Case: Rajinder Nath Etc Vs. Commissioner Of Income Tax, Delhi

1. These appeals, by special leave, are directed against a judgment dated September 17, 1971 of the High Court of Delhi, disposing of an income tax reference2. 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 Delhi3. 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. Faquir 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. 94,418/- 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. 99,148/- on account of the construction of the Gold Links property4. The assessees, who are members of the partnership firm, filed 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 delated 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 partnership firm was not the owner of the properties, and, therefore, it could not be said to have earned any concealed income5. The Income Tax Officer then initiated proceedings under Section 147(a) ofthe Income Tax Act, 1961 against the individual assesses 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 147(a). The Appellate Assistant Commissioner, on appeal, agreed that there was no default on the part of the assessees to warrant proceedings under Section 147(a) and that ordinarily the assessments would have been barred by limitations. But he maintained the assessments on the ground that Section 153(3)(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 153(33)(ii), 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 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 153(3) 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 147(a) to ?assessments passed under Section 153(3)(ii).?6. 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 cases, the Appellate Assistant Commissioner was legally justified in holding that the provisions of Section 147(a) ofthe 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 147(a) into those of Section 153(3)(ii) ofthe Income-Tax Act, 1961 and that provisions of Section 153(3)(ii) of the Act were not applicable to the instant case??7. 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 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-owners8. 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 153(3)(ii) of the Income Tax Act, held that the bar of the 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 necessary to answer the first question9. 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.

Reasoning: he presentcase,theAppellate Assistant Commissioner found thatthecost of constructingthetwo buildings had not been not bythepartnership firm. The firm had merely advanced money totheindividual four co-owners, whose personal accounts inthebooks ofthefirm had been debited accordingly. On that materialtheAppellate Assistant Commissioner held thatthepartnership was nottheowner oftheproperty and consequently any excess overthedisclosed cost of construction could not be added intheassessments ofthefirm. All that has been recorded isthefinding thatthepartnership firm is nottheowner oftheproperties. It is true thatthefinding proceeds onthebasis thatthecost has been debited intheaccounts ofthefour co-owners. But that does not mean, without anything more, thattheexcess overthedisclosed cost of construction constitutestheconcealed income oftheassessees. Thefinding thattheexcess representsr individual income requires a proper inquiry and for that purpose an opportunity of being heard was needed to be given totheassessees. Indeed, that is now plainly required by Expanation 3 to Section 153(3). The expressionr person? intheExplanation would include persons intimately connected withtheperson in whose casetheorder is made inthesense explained by this Court in Murlidhar Bhagwan Das (supra). It is one thing forthepartners of a firm to be required to explainthesource of a receipt bythefirm, it is quiter form inr individual status to be asked to explainthesource of amounts received bym as separate individuals. On such opportunity being provided it would have been open totheassessees to show thattheexcess alleged overthedisclosed cost of construction did not constitute any taxable income. The finding contemplated in Explanation 3, it will be noted, is afinding thattheamount representstheincome ofr person. We are unable to hold thattheobservation oftheAppellante Assistant Commissioner can be described as such a finding in relation to