Case: Commissioner Of Income-Tax,Hyderabad Vs. Sri Rajareddy Mallaram

1. Baba Gowd, P. V. Rajareddy and Rajareddy Mallaram formed an association of persons called "Nizamabad Liquor Shops" - called for the sake of brevity the Group. For the Fasli year 1358 i.e., 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 S. 22(1) of the Indian Income-tax Act. The Income-tax Officer, Nizamabad Circle, issued a notice under S. 34 of the Income-tax Act calling upon Baba Gowd - one 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 Income-tax Officer then assessed the taxable income of the Group under S. 23(4) at Rs. 51,000/-, and determined Rs. 8,826-14-0 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 Mallaram - another member of the Group. The latter then applied under S. 27 of the Indian Income-tax Act for cancellation of the assessment. The application was rejected by the Income-tax Officer. In appeal to the Appellant Assistant Commissioner, the order was set aside and the Income-tax Officer was directed to cancel the order of assessment under S. 23 (4) 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 S. 23(4) 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.2. At the instance of Rajareddy Mallaram the following two questions were referred to the High Court of Andhra Pradesh by the TribunalOn the facts and in the circumstances of the case, was the order of assessment made by the Income-tax Officer under S. 23(4) 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 S. 44 of the Income-taxHigh Court answered the first question in the affirmative and held that the second question did not fall to be determined. In arriving at its conclusion the High Court recorded the followingOn the facts and in the circumstance of this case, the order of assessment made by the Income-tax Officer under S. 23(4) on 30-9-1953 is bad in law,(a) absolutely, because he made the assessment 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 Ss. 34 and 22(4) were not served because of such failure to serve notices on him.The assessment is not binding on the petitioner, as no notice under S. 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 S. 44 of the Income-tax Act.Baba Gowd, P. V. Rajareddy and Rajareddy Mallaram formed an association of persons called "Nizamabad Liquor Shops" - called for the sake of brevity the Group. For the Fasli year 1358 i.e., 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 S. 22(1) of the Indian Income-tax Act. The Income-tax Officer, Nizamabad Circle, issued a notice under S. 34 of the Income-tax Act calling upon Baba Gowd - one 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 Income-tax Officer then assessed the taxable income of the Group under S. 23(4) at Rs. 51,000/-, and determined Rs. 8,826-14-0 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 Mallaram - another member of the Group. The latter then applied under S. 27 of the Indian Income-tax Act for cancellation of the assessment. The application was rejected by the Income-tax Officer. In appeal to the Appellant Assistant Commissioner, the order was set aside and the Income-tax Officer was directed to cancel the order of assessment under S. 23 (4) 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 S. 23(4) 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.2. At the instance of Rajareddy Mallaram the following two questions were referred to the High Court of Andhra Pradesh by the Tribunaln the facts and in the circumstances of the case, was the order of assessment made by the Income-tax Officer under S. 23(4) 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 S. 44 of the Income-taxHigh Court answered the first question in the affirmative and held that the second question did not fall to be determined. In arriving at its conclusion the High Court recorded the followingn the facts and in the circumstance of this case, the order of assessment made by the Income-tax Officer under S. 23(4) on 30-9-1953 is bad in law,(a) absolutely, because he made the assessment 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 Ss. 34 and 22(4) were not served because of such failure to serve notices on him.The assessment is not binding on the petitioner, as no notice under S. 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 S. 44 of the Income-tax

Reasoning: 5. The effect of S. 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 S. 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 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 S. 63(2) 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 berespondent 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 under S. 23(4).7. We hold that 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 asapplicant was liable for the amount of tax payable under the order assessment".