the High Court indicated that the Tribunal could set aside the assessment made against the association and issue ancillary directions for assessing the individual members.

The Court held that section 3 of the Income‑Tax Act implicitly gives the assessing authority the discretion to assess the total income either of the association of persons or of its members individually. Accordingly, an assessee has a right to appeal under section 30 when the assessment is made on the association rather than on the individual members. The Court further affirmed that the Income‑Tax Appellate Tribunal has jurisdiction to direct the appropriate authority to cancel the assessment on the association and to order a fresh assessment on the individual members. The language of sections 31 and 33 was interpreted as not limiting the powers of either the Appellate Assistant Commissioner or the Appellate Tribunal; both are empowered to give such directions. The judgment was issued in Civil Appeal No. 673 of 1963, which was an appeal from the judgment and decree of the lower court.

On September 22 1960 the Allahabad High Court issued a judgment in Income‑tax Miscellaneous Case No. 188 of 1953; the appellant was represented by counsel S. K. Kapur and R. N. Sachthey, while the respondent was represented by counsel Veda Vyasa and Naunit Lal. The judgment was delivered on April 30 1964 by Justice Subba Rao. The matter before the Court concerned the legal question of whether, after an Income‑tax Officer has exercised his discretionary power to assess an association of persons as a single entity, either the Appellate Assistant Commissioner on first appeal or the Income‑tax Appellate Tribunal on further appeal may set aside that assessment and instead direct the Officer to assess each member of the association individually. The factual background was that the assessee comprised a number of individuals who had joined together solely for the purpose of purchasing coal and supplying that coal to domestic consumers as well as to small‑scale industrial users. For the assessment year 1948‑49 the Income‑tax Officer imposed a tax liability on the total income of the association taken as a collective whole. The assessee contended that, given the circumstances, the tax should not have been levied on the association in its aggregate form; rather, the appropriate basis for taxation was the portion of income attributable to each individual member, and consequently it requested that the Officer assess the members on an individual basis. The Officer declined to make such an assessment. The assessee then appealed this decision to the Appellate Assistant Commissioner, whose order dismissed the appeal. The dispute was subsequently taken to the Income‑tax Appellate Tribunal. The Tribunal held that the statute gave the Officer a choice either to assess the income of the association as a whole or, alternatively, to assess the income of the individual members in proportion to their respective shares. Nevertheless, the Tribunal concluded that it itself possessed no statutory authority to direct the Officer to exercise his discretion in one particular manner rather than the other. The issue was therefore referred to the High Court of Allahabad under section 66(2) of the Indian Income‑tax Act, 1922, framed as follows: if, pursuant to section 3 of the Act, the Income‑tax Officer levies tax on the total income of an association of persons as a single unit, does the Tribunal have the competence to direct the Officer to levy tax proportionately on the individual members in accordance with each member’s share of the income? A Division Bench of the High Court answered affirmatively, holding that the Appellate Tribunal did have the power to set aside the assessment made against the association and to issue consequential and ancillary directions to the Officer requiring assessment of the individual members. Counsel for the Revenue submitted that, under the 1922 Act, later renamed the Income‑tax Act, the Officer had no alternative but to assess the total income of the association, even though each member’s share could later be added to his personal income for the purpose of determining his total income. He further argued that even assuming the Officer possessed a discretionary option to assess either the association or its members, once the Officer exercised that discretion, neither the Appellate Assistant Commissioner on appeal nor the Income‑tax Appellate Tribunal on further appeal could order the Officer to exercise his discretion differently, and he relied on the proposition that no appeal lies on the ground that the Officer should have assessed the individual members instead of the association as a whole.

The submission contended that the amount in question could be added to the individual’s income for the purpose of determining his total income. It further argued that even if the Income‑tax Officer possessed a discretionary power either to assess the association of persons on the basis of its aggregate income or to assess each individual member according to his proportionate share, once the officer exercised that discretion in one manner, neither the Appellate Assistant Commissioner at the first stage of appeal nor the Income‑tax Appellate Tribunal at the subsequent stage possessed any authority to direct the officer to alter his original exercise of discretion. To support this conclusion, the argument relied on an additional submission that no appeal could be instituted by the association of persons when it had been assessed as a single unit on the ground that the officer should instead have assessed the individual members of that association. At the beginning of the discussion, the Court found it useful to set out the relevant statutory provisions. Section 3, titled “Charge of Income‑tax,” provides that where any Central Act imposes income‑tax for a particular year at any rate or rates, such tax shall be levied for that year in accordance with, and subject to the provisions of, this Act, with respect to the total income of the preceding year of each individual, Hindu undivided family, company, local authority, and of every firm and other association of persons, as well as the partners of a firm or the members of an association taken individually. Section 14(2) stipulates that tax shall not be payable by an assessee who is a member of an association of persons, other than a Hindu undivided family, a company, or a firm, insofar as he receives any portion of an amount to which he is entitled from the association, where such tax has already been paid by the association itself. Section 30(1) provides that any assessee disputing the amount of income assessed under section 23 or the tax determined under section 23 may appeal to the Appellate Assistant Commissioner against the assessment, a refusal, or any related order. Section 31(3) explains that, in disposing of an appeal, the Appellate Assistant Commissioner may, with respect to an assessment order, either confirm, reduce, enhance or annul the assessment, or set aside the assessment and direct the Income‑tax Officer to make a fresh assessment after conducting any further inquiry deemed appropriate either by the officer himself or as directed by the Appellate Assistant Commissioner; the officer must then proceed to make such fresh assessment and, where necessary, determine the tax payable based on that fresh assessment. Paragraph 4 of the same section further states that if, as a result of an appeal, any alteration is made to the assessment of a firm or association of persons, or if a new assessment of such an entity is ordered, the Appellate Assistant Commissioner may authorize the Income‑tax Officer to amend the assessments accordingly for any partner of the firm or any member of the association.

The Court observed that the appellate authority could amend accordingly any assessment that had been made on a partner of a firm or on a member of an association. Section 3 of the Income‑Tax Act imposes tax on a person in respect of his total income. The statute specifically enumerates the persons who may be subject to that tax, namely a Hindu undivided family, a company, a local authority, a firm, an association of persons, and, separately, the partners of a firm or the members of an association taken individually. Accordingly, Section 3 does not confer a power on any particular officer to assess only one of the described persons; it is a charging provision that levies tax on the total income of whichever assessable entity falls within the description. The provision expressly treats an association of persons and the individual members of that association as two distinct assessable entities. Consequently, the tax may be levied either on the association as a whole or on each member individually, in accordance with the other provisions of the Act. No argument is permissible that Section 3 limits the assessment solely to the association as a unit, even though after such an assessment the share of income belonging to a member may be added to that member’s other income under Section 14(2). To read the statute in that way would render the concluding words “members of the association individually” meaningless, and such a construction conflicts with the explicit language of Section 3, which separates the members from the association as independent entities. Every individual, whether or not he belongs to an association, is liable to tax under the head “every individual”. Section 14(2)(b) merely provides that if an individual is a member of an association that has already been assessed, the portion of his income attributable to that association will not be taxed again. The Court noted that this Act permits an assessment either on the association as a whole or, alternatively, on the individual members with respect to their respective shares of income, a position earlier affirmed in Commissioner of Income‑Tax v. Raja Reddy Mallaram [1964] 51 I.T.R. 285 (Supreme Court). Hence, the Court held that Section 3 implicitly grants the appropriate authority the option to assess the total income of either the association of persons or its individual members. The Court then turned to the question of whether this option is confined only to the Income‑Tax Officer and excluded from the Appellate Assistant Commissioner or the Appellate Tribunal. Under the Act, after following the prescribed procedure, the Income‑Tax Officer makes the initial assessment under Section 23. Inevitably, at that first stage the Officer must decide whether to assess the association as a unit or to assess its members individually. This discretion does not arise because any provision of the Act grants the Officer an exclusive power, but because it is an integral part of the assessment process.

The Court explained that identifying the person or entity liable to pay tax forms an integral part of the assessment procedure. Consequently, the assessing officer must first determine whether the liability rests with an association of persons as a single entity or with the individual members of that association. When the officer elects to treat the association itself as the assessable unit, the association is entitled to challenge that assessment. Among other grounds, the association may argue that, given the facts of the case, the law requires each member to be assessed separately rather than the association as a whole. The Income‑tax Officer retains the discretion to reject the association’s objection and may proceed to assess the total income of the association and levy tax on that aggregate amount. Section 30 of the Income‑Tax Act provides that any assessee who disputes the amount of income assessed under section 23, the tax calculated thereunder, or who denies liability to be assessed under the Act, may file an appeal against the officer’s order before the Appellate Assistant Commissioner. It was contended that an order wherein the Income‑tax Officer refuses an association’s request to have its members assessed individually does not fit within any of the three categories of objection mentioned in the statute. The Court examined the nature of the assessee’s grievance and found that the objection consists of a denial of liability under the Act, coupled with a request that the assessment be made on each member separately. The phrase “denial of liability” is sufficiently broad to encompass both a complete refusal to accept any tax liability and a refusal to accept liability under particular conditions. In either scenario, the denial relates to liability to be assessed pursuant to the provisions of the Act. In one scenario the assessee claims that he is not liable for tax at all; in the other, the assessee contends that liability does not arise because the officer should have exercised the statutory option to assess the members individually. Accordingly, the Court held that an assessee who objects to an assessment of the association and insists on individual assessment of its members possesses a statutory right of appeal under section 30 against the Income‑tax Officer’s order.

The Court then turned to the powers available to the appellate authority once such an appeal is lodged. Section 31 of the Act outlines the jurisdiction of the Appellate Assistant Commissioner in handling appeals filed under section 30. Specifically, clause (3)(a) empowers the Commissioner, when dealing with an assessment order, to confirm the assessment, to reduce it, to increase it, or to set it aside entirely. Clause (3)(b) further authorises the Commissioner to annul the assessment and to direct the Income‑tax Officer to undertake a fresh assessment. These provisions confer plenary authority on the Appellate Assistant Commissioner to resolve the appeal in any manner that the assessing officer could have performed, and additionally to command the officer to carry out actions that he may have omitted. The Court therefore concluded that the appellate Commissioner’s jurisdiction is coterminous with that of the assessing officer; he may replicate any act of the officer and may also instruct the officer to fulfil duties that were not performed. Consequently, where the Income‑tax Officer possessed the option to assess either the association as a whole or its individual members, the Appellate Assistant Commissioner may direct the officer to exercise the appropriate option in accordance with the facts and law of the case.

The Court observed that the Appellate Assistant Commissioner possessed the authority to instruct the Income‑tax Officer to carry out any action that the Officer ought to have undertaken given the factual circumstances of the case. Accordingly, the Court noted that a taxpayer who was dissatisfied with an order issued by an Appellate Assistant Commissioner pursuant to section 28 or section 31 of the Act was entitled to challenge that order by filing an appeal before the Appellate Tribunal. Such an appeal had to be lodged within sixty days from the date on which the order was communicated to the taxpayer, as mandated by section 33(1) of the Act. The Court emphasized that the time limit was strict and that the appeal right arose only after the order had been properly served on the assesse. This procedural requirement ensured that the taxpayer could seek review of the Appellate Assistant Commissioner’s decision in a timely manner, thereby preserving the statutory framework for appellate remedies.

Further, the Court examined the substantive powers conferred on the Appellate Tribunal by sections 33(4) and 33(5) of the Act. Section 33(4) provided that the Tribunal, after granting both parties an opportunity to be heard, could pass any order it deemed appropriate and was obliged to communicate such orders to both the assessee and the Commissioner. Section 33(5) stipulated that if, as a result of an appeal, any alteration was made to the assessment of a firm or an association of persons, or if a new assessment of such a body was ordered, the Tribunal could authorize the Income‑tax Officer to accordingly amend the assessments of any partner of the firm or any member of the association. The Court held that these provisions granted the Tribunal ample power to set aside an assessment made on an association of persons, to direct the Income‑tax Officer to assess the individual members, or to order the amendment of assessments already made against the members. The Court further concluded that the wording of both section 31 and section 33 left no room for the Revenue to curtail the powers of the Appellate Assistant Commissioner or the Appellate Tribunal. Consequently, the Court agreed with the High Court that the Tribunal possessed jurisdiction to direct the appropriate authority to cancel the assessment of the association and to require a fresh assessment of each member individually. The Court affirmed that the High Court’s answer to the question posed was correct, and consequently dismissed the appeal with costs, ordering that the appeal be dismissed.