Ch. Atchaiah v. S Income Tax Officer, 'b' Ward, Special Circle Ii, Lakdikapul, Hyderabad

ALLADI KUPPUSWAMI, J.

(1) THE petitioner in these two writ petitions and one Kondal reddy purchased under a sale deed, dated 20th October, 1962 an extent of 454-11 acres in Manmole village, Sangareddy taluk, Medak district, from Sri Ikra-muddin and Smt. Azizunnissa Begum for a sum of Rs. 75,000. Even prior to the sale deed, by a notification, dated 10th October, 1951 the property had been acquired under the Land Acquisition Act for Ms. Bharat Heavy Electrical Project. The purchasers therefore claimed the compensation amount. By an award dated 4th February, 1964 the Land acquisition Officer fixed compensation including solatium at Rs. 1,38,794-12. This amount was received by the purchasers on 4th December 1964 (not on 4th February, 1964 as stated in the petition) and was shared equally by the purchasers. On reference to the Court of the District Judge in O. P. No. 6 of 1965 the district Judge by his judgment dated 3rd august 1965 enhanced the compensation according to the petitioner to Rs. 3,95,626, but according to the respondent to Rs. 4,17,177. According to the petitioner this amount was shared by him and kondal Reddy as follows:

Rs.

petitioner. 2,08,739-00

kondal Reddy. 1,86,288-00

(2) THE Income-Tax Officer, c Ward, special Circle II, Hyderabad, in his assessment order for the year 1965-66 assessed the petitioner to capital gains in a sum of Rs. 35,397. It is stated that the petitioner along with Kondal Reddy purchased the lands and according to the statement given by the petitioner he invested a sum of Rs. 34,000 approximately towards his share. The assessees share of compensation was Rs. 69,397 and hence the assessee derived a net capital gain of Rs 35,397 which his taxable under section 21 (2) of the Act. After the District judge enhanced the compensation of the petitioners share of the enhanced compensation in his hands was assessed to tax for the assessment year 1968-69. Similarly, the share of Kondal Reddy was also assessed in his hands for the relevant years.

(3) ON 18th February, 1972 the Income-Tax Officer, f Ward. Circle I, issued a notice addressed to the petitioner and kondal Reddy, in which he stated that he had reason to believe that their income chargeable to tax for the assessment year 1964-65 had escaped assessment within the meaning of section 147 of the Income-Tax Act. He, therefore, proposed to assess the income for the said year and required them to deliver to him a return for the said assessment year. Accordingly the petitioner and kondal Reddy by their letter, dated 3rd April, 1972 enclosed a nil return, as there was no income received or accrued to them for the assessment year under consideration, namely, 1964-65. Thereafter, the Income-Tax Officer gave a notice dated 3rd August, 1972 to both of them in which he stated that on going through the records he found that they did not mention the status in the return filed by them and they were required to state the status in which the return was filed. He added that he found that they had actually received a compensation of Rs. 2,29,180 under the award passed by the Land Acquisition Officer on 4th February, 1964. In the judgment passed by the District Court, they received a sum of Rs. 4,17,476. The total amount thus received was Rs. 6,46,656. Deducting the cost of purchase, the profit to be taxed would be Rs. 5,71,650. The petitioner and Kondal Reddy by their letter, dated 18th September, 1972 raised several objections to the notice, dated 3rd august 1972. The petitioner, however, apprehending that further action would be taken in pursuance of the notice, dated 18th February, 1972 filed this writ petition praying for the issue of a writ of prohibition or any other appropriate writ or order restraining the respondent, namely the Income-Tax Officer concerned from taking any action pursuant to his notice dated 18th February, 1972 under section 148 (2) of the Income-Tax Act.

(4) THE main contention of the petitioner is that the respondent having assessed the shares in the individual hands of the petitioner and Kondal Reddy has no jurisdiction to assess the same income in their joint hands. Having exercised the discretion vested in him to assess them individually with respect to the shares, to which they were entitled, he was not entitled to assess them as an association of persons. It is further contended that the notice under section 148 of the Act is invalid as the officer has not recorded his reasons for doing so, nor did he communicate them to the petitioner It is submitted that it cannot be said that the respondent had any further information as all the relevant facts and materials had been placed by the petitioner before the authorities in his individual assessment and after considering the entire material before him the officer exercised his discretion by assessing the income in the individual hands of the petitioner and Kondal Reddy. The provisions of section 147 are not complied with.

(5) LASTLY, it is urged that the relevant assessment year is not 1964-65.

(6) ANOTHER notice was issued under section 148 of the Act on 17th March. 1972 in the personal assessment of the petitioner. The petitioner has filed w. P. No. 338 of 1973 for the issue of a writ of prohibition or other appropriate writ restraining the respondent from taking any action on that notice also. The grounds urged are practically the same as those in W. P. No. 5856 of 1972.

(7) THE main contention urged on behalf of the assessee by Sri Panduranga Rao is that having exercised his option to assess the tax on the members of the association of persons as individuals in respect of their respective shares of the profits made, it is not open to the income-Tax Officer to seek to assess the same income in the hands of the association in the order of assessment dated 10th march, 1970 the Income-Tax Officer clearly says that the assessee along with kondal Reddy purchased the lands and according to the statement given by the assessee on 6th January, 1970 he invested a sum of Rs. 30,000 towards his share. Deducting this from the assessees share of compensation which was fixed at Rs. 69,397 the officer found that the net capital gain derived by the assessee was Rs. 39,397, and assessed it accordingly. The officer was informed that the properties have been purchased by the association of persons, namely, the assessee and Kondal Reddy, that they were paid compensation by the Government and thereby derived profit, but the officer chose to tax the capital gain in respect of the assessees share and not the gain of the association as such. It is clear, therefore, that he exercised his option and assessed the tax not on the association as a unit of taxation, but as a member of the association individually. There is abundant authority that in such a case he cannot thereafter assess the same income in the hands of the association. Vide Commissioner of I. T. , Bombay v. M. J. and P. G. and P. Factory, Joti Prasad v. I. T. Officer, Mathura, and the recent decision of this Court in I. T. Commissioner, a. P. v. H. D. L. Syndicate, and Ravinder narain v I. T. O. The learned Standing counsel for the Income-tax tried to distinguish these decisions on the ground that they were concerned with the relevant provisions of the Income-tax Act of 1922. He submitted that the position under the new Act is different, as under this Act, the Income-Tax Officer has no option to assess the tax on the association as a unit or as members of the association individually, and it is obligatory on him to assess the tax on the association as a unit. We see no warrant for this distinction. Under section 4 of the Act, 1961 income-tax shall be charged in respect of the total income of the previous year or the years as the case may be of every person. "person" is defined under section 2 (31) as including (1) an individual; (2) a Hindu undivided family ; (3)a company ; (4) a firm : (5) an association of persons or a body of individuals, whether incorporated or not ; (6) a local authority ; and (7) every artificial juridical person, not falling within any of the preceding sub-clauses.

(8) UNDER section. 3 of the old Act, instead of stating that the tax shall be charged on every person, the categories of assessees were enumerated in the section itself and one of the categories was an association of persons. Under the present Act, instead enumerating the categories in the body of section, it is stated the income will be charged on every person and in the definition of person in section 2 (31) the various categories of persons are enumerated In our view this change in the wording of the section does not affect the legal position and all the decisions under the old act referred to above are applicable even to-day under the present Act. As observed by the Supreme Court in Commissioner of Income-Tax, Bombay v. Murlidhar Jhawar and Purna Ginning and Pressing Factory an association of persons and the individual members of an association are two distinct and different assessable entities and under section 3 of the income-tax Act, 1922, the tax can be levied on either of the said two entities. The Income-tax Officer cannot seek to assess the one income twice-once in the hands of the partners and again in the hands of the association. This principle holds good even under the present Act. The learned standing counsel for the income-tax department was unable to give any valid reason why the said principle does not apply under the Act, 1961.

(9) THE learned income-tax Counsel relied strongly on the decision of the Supreme court in Income-tax-Officer v. Bachu Lal kapoor In that case the respondent was assessed to income-tax as kartha of the Hindu undivided family Sometime thereafter the income-tax Officer accepted the claim of partition under section 25-A of the Act and in the subsequent years the members of the family were assessed as individuals Later on, the Income-tax officer issued a notice under section 34 of the Income-tax Act of 1922 in regard to one of those years as the kartha of Hindu undivided family. It was held that a Hindu undivided family was a distinct assessable entity and if its income had escaped assessment for any year, the Income-tax Officer could issue a notice to the family under section 34 of the Act. If the case for the revenue were true and the fact of the existence of the joint family was kept back from the knowledge of the Income-tax Officer it would be a clear case of the familys income escaping assessment and in such a case it could not be said that the Income-tax Officer had elected to assess the members with the knowledge that the joint family existed. So long as the Hindu undivided family exists, the individuals thereof cannot separately be assessed in respect of its income. Hence the Income-tax Officer bad jurisdiction to initiate proceedings under section 34 of the Act against the respondent as kartha of the Hindu undivided family. It is seen that the whole basis of this decision is that if there is a Hindu undivided family, an individual member thereof could not be separately assessed in respect of its income. In other words, in the case of a Hindu undivided family, the officer has no option to assess the individual or the family. But in the case of an association of persons the position is different as the officer has such an option. This distinction is clearly pointed out at pages 79 and 80 of the judgment where their Lordships observed that "this was not a case of election between two alternative units of assessment, but an attempt to bring to tax the income of an assessable entity which had escaped assessment and that under section 3 of the Act there is no question of any election between a Hindu undivided family and a member thereof in respect of the income of the family. If a Hindu undivided family exists, the income-tax Officer has to assess it in respect of its income. Reference was made to section 14 (1) of the Act which ways that any part of the income received by its members cannot be assessed over again. The distinction between an association of persons and a Hindu undivided family was expressly referred to and it was observed while section 3 refers an option on the income-tax Officer to assess either the association of persons or the members of the association individually, no such option is conferred on him there under in the case of a Hindu undivided family, as its existence excludes the liability of its members in respect of the income of the former received by the latter. "

(10) THE above decision of the Supreme court has no application to the facts of this case where we are concerned with the assessment of an association of persons in respect of which we have already held that even under the new Act there is an option to assess either the association as a unit or the members individually. It is true in the above decision, the Supreme court gave a direction that if the assessment proceedings initiated under section 34 culminated in the assessment of the Hindu undivided family, appropriate adjustments had to be made by the income-tax Officer in respect of the tax realised by the revenue on that part of the income of the family assessed in the hands of the individuals. But that direction was given because the original assessment in the hands of the individuals was contrary to the provisions of the Act. In a case of association of persons, if the officer exercises his option and assesses the tax in the hands of the members individually, it cannot be said that the assessment is invalid. Hence, no question of adjustment arises.

(11) THE impugned notice merely states that the Income-tax Officer has reason to believe that the income chargeable to tax for the assessment year 1964 65 has escaped assessment. It is however, argued that the escaping of assessment is by reason of omission or failure on the part of the association of persons to make a return for the assessment year in question, namely, 1964-65. It is, submitted that there is no dispute that the association of persons did not submit return for that assessment year and therefore, the notice is justified under section 147 of the Act, section 147, however applies only if the aseessee omits or fails to submit a return. assessee is defined as person by whom any tax or any other sum of money is payable under the Act and also includes every person who is deemed to be an assessee under any provision of the Act in this ease, as the Income-tax Officer had exercised his option and assessed the individual member to tax, the assessee must be taken to be the individual. Once that option is exercised the association of persons cannot be assessed in so far as the same transaction is concerned. It cannot therefore be said that in this case the association of persons which omitted to file a return is the assessee.

(12) SRI Rama Rao, learned counsel for the Income-tax department submitted that the order of assessment, dated 10th march, 1970 was set aside on appeal by the Appellate Assistant Commissioner in his order dated 21st February, 1973 in so far as this item of capital gain is concerned. He, therefore, contended that it cannot be regarded that the Income-tax officer has exercised his option and assessed the individual member to tax. We are unable to agree with the contention. Firstly, in judging the validity of an impugned notice which was issued on 18th February, 1972 it is not possible to take into account an order passed long after that notice, namely, 2lst February, 1973. Secondly, the Appellate Assistant commissioner observed as follows :"it is seen that the assessee purchased the rights of another person who was to receive the compensation from the government in respect of the land acquired by the Government for the establishment of Bharat Heavy Electricals Ltd. in Ramachandrapuram area on the outskirts of Hyderabad city. The appellant acquired 60 per cent right in the compensation to be realised from the Government. The income-tax Officer has described the income arising therefrom as capital gains, in the head-note, but brought it to tax under section 41 (2) of the income-tax Act. I have not followed what the Income-tax Officer had in his mind. The present Income-tax Officer assured me that the matter was being relooked into and he had nothing to say in support of the inclusion in the present assessment. In my view, there is no proper basis for including this amount either as capital gain or as profit under section 41 (2), As the matter is being looked into once again, the addition of Rs. 35,397 is deleted. "it is seen that the deletion is because the Income-tax Officer said that the matter was being looked into once again and the Appellate Assistant Commissioner found there was no basis for including the amount either as capital gain or as profit under section 41 (2). We do not read the order as saying that the Income tax Officer either did not exercise his option of taxing the individual member and not the association or that he was wrong in doing so. We have also perused the grounds of appeal filed before the Appellate Assistant Commissioner. The only ground relating to this item was that the income had arisen regarding the transaction pertaining to agricultural land at Ramachandrapuram and it should not be brought under the purview of capital gains. The petitioner did not question the exercise of the option by the Income-tax Officer.

(13) THE next submission that was made on behalf of the department was that the present notice is for the assessment year 1964-65; whereas the assessment previously made on the assessee was for the assessment year 1965-66. Therefore it cannot be said that the Income-tax officer exercised his option for the year 1964-65, as there was no assessment of tax on this capital gain either in respect of the individual or in respect of association for the year 1964-65. In our view there is a fallacy in this argument when making an assessment the Income tax officer exercised his option and chose to assess the individual, but he did so for the year 1965-66, as the amount was received by the assessee on 4th December, 1964. The question is not for what particular year the assessment was made, but whether the Income-tax Officer exercised his option in levying the tax on the income in the hands of the individual or in the hands of the association. By merely choosing to give a notice in respect of a different year, it is not open to the officer to contend that he has not exercised his option earlier in the matter of assessment of tax of a particular income in the hands of either the individual or the association. We, therefore, do not see any force in the contention that because the present notice relates to the year 1964-65 and the previous assessment relates to the year 1965-66 the Income-tax officer is not precluded from assessing the association of persons. The impugned notice by which the officer seeks to assess the association of persons who has already exercised his option to assess the capital gain in the hands of the individual is therefore, liable to be quashed. In the view we have taken, it is unnecessary for us to deal with the various other contentions raised by Sri Pandu-ranga Rao in regard to the notice issued.

(14) THE writ petition is allowed with costs.

(15) W. P. No. 338 of 1973: The writ petition relates to a notice, dated 17th March, 1972 in regard to the personal assessment of the petitioner No serious arguments were addressed by the learned counsel for the petitioner in respect of this notice. The writ petition is, therefore, dismissed with costs. W. P. No. 5056 of 1972, allowed. W. P. No. 338 of 1973, dismissed.