SMT. RADHA GAJAPATHI RAJU VS COMMISSIONER OF INCOME-TAX, 1992 PTD-MADRAS-HIGH-COURT-INDIA 1277 (1990)

(a) Income Tax--------

----Rectification of assessment---Partner of firm---Change of law---Inclusion of income of minor child from firm in total income of parent---Difference between S.35(5) of the Act of 1922 and 5.155 of the Indian Act of 1961-- Inclusion of income of minor child from firm in total income of parent under S.155---Valid---Indian Income Tax Act, 1922, S.35(5)---Indian Income Tax Act, 1961, Ss.5, 64 & 155.

Section 5 of the Indian Income Tax Act, 1961, lays down that all the income, profits or gains which had accrued or arisen to the assessee or been received by or on behalf of the assessee would be liable to be included in his total income. This provision is subject to the other provisions of the Act and, therefore, if the income of any person is declared by section 64 to be includible in computing the total income of the assessee such income would form part of the total income exigible to tax under section 4 of the Act.

Under section 35(5) of the Income Tax Act, 1922, the inclusion or necessary correction of a partner's share of income from his firm, in his assessment, consequent upon the subsequent assessment of the firm, is deemed to be rectification of a mistake apparent from the record within the meaning of section 35(1). However, there is no such provision in section 1'55 of the Act of 1961. Under section 155, the power to amend the assessment of the partners has been conferred without recourse to any fiction. If the share income of a partner from a firm is omitted to be included in his/her assessment, it can be rectified under section 155 and if the share of a minor from the firm is omitted to be included in the assessment of the parent, it can also be rectified under section 155(1).

Held, that, on the facts of the case, particularly in view of the concession made by the representative of the assessee to the effect that the share income of the minor children could be clubbed with the income of the assessee, the order under, section 155 clubbing the share of the minors in the income of the assessee was valid.

Additional CIT v. Shree Shankar & Co. (1979) 118 ITR 636 (Mad.); Balaram (T.S.), ITO v. Volkart Bros. (1971) 82 ITR 50 (SC); CIT v. Balkishan Bhatia (1972) 86 ITR 452 (Delhi); CIT v. Gotla (J.H.), (1985) 156 ITR 323 (SC); CIT v. Kochammu Amma (P.K.) (Smt) (1980) 125 ITR 624 (SC); CIT v. Thimmaiah (M.M) (1968) 67 ITR 180TMys.); ITO v. Habibullah (S.K.) (1962) 44 ITR 809 (SC); Jiyajeerao Cotton Mills Ltd. v. ITO (1981) 130 ITR 710 (Cal.) and Viswanathan Chettiar (Em.) v. Agri. ITO (1983) 142 ITR 244 (Kar.) ref.

N. Bhaskaran for the-Assessee.

N.V. Balasubramaniam for the Commissioner.

JUDGMENT

ABDUL HADI, J.---In these tax cases under section 256(1) of the Incometax Act, 1961 (hereinafter referred to as "the Act"), at the instance of the assessee, the following common question of law in respect of the assessment years 1970-71 to 1972-73 has been referred to this Court for its opinion:

"Whether, on the facts and circumstances of the case, the Tribunal is right in law in holding that the provisions of section 155 would apply to the facts of the case and that the order under section 155 clubbing the share income of the minors is valid and within jurisdiction?"

The assessee, alongwith her husband, P.V. Gajapathi Raju, and two minor daughters, was a partner in Admiralty Flats Motel. Shri P.V. Gajapathi Raju was a partner in the said motel, representing the Hindu undivided family consisting of his wife, his two minor daughters and himself. For the assessment year 1970-71, the assessee riled a return disclosing her share income from the said Admiralty Flats Motel at Rs.24,735 and in Part IV of the return, she had given the names of the other three persons as the other partner thereof, each being entitled to a one-fourth share. Similarly, returns were also filed for the assessment years 1971-72 and 1972-73, disclosing her share income at Rs.29,085 and Rs.13,009, respectively. Originally, the Income-tax Officer finalised the assessments for these three assessment years, determining the assessee s income tentatively as "nil" on the ground that, as per the order, dated January 31, 1972, in relation to the assessment year 1969-70 in the case of P.V. Gajapathi Raju, the karta of the Hindu undivided family, there was no genuine partnership in existence and the entire income of Admiralty Flats Motel was assessable in the hands of the Hindu undivided family. Nevertheless, the Income-tax Officer, in the assessment orders for the three assessment years in question, had also stated that the assessments would be revised, if necessary, as per the decision of the appellate authorities (presumably with reference to the order, dated January 31, 1972, referred to earlier) and the correct income would be adopted and that in such an event, the share income of the husband and the minor children of the assessee would also be considered for inclusion in the assessee's hands, if that was advantageous to the Revenue.

Subsequently, by the appellate order, amongst others, Admiralty Flats Motel was treated as a registered firm and a direction was given to the assessing authority to make a fresh assessment accordingly and this was also confirmed by the Tribunal. Finally, the income from the Admiralty Flats Motel, assessed earlier in the hands of the Hindu undivided family through its karta, P.V. Gajapathi Raju, was assessed as that of the registered firm of Admiralty Flats Motel.

Thereafter, the Income-tax Officer issued a notice to the assessee under section 155 of the Act to show cause why the share income of her husband and those of her two minor daughters, should not be clubbed in her assessment for the aforesaid three assessment years by invoking section 64 of the Act. The assessee raised objections on the ground that section 155 of the Act could not be invoked to club the share income of her husband and minor daughters, as a disputed question of law arose as to whether the share income of the minors is to be added to her income or to the income of her husband, who was also a partner of the firm, and if at all section 64 could be invoked, it could be so done in the case of her husband, P.V. Gajapathi Raju, only. The objections so raised by the assessee were overruled by the Income Tax Officer, as according to him, the assessee was admittedly a partner of Admiralty Flats Motel, and, under section 64(1) of the Act, in computing the income of the assessee, such income, arising directly or indirectly to the spouse or the minor children of the assessee from the partnership, had to be included and where both the husband and wife and minor children are partners, the income of the minor children had to be included either in the husband's assessment or in the assessment of the wife, depending upon whose income was larger and further that, as the husband had no individual income of his own, the shire income of the minor daughters from the firm should be clubbed with the assessee's income and subjected to tax. Accordingly, the Income-tax Officer passed an order in relation to the assessment years 1970-71 and 1971-72, but in respect of the assessment year 1972-73, as one of the daughters, by then, had become a major, only the share income of the other minor daughter was clubbed with the income of the assessee. On appeal by the assessee to the Appellate Assistant Commissioner, contesting the validity of the initiation of proceedings under section 155 of the Act and also the inclusion of the income in the assessment of the assessee for the three years in question, applying section 64(1) of the Act, the Appellate Assistant Commissioner, while dismissing the appeals and upholding the order of the Income Tax Officer, observed as under:

"The provisions of section 64 are mandatory and it is not as if the principle of clubbing of income itself is in dispute. In fact, it was conceded by the representative that the share incomes of the minor children are to be clubbed in the hands of the appellant, but the only issue was whether the provisions of section 64 could be given effect to in an order of rectification under section 155 of the Act. This order under section 155 of the Act is not merely rectification, but has arisen as a consequence of the appellate decision as a result of which the appellant's total income has to be determined."

On further appeal before the Tribunal, it was contended that, under section 155 of the Act, at best, the Income-tax Officer could have included only the share income of the assessee and not the income of the minors and such inclusion of the share income of the minors in the hands of the assessee or her husband, had to be decided by an investigation and, therefore, there was no mistake apparent from the record. Referring and relying upon the decision of the Supreme Court in ITO v. S.K. Habibullah (1962) 44 ITR 809, the Tribunal held that the present case is governed by section 155(1) of the Act corresponding to section 35(5) of the Indian income-tax Act, 1922, and that, if the share income of the parent partner is omitted to be included in the assessment, that can form the subject-matter of rectification under section 155 and if the share income of a minor child partner has not been included in the assessment, such assessment could also be rectified under section 155(1) of the Act. Ultimately, the Tribunal dismissed the appeals which has given rise to these references on the question of law set out earlier.

Learned counsel for the assessee submitted that, in passing the order under section 155, the share income of the minor daughters in the firm, Admiralty Flats Motel, could not be clubbed with the. assessee's income, invoking section 64 of the Act, since only a mistake apparent from the record could be corrected, and, in this case, there is a disputed question of law as to whether the share income of the minors is to be added to the share income of the assessee or that of her husband and that cannot be regarded as a mistake apparent on the record justifying the invoking of section 155. Reliance was also placed by learned counsel upon the decision in T.S. Balaram, I.T.O. v. Volkart Brothers (1971) 82 ITR 50 (SC). On the other hand, learned counsel for the Revenue contended that the contention of counsel for the assessee is totally misconceived, as it is not warranted by the terms of section 155(1) of the Act.

We may now make a reference to the relevant provisions of the Act. Section 155(1) of the Act runs as follows:

"155.--(1) Where in respect of any completed assessment of a partner in a firm it is found--- .

(a) on the assessment or reassessment of the firm, or...

that the share of the partner in the income of the firm has not been included in the assessment of the partner or, if included, is not correct, the Income Tax Officer may amend the order of assessment of the partner with a view to the inclusion of the share in the assessment or the correction thereof, as the case may be, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in subsection (7) of that section being reckoned from the date of the final order passed in the case of the firm."

The corresponding provision, in section 35(5) of the Indian Income Tax Act, 1922, was as under:

"Where in respect of any completed assessment of a partner in a firm it is found on the assessment or reassessment of the firm or on any reduction or enhancement made in the income of the firm under section 31, section 33, section 33-A, section 33-B, section 66 or section 66-A that the share of the partner in the profits or loss of the firm has not been included in the assessment of the partner or, if included, is not correct, the inclusion of the share in the assessment or the correction thereof, as the case may be, shall be deemed to be a rectification of a mistake apparent from the record within the meaning of this section, and the provisions of subsection (1) shall apply thereto accordingly, the period of four years referred to in that subsection being computed from the date of the final order passed in the case of the firm."

Section 35(1) of the Indian Income Tax Act, 1922, provided for rectification of "any mistake" apparent from the record, while the corresponding new provision under the Act, viz. section 154(1), is in the following terms:

"154.--(1) With a view to rectifying any mistake apparent from the record---

(a) the Income Tax Officer may amend any order of assessment. or of refund or any other order passed by him;

(b) the Appellate Assistant Commissioner may amend any order passed by him under section 250 or section 271;

(c) the Commissioner may amend any order passed by him in revision under section 263 or section 204."

We may point out that the difference between the language of section 35(5) of the Indian Income Tax Act, 1922, and section 155 of the 1901 Act, renders the contention of learned counsel for the assessee unacceptable. Under section 35(5) of the Indian Income-tax Act, 1922, the inclusion or necessary correction of a partner's share of income from his firm, in his assessment, consequent upon the subsequent assessment of, the firm, is deemed to be rectification of a mistake apparent from the record within the meaning of section 35(1) of that Act. However, there is no such provision in section 155 of the Act. There is, in fact, no reference in section 155 to any such fiction and section 155, on its-terms, has nothing whatever to do with a mistake apparent from the record. No doubt, under the provisions of the Indian Income Tax Act, 1922, since it was doubtful whether there was a mistake apparent on the record in such cases in the original assessment of the partner, a fiction was enacted and such cases were also treated as involving a mistake apparent on the record. Now, under section 155 of the Act, the power to amend the assessment of the partners has been conferred, without recourse to any fiction, unlike in the provisions of the Indian Income Tax Act, 1922. In this connection; the following observations of the Delhi High Court in CIT .v. Balkishan Bhatia.(1972) 86 1TR 452, 458, are significant:

"It may be that the Income Tax Officer erred in treating that portion of the income as earned income. The mistake committed by him may be apparent from the record but such mistakes cannot be rectified under section 1.55. That section deals with amendment of the assessment of a partner or a member of a firm or association under circumstances mentioned therein. It has nothing to do with mistakes apparent or otherwise."

Likewise, the following observations in CIT v. M.M. Thimmaiah (1968) 67 ITR 180, 184 (Mys) are also apposite. "Our opinion is sought on the solitary question whether, while acting under section 155, the Income-tax officer could have changed the basis of taxation. In other words, whether he could have treated any portion of the income as unearned income which he had earlier treated as earned income by having recourse to his power under section 155. It may be that the Income Tax Officer erred in treating that portion of the income as earned income. The mistake committed by him may be apparent from the record. But such mistakes cannot be rectified under section 155. That section deals with amendment of assessment of a partner or a member of a firm or association under circumstances mentioned therein. It has nothing to do with mistakes apparent or otherwise". .

No doubt, section 155 of the Act states that "the provisions of section 154 shall, so far as may be, apply thereto." (underlining ours). This, however, cannot be interpreted to mean that section 155 deals with a case of mistake apparent from the record spoken to in section 154(1) of the Act. Even otherwise, in the present case, it could not be stated that there was a mistake apparent from the record and that too on a disputed question of law, as there was no such dispute owing to the concession made by the representative of the assessee to the effect that the share income of the minor children in the hands of the assessee can be clubbed with the income of the assessee, as could be seen from the order of the Appellate Assistant Commissioner. We may now make a brief reference to the decision relied on by the Tribunal in the course of its order, in ITO v. S.K. Habibullah (1962) 44 ITR 809 (SC). That decision was rendered with reference to section 35(5) of the Indian Income Tax Act, 1922, and the Supreme Court pointed out that; by a fiction enshrined in the section, whereby the inclusion or correction of the share income of a partner in a firm, consequent upon the subsequent assessment of the firm to which he was a partner, was deemed to be rectification of a mistake apparent from the record under section 35(1) contemplated by section 35(1) of the Indian Income Tax Act, 1922, and further stated that, but for section 35(5), the case would not be one of a mistake apparent from the record which could be corrected under section 35(1) of the Indian Income Tax Act, 1922. Even considered as a fiction, it should be necessarily carried forward to its logical conclusion by clubbing the minor partner's share income also alongwith the parent partner's share. Income and making the correction accordingly in the individual assessment of the parent partner, in view of section 2(23) of the Act, including in the definition of a partner, any person who, being a minor; has been admitted to the benefits of partnership. We have earlier pointed out that the present case would be governed by section 155 of the Act and if the share income of the parent partner is omitted to be included in the assessment, it can be rectified under section 155 and if the share income of a minor child partner has not been included in the assessment- under section 64, the assessment can also be rectified under section 155(1). The reliance placed by learned counsel for the assessee upon the decision in T.S. Balaram, ITO v. Volkart Brothers (1971) 82 ITR 50 (SC) where it was held that the Income-tax Officer has no jurisdiction under section 154 of the Act to rectify the assessment of a firm, originally made under section 17(3) of the Indian Income Tax Act, 1922, in a case of doubtful applicability of section 18(1) to the firm, the mistake could not be regarded as apparent from the record, would not also be of any assistance to the assessee. No doubt, it was observed by the Supreme Court that a mistake apparent from the record must be an obvious and patent mistake and not one which can be established by a long drawn out process of reasoning on points on which there may conceivably be two opinions. But such is not the case here. Reference was also made to Jiyajecrao Cotton Mills Ltd. v. ITO (1981) 130 ITR 710 (Cal.) and Additional CIT v. Shree Shankar & Co. (1979) 118 ITR 636 (Mad.). In those cases, it has been held that rectification presumably was of a debatable assessment and that there was no provision for rectification of an order passed under section 183(6) on the firm, in the light of the. return submitted by, or the assessment on the partners. The decision in E.M. Viswanathan Chettiar v. Agri. ITO (1983) 142 ITR 244 (Kar.) also had taken a similar view. We have earlier pointed out how, on the language employed in section 155 and also on the facts of this -case, particularly in view of the concession made by the representative for the assessee, there could not be any doubt or dispute regarding the justification for invoking section 155(1) of the Act and, under these circumstances, we are of the view that the decision on which learned counsel of the assessee had placed reliance would not be of any assistance whatever.

We may now proceed to consider whether the minor's share income from the firm could be clubbed with the income of the assessee invoking section 64 of the Act while passing orders under section 155 of the Act. We may refer in this connection to the decision in CIT v. P.K. Kochammu Amma (1980) 125 ITR 624 (SC), to which our attention was drawn by learned counsel for the Revenue. There, it was held that amounts representing the share income of the spouse and the minor daughters in the firms in which they were partners were part of the income of the assessee who was the other spouse and for the purpose of assessment to tax, it had to be shown in the return filed by her. The Supreme Court also observed that section 2(45) of the Act referred to section 5 which laid down that all income, profits and gains which had accrued or arisen to the assessee or been received by or on behalf of the assessee would be liable to be included in his total income but that this provision was subject to the other provisions of the Act and, therefore, if the income of any person was declared by section 64 to be includible in computing the total income of the assessee, such income would form part of the total income exigible to tax under section 4 of the Act. We may also usefully refer in this connection to the following observations bf the Supreme Court in CIT v. J.H. Gotla (1985) 156 ITR 323, 340:

"On a consideration of the scheme of the Act and the provisions therein as noted before, the share income of the wife and minor children included in the assessee's total income under section 16(3) of the Act should be regarded as business income derived from business carried on by the assessee, and in that view of the matter, the assessee is entitled to set off his loss carried forward from the previous years.",

Thus, on a due consideration of the facts and the relevant provisions 'of the Act, we answer the question referred in the affirmative and against the assessee. The Revenue will be entitled to its costs in this reference. Counsel's fee Rs.500 (one set).

M.BA./1613/T.Reference answered.