Case: M/s. Daffadar Bhagat Singh & Sons Vs. The Income Tax Officer, A-Ward, Ferozepure

Grover, J.1. This is an appeal by special leave against the judgment of the Punjab High Court dismissing the writ petition of appellants herein under Articles 226 and 227 of the Constitution by which it was prayed that a writ of prohibition directing the Income-tax authorities not to proceed with the assessment for the year 1952-53 be issued. A prayer was also made for the issue of a writ of certiorari for quashing the notices under Sections 23 (2) and 22 (4) of the Income-tax Act 1922 hereinafter called the Act, which had been issued by the Income-tax Officer in that connection. The appellant firm filed a return for the assessment year 1952-53 on March 31, 1953. It also applied that it may be registered as a firm under Section 26A of the Act, the partners being Bhagat Singh and his two sons Katar Singh and Dhian Singh, their shares being in the proportion of 4/16, 6/16 and 6/16 respectively. The Income-tax Officer passed an order on March 26, 1957 holding that the assessee constituted a Hindu Undivided Family and not a firm. The registration under Section 26A was also refused. The appellants approached the Appellate Assistant Commissioner in appeal who made an order on August 11, 1959 allowing registration of the partnership firm under Section 26A. He further held that the business belonged to the firm and therefore its income must be excluded from that of the family. The Income Tax Officer was directed to assess the income of the business in the hands of the firm. The Income-tax Officer issued fresh notice to the appellants under Sections 22 (4) and 23 (2) of the Act. The appellant refused to comply with these notices and moved the Inspecting Assistant Commissioner of Income-tax for giving a direction that the assessment should not be proceeded with owing to the statutory bar created by Section 34 (3) of the Act. As the Income-tax authorities did not accede to the request of the appellants a petition under Articles 226 an 227 was filed in the High Court.The High Court dismissed the petition on the ground that in view of the decision of this Court in Income tax Officer, A-Ward, Sitapur v. Murlidhar Bhagwandas 1964-52 ITR 335= (AIR 1965 SC 342 ) the second proviso to S. 34(3) would be applicable because the members of the appellant firm could not be regarded as strangers to the proceedings which resulted in the assessment order made in respect of them on the basis of their constituting a Hindu Undivided Family along with others and that they were intimately connected with the "person" whose assessment was made by the Income-tax Officer and set aside by the Appellate Assistant Commissioner on whose direction fresh assessment proceedings were taken. The second proviso to S. 34 (3) of the Act reads:"Provided further that nothing contained in this section limiting the time within which any action may be taken, or any order, assessment or reassessment may be made, shall apply to a reassessment made under S. 27 or to an assessment or reassessment made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under Section 31, Section 33, Section 33A, Section 33B, Section 66 or Section 66A.In S. C. Prashar v. Vasantsen Dwarkadas, 1963-49 ITR (SC) 1=(AIR 1963 SC 1356 ) this court, by majority, held that the provisions of second proviso to S. 34 (3) insofar as they authorised the assessment or reassessment of any person other than the assessee beyond the period of limitation specified in S. 34 in consequence of or to give effect to a finding or direction given in an appeal, revision or reference arising out of proceedings in relation to the assessee, violated the provisions of Art. 14 of the Constitution and were invalid to that extent.The scope and ambit of the second proviso came up for consideration again in 1964-52 ITR 335 =(AIR 1965 SC 342 ).According to the majority decision the expression finding" and "direction" in the said proviso means respectively a finding necessary for giving relief in respect of the assessment for the year in question and a direction which the appellate or revisional authority, as the case may be, was empowered to give under the section mentioned in that proviso. A "finding" therefore could only be that which was necessary for the disposal of an appeal in respect of an assessment of a particular year.If the Appellate Assistant Commissioner found that the income shown by the assessee was not the income for the relevant year but was income which belonged to another year that was not a finding necessary for the disposal of the appeal and was only incidental to it. The meaning of the words "any person" was also considered and it was said at page 346 (of ITR)= (at p.349 of AIR) that a combined reading of Ss. 30 (1) and 31 (3) indicated the case where persons other than the appealing assessee might be affected by the orders passed by the Appellate Commissioner. It was observed:"Modification or setting aside of assessment made on a firm, joint Hindu Family, association of persons, for a particular year may affect the assessment for the said year on a partner or partners of the firm, member or members of the Hindu Undivided Family or the individual, as the case may be. In such cases though the latter are not eo nomine parties to the appeal, their assessments depend upon the assessments on the former. The said instances are only illustrative. It is not necessary to pursue the matter further. We would, therefore, hold that, the expression "any person" in the setting in which it appears must be confined to a person intimately connected in the aforesaid sense with the assessments of the year under appeal". The argument of Mr. Veda Vyasa for the appellant has been two-fold. He contends firstly that the finding or direction which the Appellate Assistant Commissioner gave in the present case in his order dated August 11, 1959 that the business belonged to the partnership and not the Hindu Undivided Family and the further direction which was given by him that the Income tax Officer should assess the income in the hands of the partnership firm were not necessary for the disposal of the appeal According to Mr. Veda Vyasa the crux of the matter was that the Appellate Assistant Commissioner gave a decision that the income was to be excluded from the assessment of the Hindu Undivided Family thereby reversing the decision of the Income tax Officer that it was assessable in the hands of the family. It is contended that, in these circumstances, the direction to the Income tax Officer that be should assess the income in the hands of the firm was neither necessary nor called for and therefore the law laid down in Murlidhar Bhagwan Dass case, 1964-52 ITR 335 = (AIR 1965 SC 342 ) was clearly applicable. In this connection it may be mentioned that according to Mr. Veda Vyasa two returns had been filed by the appellant for the assessment year 1952-53, one relating to the Hindu Undivided Family and the other, of the partnership firm. But the statements contained in the writ petition of the appellant do not support this submission. In para 3 of that petition it is stated that the firm and all the three partners filed their returns of profit and loss on March 31, 1953 with the Income tax Officer and also made in applicable under S. 26A of the Act for registration of the firm. It is true that in the assessment order of the Income tax Officer the status of the assessee is shown to be Hindu Undivided Family but that has been apparently shown in the order because the Income tax Officer gave an express decision about the status of the assessee and held that it constituted a Hindu Undivided Family.It, however, stands proved that the assessee filed the return claiming the status of a firm together with an application under S. 26A or its registration which was disallowed by the Income tax Officer but was allowed by the Appellate Assistant Commissioner. The substantial issue before the Appellate Assistant Commissioner was one of status of the assessee and he held that it was a partner firm and not a Hindu Undivided Family. This finding was necessary for deciding the appeal before the Appellate Assistant Commissioner and it is not possible to understand how it can be regarded as having been made only incidentally. Once a finding is given which was necessary for the disposal of the appeal the second proviso to S. 34(3) of the Act would be attracted and the bar of limitation would be lifted. In N. K. Sivalingam Chettiar v. Commissioner of Income-tax, Madras, Civil Appeal No. 1985 of 1966 D/- 27-3-1967 (SC) this Court after referring to the relevant observations in Murlidhar Bhagwandas case1964-52 ITR 335 =(AIR 1965 SC 342 ) reiterated that a finding within the second proviso to Section 34 (3) must be necessary for giving relief in respect of the assessment of the year in question. It was further observed that this Court in an earlier case lent approval to the observations of the Allahabad High Court in Hazari Lal v. Income tax Officer, Kanpur, 1960-39 ITR 265 = (AIR 1960 All 97 ) "that the word "finding" only covers "material questions which arise in a particular case for decision by the authority hearing the case or the appeal which, being necessary for passing the "final order or giving the final decision in the appeal, has been the subject of controversy between the interested parties or on which the parties concerned have been given a hearing." The first submission of Mr. Veda Vyasa therefore cannot be accepted.2. The second limb of the argument of Mr. Veda Vyasa is based on the premise that the appellant which was a partnership firm was a distinct legal entity and was thus a total stranger to the Hindu Undivided Family the assessment of which came up for consideration before the Appellate Assistant Commissioner in which the orders already referred were made by him. It is suggested that the appellant could not fall within the meaning of the expression "any person" in the second proviso to Section 34 (3) of the Act.If the observations made in Murlidhar Bhagwan Dass case 1964-52 IRT 335=(AIR 1965 SC 342 ) are borne in mind it is again not possible to understand how the appellant can be taken out of the category of person or persons intimately connected with the assessment of the year under appeal. The returns, as stated before, were originally filed by the partnership firm comprising Bhagat Singh and his two sons. The question was of the assessment of the income of the business of the firm. The Income tax Officer treated the father and the sons as Hindu Undivided Family. On appeal, however. the Assistant Commissioner accepted their contention that they formed a partnership firm. It is difficult, in these circumstance, to agree that the appellant was a total stranger to the assessment which was under appeal before the Appellate Assistant Commissioner and had no intimate connection with the person whose assessment was made by the Income tax Officer and was set aside in appeal by the Appellate Assistant Commissioner.

Decision:
0[ds]In this connection it may be mentioned that according to Mr. Veda Vyasa two returns had been filed by the appellant for the assessment yearone relating to the Hindu Undivided Family and the other, of the partnership firm. But the statements contained in the writ petition of the appellant do not support this submission. In para 3 of that petition it is stated that the firm and all the three partners filed their returns of profit and loss on March 31, 1953 with the Income tax Officer and also made in applicable under S. 26A of the Act for registration of the firm. It is true that in the assessment order of the Income tax Officer the status of the assessee is shown to be Hindu Undivided Family but that has been apparently shown in the order because the Income tax Officer gave an express decision about the status of the assessee and held that it constituted a Hindu Undivided Family.It, however, stands proved that the assessee filed the return claiming the status of a firm together with an application under S. 26A or its registration which was disallowed by the Income tax Officer but was allowed by the Appellate Assistant Commissioner. The substantial issue before the Appellate Assistant Commissioner was one of status of the assessee and he held that it was a partner firm and not a Hindu Undivided Family. This finding was necessary for deciding the appeal before the Appellate Assistant Commissioner and it is not possible to understand how it can be regarded as having been made only incidentally. Once a finding is given which was necessary for the disposal of the appeal the second proviso to S. 34(3) of the Act would be attracted and the bar of limitation would bewas further observed that this Court in an earlier case lent approval to the observations of the Allahabad High Court in Hazari Lal v. Income tax Officer, Kanpur,ITR 265 = (AIR 1960 All 97  ) "that the word "finding" only covers "material questions which arise in a particular case for decision by the authority hearing the case or the appeal which, being necessary for passing the "final order or giving the final decision in the appeal, has been the subject of controversy between the interested parties or on which the parties concerned have been given a hearing." The first submission of Mr. Veda Vyasa therefore cannot bethe observations made in Murlidhar Bhagwan Dass caseIRT 335=(AIR 1965 SC 342  ) are borne in mind it is again not possible to understand how the appellant can be taken out of the category of person or persons intimately connected with the assessment of the year under appeal. The returns, as stated before, were originally filed by the partnership firm comprising Bhagat Singh and his two sons. The question was of the assessment of the income of the business of the firm. The Income tax Officer treated the father and the sons as Hindu Undivided Family. On appeal, however. the Assistant Commissioner accepted their contention that they formed a partnership firm. It is difficult, in these circumstance, to agree that the appellant was a total stranger to the assessment which was under appeal before the Appellate Assistant Commissioner and had no intimate connection with the person whose assessment was made by the Income tax Officer and was set aside in appeal by the Appellate Assistant Commissioner.