Civil Appeals Nos
1864 1869 of 1972
Appeals by Special Leave from the Judgment and Order dated 17 9 1971 of the Delhi High Court in Income Tax Reference Nos 22 25 and 26 of 1970
section C Manchanda and A D Mathur for the Appellants
T A Ramachnadran and Miss A Subhashini for the Respondent
There was a Hindu undivided family consisting of the karta Lala Sham Nath and his three sons Rajinder Nath Ram Chander Nath and a minor Surinder Nath
The family carried on business
On April 29 1949 land was acquired in Sunder Nagar New Delhi in the name of the karta and the price was paid out of the books of the family
A building was constructed on the land and was completed in September 1954
Another building was constructed in the following year on a plot at Golf Links New Delhi
On March 18 1950 there was a partial partition of the Hindu undivided family and its business was taken over by a partnership firm Messrs Faqir Chand Raghunath Dass consisting of Lala Sham Nath and the two elder sons Rajinder Nath and Ram Chander Nath
The partnership firm debited a sum of Rs 98418 in the building account of the firm towards the cost of construction of the Sunder Nagar property during the assessment year 1955 56
In the assessment year 1956 57 the partnership firm debited a sum of Rs 99148 on account of the construction of the Golf Links property
The assessees who are members of the partnership firm field separate returns in their individual status for the assessment years 1955 56 and 1956 57
They claimed that the Sunder Nagar and the Golf Links properties belonged to the four members of the family in their individual capacity
But the Income Tax officer regarded the properties as belonging to the partnership firm and in the assessment proceedings of the firm for those years he estimated the cost of construction at a higher figure than the cost disclosed and made additions accordingly to the returned income of the firm
The partnership firm appealed
Allowing the appeals the Appellate Assistant Commissioner deleted the additions
He found that when the construction of the buildings was commenced the moneys were advanced by the New Delhi branch of the firm and the debit in its books was transferred to the Head Office where one fourth of the total expenditure was debited to the account of each co owner
On that he held that the partneship firm was not the owner of the properties and therefore it could not be said to have earned any concealed income
The Income Tax Officer then initiated proceedings under section 147a of the Income Tax Act 1961 against the individual assessees 276 for the assessment years 1955 56 and 1956 57 and the additions on account of concealed income originally made in the assessments of the partnership firm were now divided between the assessees and included in their individual assessments
The Income Tax officer rejected the plea of the assessees that as they had already disclosed that they had invested in the properties when filing their original individual returns there was no case for invoking section 147a
The Appellate Assistant Commissioner on appeal agreed that there was no default on the part of the assessees to warrant proceedings under section 147a and that ordinarily the assessments would have been barred by limitation
But the maintained the assessments on the ground that section 1533 ii of the Act applied
In second appeal the Income tax Appellate Tribunal while rejecting the contention that the assessees were not covered by the expression any person in section 1533ii pointed out that nevertheless that provision could not be availed of by the Income Tax Officer because there was neither any finding nor a direction in the earlier order of the Appellate Assistant Commissioner in consequence of which or to give effect to which the impugned assessments can be said to have been made
It also observed that no opportunity had been afforded to the assessees of being heard as was required by Explanation 3 to section 1533 before that earlier order was made
The Tribunal further expressed the view that the Appellate Assistant Commissioner had no jurisdiction in the appeals before him to convert the assessments made by the Income Tax Officer under section 147a to assessments passed under section 1533 ii
The Commissioner of Income Tax obtained a reference to the High Court of Delhi on the following two questions 1
Whether on the facts and in the circumstances of the case the Appellate Assistant Commissioner was legally justified in holding that the provisions of section 147a of the Income tax Act 1961 were not applicable to the case for the assessment years 1955 56 and 1956 57 respectively  2
Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the Appellate Assistant Commissioner in appeals before him could not convert the provisions of section 1471 into those of Section 1533ii of the Income tax Act 1961 and that provisions of section 1533 ii of the Act were not applicable to the instant case  277 The High Court noted the finding of the Appellate Assistant Commissioner that the properties did not belong to the partnership firm and therefore the excess amount of the cost of construction could not be regarded as the concealed income of the firm
The High Court observed that such a finding was necessary for the disposal of of the appeals filed by the firm and as a corollary it was held that the buildings belonged to the co owners
This according to the High Court necessitated the direction to the Income Tax Officer that he was free to assess the excess amount in the hands of the co owners
The High Court taking the view that the co owners were partners of the firm and therefore covered by the expression any person in section 1533ii of the Income tax Act held that the bar of limitation for making the impugned assessments was raised by that provision and that the assessments could be sustained by reference to that provision
It answered the second question referred by the Tribunal in favour of the Revenue and in the circumstances considered it unnecessary to answer the first question
The present appeals have been filed by individuals who are partners of the firm
No appeal has been filed by Surinder Nath who at the time when the partnership was constituted was a minor and was not admitted to the benefits of the partnership
The case has been dealt with throughout on the basis that if section 1533 ii of the Act applies and the bar of limitation thereby removed it is immaterial that the assessments have been made under section 147a of the Act
The question therefore is whether section 1533ii can be invoked
It is not contended on behalf of the assessees that they are not covered by the expression any person in section 1533ii of the Act
The only contention is that there is no finding or direction within the meaning of section 1533 ii of the Act in the order of the Appellate Assistant Commissioner in consequence of which or to give effect to which the impugned assessments have been made
The expressions finding and direction are limited in meaning
A finding given in an appeal revision or reference arising out of an assessment must be a finding necessary for the disposal of the particular case that is to say in respect of the particular assessee and in relation to the particular assessment year
To be a necessary finding it must be directly involved in the disposal of the case
It is possible in certain cases that in order to render a finding in respect of A a finding in respect of B may be called for
For instance where the 278 facts show that the income can belong either to A or B and to no one else a finding that it belongs to B or does not belong to B would be determinative of the issue whether it can be taxed as A s income
A finding respecting B is intimately involved as a step in the process of reaching the ultimate finding respecting A
If however the finding as to A s liability can be directly arrived at without necessitating a finding in respect of B then a finding made in respect of B is an incidental finding only
It is not a finding necessary for the disposal of the case pertaining to A
The same principles seem to apply when the question is whether the income under enquiry is taxable in the assessment year under consideration or any other assessment year
As regards the expression direction in section 1533ii of the Act it is now well settled that it must be an express direction necessary for the disposal of the case before the authority or court
It must also be a direction which the authority or court is empowered to give while deciding the case before it
The expressions finding and direction in section 1533 ii of the Act must be accordingly confined
Section 1533ii is not a provision enlarging the jurisdiction of the authority or court
It is a provision which merely raises the bar of limitation of making an assessment order under section 143 or section 144 or section 147
Income Tax Officer A Ward Sitapur vs Murlidhar Bhagwan Das and N Kt
Sivalingam Chettiar vs Commissioner of Income tax Madras
The question formulated by the Tribunal raises the point whether the Appellate Assistant Commissioner could convert the provisions of section 1471 into those of section 1533ii of the Act
In view of section 1533ii dealing with limitation merely it is not easy to appreciate the relevance or validity of the point
In the present case the Appellate Assistant Commissioner found that the cost of constructing the two buildings had not been met by the partnership firm
The firm had merely advanced money to the individual four co owners whose personal accounts in the books of the firm had been debited accordingly
On that material the Appellate Assistant Commissioner held that the partnership was not the owner of the property and consequently any excess over the disclosed cost of construction could not be added in the assessments of the firm
All that has been recorded is the finding that the partnership firm is not the owner of the properties
It is true that the finding proceeds on the basis that the cost has been debited in the accounts of the four co owners
But that does not mean without anything 279 more that the excess over the disclosed cost of construction constitutes the concealed income of the assessees
The finding that the excess represents their individual income requires a proper enquiry and for that purpose an opportunity of being heard is needed to be given to the assessees
Indeed that is now plainly required by Explanation 3 to section 1533
The expression another person in the Explanation would include persons intimately connected with the person in whose case the order is made in the sense explained by this Court in Murlidhar Bhagwan Das supra
It is one thing for the partners of a firm to be required to explain the source of a receipt by the firm it is quite another for them in their individual status to be asked to explain the source of amounts received by them as separate individuals
On such opportunity being provided it would have been open to the assessees to show that the excess alleged over the disclosed cost of construction did not constitute any taxable income
The finding contemplated in Explanation 3 it will be noted is a finding that the amount represents the income of another person
We are unable to hold that the observation of the Appellate Assistant Commissioner can be described as such a finding in relation to the assessees
It is also not possible to say that the order of the Appellate Assistant Commissioner contains a direction that the excess should be assessed in the hands of the co owners
What is a direction for the purposes of section 1533ii of the Act has already been discussed
In any event whatever else it may amount to on its very terms the observation that the Income Tax Officer is free to take action to assess the excess in the hands of the co owners cannot be described as a direction
A direction by a statutory authority is in the nature of an order requiring positive compliance
When it is left to the option and discretion of the Income Tax Officer whether or not to take action it cannot in our opinion be described as a direction
Therefore in our judgment the order of the Appellate Assistant Commissioner contains neither a finding nor a direction within the meaning of section 1533ii of the Income Tax Act in consequence of which or to give effect to which the impugned assessment proceedings can be said to have been taken
Reliance was placed by the Revenue on Commissioner of Income Tax Andhra Pradesh vs Vadde Pullaiah  Co In that case
280 there were two appeals before the Appellate Assistant Commissioner an appeal by the firm and another by Pulliah a partner of the firm filed in his individual status
The question was whether the business was the business of the firm or that of Pullaiah
In order to decide the appeal of the firm as well as that of Pullaiah the Appellate Assistant Commissioner had to decide whether the business was that of the firm or that of Pullaiah
In finding that the business was that of the firm and not of Pullaiah the Appellate Assistant Commissioner had necessarily to inquire into a matter which covered the subject matter of both the appeals
In the circumstances differing from the High Court we held that the provisions of section 1533 ii of the Income Tax Act are not applicable to the instant case
The question is answered in favour of the assessees and against the Revenue
The High Court did not enter into the first question formulated for its opinion that is to say whether the provisions of section 147 a of the Income Tax Act are applicable for the assessment years 1955 56 and 1956 57
It is agreed by the parties that if section 153 3 ii of the Act cannot be invoked by the Revenue it is necessary to decide the first question formulated by the Tribunal
In view of the opinion expressed by us on the application of section 1533ii of the Act the case must go back to the High Court for its opinion on the first question
The appeals are allowed the judgment dated September 17 1971 of the High Court governing the cases of the different assessees for the assessment years 1955 56 and 1956 57 is set aside
The provisions of section 1533ii of the Income Tax Act 1961 are not applicable to the instant case
Accordingly the second question is answered in favour of the assessees and against the Revenue
The cases are remanded to the High Court for its opinion on the first question formulated by the Income Tax Appellate Tribunal
The assessees are entitled to their costs of these appeals
NVK Appeals allowed


Summary:
A Hindu undivided family consisting of the father Karta and his three sons carried on business
Land was acquired in the name of the Karta and the price was paid out of the books of the family and a building was constructed on the land
Another building was constructed on another plot of land
On a partial partition of the above Hindu undivided family its business was taken over by a partnership firm consisting of the Karta and the two elder sons and the firm debited a certain sum of money in the building account of the firm for the assessment year 1955 56 and a similar sum in respect of the other property for the assessment year 1956 57
The appellants assessees who were members of the partnership firm filed separate returns in their individual status for the assessment years 1955 56 and 1956 57 claiming that the two properties belonged to the four members of the family in their individual capacity
The Income Tax Officer however regarded the properties as belonging to the partnership firm and in the assessment proceedings of the firm for the said years estimated the cost of construction at a higher figure than the cost disclosed and made additions accordingly to the returned income of the firm
Allowing the appeals of the partnership firm the Appellate Assistant Commissioner deleted the additions holding that as the money was advanced by the firm and debited to the account of each co owner the partnership firm was not the owner of the properties and therefore it could not be said to have earned any concealed income
The Income Tax Officer then initiated proceedings under section 147a of the IT Act 1961 against the individual assessees for the assessment years 1955 56 and 1956 57 and the additions on account of concealed income originally made in the assessments of the partnership firm were divided between the assessees and included in their individual assessment rejecting the plea of the assessees that there was no case for invoking the said section as they had already disclosed that they had invested in the properties when filing their original individual returns
On appeal the Appellate Assistant Commissioner though agreeing that there was no default on the part of the assessees to warrant proceedings under section 147a and though ordinarily the assessments would be barred by limitation maintained the assessments on the ground that section 1533ii of the Act applied
273 The Income Tax Appellate Tribunal though rejecting the contention that the assessees were not covered by the expression any person in section 1533ii pointed out that the provision could not be availed of by the Income Tax Officer as there was neither any finding nor a direction on the earlier order of the Appellate Assistant Commissioner in consequence of which or to give effect to which the impugned assessment could be said to have been made and that no opportunity had been afforded to the assessees of being heard as was required by Explanation 3 to section 1533 before that earlier order was made
It held that the Appellate Assistant Commissioner had no jurisdiction to convert the assessments made by the Income Tax Officer under section 147a to assessments passed under section 1533ii
The High Court on Reference by the Tribunal observed that the finding that the properties did not belong to the partnership firm and therefore the excess amount of the cost of construction could not be regarded as the concealed income of the firm was necessary for the disposal of the appeals filed by the firm and as a corollary it was held that the buildings belonged to the co owners
This necessitated the direction to the Income Tax officer that he was free to assess the excess amount in the hands of the co owners
It held that the Appellate Assistant Commissioner could convert the provisions of section 147i into those of section 1533ii of the Act and that the provisions of section 1533ii of the Act applied to the case
In the assessee s appeals to this Court on the question whether section 1533ii can be invoked
Allowing the appeals  HELD 1 The provisions of section 1533ii of the Income Tax Act 1961 are not applicable to the instant case
280 C 2 The expression finding and direction are limited in meaning
A finding given in an appeal revision or reference arising out of an assessment must be a finding necessary for the disposal of the particular case that is to say in respect of the particular assessee and in relation to the particular assessment year
To be a necessary finding it must be directly involved in the disposal of the case
277G 3 Where the facts show that the income can belong either to A or B and to no one else a finding that it belongs to B or does not belong to B would be determinative of the issue whether it can be taxed as A s income
A finding respecting B is intimately involved as a step in the process of reaching the ultimate finding respecting A
If however the finding as to A s liability can be directly arrived at without necessitating a finding in respect of B then a finding made in respect of B is an incidental finding only
It is not a finding necessary for the disposal of the case pertaining to A
The same principles apply when the question is whether the income under enquiry is taxable in the assessment year under consideration or any other assessment year
278A B 4 It is now well settled that the expression direction in section 1533 ii of the Act must mean an express direction necessary for the disposal of the case before the authority or court
It must also be a direction which the authority or court is empowered to give while deciding the case before it
278C 274 5
i Section 1533 ii is not a provision enlarging the jurisdiction of the authority or court
It is a provision which merely raises the bar of limitation for making an assessment order under section 143 or section 144 or section 147
278D Income Tax Officer A Ward Sitapur vs Murlidhar Bhagwan Das  N Kt
Sivalingam Chettiar vs Commissioner of Income tax Madras  referred to
In the instant case all that has been recorded is the finding that the partner ship firm is not the owner of the properties
The finding proceeds on the basis that the cost has been debited in the accounts of the four co owners
But that does not mean that the excess over the disclosed cost of construction constitutes the concealed income of the assessees
The finding that the excess represents their individual income requires a proper enquiry and for that purpose an opportunity of being heard is needed to be given to the assessees
That is plainly required by Explanation 3 to section 1533
The finding contemplated in Explanation 3 is a finding that the amount represents the income of another person
278H 279B D ii It is one thing for the partners of a firm to be required to explain the source of a receipt by the firm it is quite another for them in their individual status to be asked to explain the source of amounts received by them as separate individuals
279C iii The observation of the Appellate Assistant Commissioner cannot be described as such a finding in relation to the assessee
279D iv It is also not possible to say that the order of the Appellate Assistant Commissioner contains a direction that the excess should be assessed in the hands of the co owners
The observation that the Income Tax Officer is free to take action cannot be described as a direction
A direction by a statutory authority is in the nature of an order requiring positive compliance
When it is left to the option and direction of the Income Tax Officer whether or not to take action it cannot be described as a direction
279E F v The order of the Appellate Assistant Commissioner contains neither a finding  nor a direction  within the meaning of section 1533ii of the Act in consequence of which or to give effect to which the impugned assessment proceedings can be said to have been taken
279G Commissioner of Income tax Andhra Pradesh vs Vadde Pullaiah  Co  referred to