Appeal No 290 of 1963
Appeal from the judgment and order dated January 19 1960 of the Andhra Pradesh High Court in case referred No 7 of 1958
K N Rajagopal Sastri and RN Sachthey for the appellant
K Bhimasankaram and KR Sharma for the respondent
November 20 1963
The Judgment of the Court was delivered by SHAH J
Baba Gowd PV Rajareddy and Rajareddy Mallaram formed an association of persons called Nizamabad Group Liquor Shops called for the sake of brevity the Group 
For the Fasli year 1358 ie October 1 1948 to September 30 1949 the Group carried on business in liquor contracts obtained from the former State of Hyderabad
With the end of Fasli year 1358 the contracts came to an end
The business was then discontinued and the Group was dissolved
The Group did not make a return of its income pursuant to the general notice under section 221of the Indian Income tax Act
The Incometax Officer Nizamabad Circle issued a notice under section 34 of the Income tax Act calling upon Baba Gowdone of the members of the Group to file a return of the income of the Group but Baba Gowd failed to file the return on the due date
The Incometax Officer then assessed the taxable income of the 511 Group under section 234 at Rs 51000 and determined Rs 8826 14 0 as the tax payable
Attempts made by the Income tax Department to recover the tax from Baba Gowd having proved unsuccessful on March 13 1954 the Income tax Officer issued a notice of demand addressed to Rajareddy Mallaramanother member of the Group
The latter then applied under section 27 of the Indian Income tax Act for can cellation of the assessment
The application was rejected by the Income tax Officer
In appeal to the Appellate Assistant Commissioner the order was set aside and the Income tax Officer was directed to cancel the order of assessment under section 234 and to make a fresh assessment after giving an opportunity to Rajareddy Mallaram to file a return and to produce the books of account of the dissolved Group
The Income tax Appellate Tribunal Hyderabad Branch modified the order of the Appellate Assistant Commissioner
The Tribunal held that a valid order of assessment under section 234 having already been made in the case there could be no occasion to issue a fresh notice to Rajareddy Mallaram or to make a fresh assessment but somewhat inconsistently with that opinion the Tribunal directed that the Appellate Assistant Commissioner do consider whether Rajareddy Mallaram had been prevented by sufficient cause from making the return
At the instance of Rajareddy Mallaram the following two questions were referred to the High Court of Andhra Pradesh by the Tribunal 1 On the facts and in the circumstances of the case was the order of assessment made by the Income tax Officer under section 234 on 30 9 1953 bad in law 2 If the answer to the above question is in the negative was not the applicant liable for the amount of tax payable as determined in that order of assessment by reason of the terms of section 44 of the Income tax Act The High Court answered the first question in the affirmative and held that the second question did 512 not fallto be determined
In arriving at its conclusion the HighCourt recorded the following findings 1On the facts and in the circumstances of this case the order of assessment made by the Income tax officer under section 23 on 30 9 1953 is bad in law a absolutely because he Made the assess ment of the association and not of those who were members of the association at the time of the dissolution jointly and severally and b particularly as against any member on whom notices under sections 34 and 224 were not served because of such failure to serve notices on him
The assessment is not binding on the petitioner as no notice under section 22 was issued to him and as he was not assessed severally or jointly with others referred to above
ii The applicant is not liable for the amount of tax payable as determined in the order of assessment dated 30 9 1953 as that assessment was not made in conformity with section 44 of the Income tax Act
 The sole question which fell to be determined before the taxing authorities was whether the order of assessment made by the Income tax Officer subsequent to the dissolution of the Group assessing its income after serving a notice upon one and not all the members of the Group could be enforced against members of the Group who were not served
The material part of section 44 of the Indian
Income tax Act insofar as it dealt with the liability of discontinued associations before it was amended by section 11 of Finance Act XI of 1958 with effect from April 1 1958 stood as follows Where any business profession or vocation carried on by a association of persons has been discontinued or where an 513 association of persons is dissolved every person who was at the time of such discontinuance of 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
 The section declares the liability for assessment under Ch
IV of the Act in case of discontinuance of the business of or dissolution of an association
The Group admittedly discontinued its business at the end of Fasli year 1358 and it was also dissolved
Every person who was at the time of such discontinuance or dissolution a member of the Group was by the express terms of section 44 liable to be assessed jointly and severally in respect of the income profits and gains of the Group and was also liable for the amount of tax payable
This Court in examining the scheme of section 44 as it  stood before its amendment in 1958 in its application to a firm which had discontinued its business observed CA Abraham Uppoottil Kottayam Y The Income tax Officer Kottayam and another In effect the Legislature has enacted by section 44 that the assessment proceedings may be commenced and continued against a firm of which business is discontinued as if discontinuance has not taken place
It is enacted manifestly with a view to ensure continuity in the application of the machinery provided for assessment and imposition of tax liability notwithstanding dis
continuance of the business of firms
By a fiction the firm is deemed to continue after discontinuance for the purpose of assessment under Chapter IV In Abraham s case 1 the Court was concerned withthe assessment of a firm of which the business was discontinued because of the  dissolution of the 11961 2 SCR 765 at p 770
514 firm by the death of one of the partners
But section 44 as it stands amended by Act 7 of 1939 applies to discontinuance of the business of associations of persons as well as of firms and the question which directly fell to be determined in that case was whether penalty for concealing the particulars of income or for deliberately furnishing inaccurate particulars of income in the return could lawfully be imposed after discontinuance of the business
It is true that the validity of the order assessing the firm was not expressly challenged though at the date of the order of assessment the firm stood dissolved and its business was discontinued but the Court could not adjudicate upon the validity of the order imposing penalty without deciding whether there was a valid assessment for an order imposing penalty postulates a valid assessment
Counsel for the respondent contended that even if the assessment after dissolution of the Group be regarded as valid it is binding upon only those persons who were served with the notice calling for a return and in support of this plea
relied upon the clause 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
He urged that the expression every person in section 44 means all persons and that by enacting that such persons shall be liable to assessment jointly and severally it was intended that after the association is dissolved only the members at the date of dissolution can be assessed in respect of the income of the association
As a corollary to the argument it was submitted that all members who are sought to be assessed must be individually served with notice of assessment and those not served will not be bound by the assessment
The argument is plainly inconsistent with what was observed by this Court in Abraham s case
If by section 44 the continuity of the firm or association is for the purpose of assessment ensured 1 at P 770
515 no question of assessing the individual members of the association can arise
Under Ch
IV of the Income tax Act an association of persons may be assessed as a unit of assessment or the individual members may be assessed separately in respect of their respective shares of the income but the Act contains no machinery for assessing the income received by an association in the hands of its members collectively
The unit of assessment in respect of the income earned by the association is either the association or each individual member in respect of his share in the income
This is so when the association is existing and after it is dissolved as well
There can be no partial assessment of the income of an association limited to the share of the member who is served with notice of assessment
For the purpose of assessment the Income tax Act invests an association with a personality apart from the members constituting if and if that personality is for the purposes of Ch
IV insofar as it relates to assessment continued the theory of assessment binding only upon members who were served with the notice of assessment can have no validity
This view is supported by the use of the expression tax payable in section 44 which in the context in which it occurs can only mean tax which the association but for dissolution or discontinuance of its business would have been assessed to pay
Since the primary purpose of section 44 is to bring to tax the income of the association after it is dissolved or its business is discontinued assessment of an aliquot share of that income is not contemplated by section 44 of the Income tax Act
The effect of section 44 is as we have stated merely to ensure continuity in the application of the machinery provided in Ch
IV of the Act for assessment and for imposition of tax liability notwithstanding discontinuance of the business of the association or its dissolution
By virtue of section 44 the personality of the association is continued for the purpose of assessment and Ch
IV applies thereto
What can be assessed is the income of the association received prior to its dissolution and the members of the association would be 516 jointly and severally assessed thereto in their capacity as members of the association
For the purpose of such assessment the procedure is that applicable for assessment of the income of the association as if it had continued
A notice to the appropriate person under section 632 would therefore be sufficient to enable the authority to assess to tax the association
The plea that the respondent not having been served personally with the notice of assessment is not liable to pay the tax assessed cannot therefore be sustained
Counsel for the respondent then contended that the original assessment made under section 234 was invalid because notice of assessment was not served upon the Group in the manner provided by section 632 of the lndian Income tax Act Baba Gowd who was served with  the notice not being the principal officer who could be served with notice on behalf of the Group
But no such contention was raised before the Tribunal
It does not arise out of the order of the Tribunal and the question referred by the Tribunal to the High Court does not
justify consideration of that plea
The respondent  cannot be permitted to raise a question which did not arise out of the order of the Tribunal and has not been referred
The case must be decided on the footing that notice of assessment was properly served on Baba Gowd and that the assessment was properly  made by the Income tax Officer tinder section 234
We hold that the answer to the first question will be in the negative
If the order of assessment is held to be valid the application made by the respondent for setting aside the assessment on the ground that he was not served with the notice of assessment must fail
 The second question will be answered as follows The applicant was liable for the amount of tax payable under the order of assessment
 The appeal is allowed
The respondent will pay the costs of this appeal in this Court and in the High Court
Appeal allowed


Summary:
An association of three persons carrying on business in liquor was dissolved
No return was filed on behalf of the association or the individual members
The Income tax Officer issued a notice under section 34 of the Income tax Act calling upon Baba Gowd one of the members of the association to file a return of the income of the association but he did not so
The Income tax Officer then assessed the taxable income of the association under section 234 of the Act and determined the tax payable
Attempts to recover tax from Baba Gowd were not successful
The Income tax Officer then issued a notice of demand to the respondent another member of the dissolved association
The respondent applied under section 27 for cancellation of the assessment
The application was rejected by Income tax Officer
The Appellate Assistant Commissioner ordered cancellation of the assessment and directed that fresh assessment be made after giving an opportunity to the respondent to file a return and to produce evidence in support thereof
The Income tax Appellate Tribunal held that a valid order of assessment had already been made and there was no occasion to issue a fresh notice to the respondent or to make a fresh assessment
At the instance of the respondent the Tribunal referred to the High Court two questions whether the order of assessment made by the Income tax Officer under section 234 on September 30 1953 was bad in law or not and whether the respondent was or was not liable for the amount of tax payable as determined in that order of assessment by reason of the terms of section 44 of the Incometax Act
The High Court held that the order of assessment under section 23 4 was bad in law and the respondent was not liable
In appeal to this Court
HeldThe order of assessment made by the lncome tax Officer under section 234 on September 30 1953 was not bad in law and the respondent was liable for the amount of tax payable under the order of assessment
Under Chapter IV of the Income tax Act an association of persons can be assessed as a unit of assessment or the individual members can be assessed separately in respect of their respective shares of income
The Act does not contain any machinery for assessing the income received by an association in the hands of its members collectively
The unit of assessment in respect of the income earned by the association is either the association or each individual member in respect of his share in the income
This is so when the association is existing and the same is true after its dissolution
There can be no partial assessment of the income of an association limited to the share of the member who is served with notice of assessment
The theory of assessment binding only those members who were served with the notice of assessment is not valid
The use of the expression tax payable in section 44 in the context in which it occurs can only mean tax which the association but for its dissolution or discontinuance of its business would have been assessed to pay
510 By virtue of section 44 the personality of the association is continued for the purposes of assessment
What can be assessed is the income of the association recieved prior to its dissolution and the members of the association would be jointly and severally assessed thereto in their capacity as members of association
For the purpose of such assessment the procedure is that applicable for the assessment of the income of association as if it had continued
A notice to the appropriate person under section 632 would therefore be sufficient to enable the authority to assess to tax the association
The plea that the respondent was not served personally with the notice of assessment and was therefore not liable to pay the tax assessed cannot be sustained
CA Abraham Uppoottil Kottayam vs Income tax Officer Kottayam   referred to