Option to assess AOP or members individually lies in the first instance with the ITO: Supreme Court

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Option to assess AOP or members individually lies in the first instance with the ITO: Supreme Court

Section 3 expressly treats an AOP and the individual members of an association as two distinct and different assessable entities. On the terms of the section the tax can be levied on either of the said two entities according to the provisions of the Act. Therefore, s. 3 impliedly gives an option to an appropriate authority to assess the total income of either the AOP or the members of such association individually. In making the assessment at the first instance ITO has to exercise the option whether he should assess the AOP or the members thereof individually. It is not because that any section of the Act confers an exclusive power on him to do so, but because it is part of the process of assessment that is to say, he has to ascertain who is the person liable to be assessed for the tax. If he seeks to assess an AOP as an assessable entity, the said entity can object to the assessment, inter alia, on the ground that in the circumstances of the case the assessment should be made on the members of the association individually. Such an assessee has a right of appeal under s. 30 against the order of the ITO assessing the association of members instead of the members thereof individually. Scope of AAC’s power is co- terminous with that of the ITO. He can do what the ITO can do and also direct him to do what he has failed to do. If the ITO has the option to assess one or other of the entities in the alternative, the AAC can direct him to do what he should have done in the circumstances of a case. Under s. 33(5) the Tribunal has ample power to set aside the assessment made on the AOP and direct the ITO to assess the individuals or to direct the amendment of the assessment already made on the members. The comprehensive phraseology used both in s. 31 and s. 33 does not contenance the attempt of the Revenue to restrict the powers of the AAC or of the Tribunal; both of them have power to direct the appropriate authority to assess the members individually instead of the AOP as a unit.—Kanpur Coal Syndicate vs. CIT (1961) 41 ITR 406 (All) : TC44R.1082 affirmed.

Supereme court in Commissioner Of Income Tax Vs. Kanpur Coal Syndicate  has held as under:

  1. Aan Option to assess AOP or members individually lies in the first instance with the ITO, the exercise of option being a part of assessment; however, where the ITO exercises his discretion to assess the AOP, the AAC and the Tribunal have power to set aside the assessment and direct assessment on members.
  2. The Tribunal has ample power to set aside the assessment made on the AOP and direct the ITO to assess the individuals or to direct the amendment of the assessment already made on the members.
  3. Under s. 31(3)(a) in disposing of such an appeal the AAC may, in the case of an order of assessment, confirm, reduce, enhance or annul the assessment; under cl. (b) thereof he may set aside the assessment and direct the ITO to make a fresh assessment. The AAC has, therefore, plenary powers in disposing of an appeal. The scope of his power is co-terminous with that of ITO. He can do what the ITO can do and also direct him to do what he has failed to do. If the ITO has the option to assess one or other of the entities in the alternative, the AAC can direct him to do what he should have done in the circumstances of a case.
  4. Powers of AAC are co-terminous with that of ITO and he can do what the ITO can do and also direct him to do what he has failed to do.
  5. Section 3 expressly treats an AOP and the individual members of an association as two distinct and different assessable entities. On the terms of the section the tax can be levied on either of the said two entities according to the provisions of the Act. There is no scope for the argument that under s. 3 the assessment shall be only on the AOP as a unit though after such assessment the share of the income of a member of that association may be added to other income under s. 14(2). This construction would make the last words of the section, viz., “members of the association individually” a surplusage. This argument is also contrary to the express provisions of s. 3, which mark out the members of the association individually as a separate entity from the AOP.
  6. An AOP has a right of appeal under s. 30 of 1922 Act against order of ITO assessing the AOP instead of members thereof individually.
  7. As a result, Kanpur Coal Syndicate vs. CIT (1961) 41 ITR 406 (All) has been affirmed & CIT vs. Raja Reddy Mallaram (1964) 51 ITR 285 (SC) is relied on by the Hon’ble court.

 

 COMMISSIONER OF INCOME TAX vs. KANPUR COAL SYNDICATE

SUPREME COURT OF INDIA

  1. Subba Rao, J.C. Shah & S.M. Sikri, JJ.

Civil Appeal No. 673 of 1963

30th April, 1964

(1964) 32 CCH 0146 ISCC

(1964) 53 ITR 0225

Legislation Referred to

Sections 4, 250, 251, 267, 254(1)

Case pertains to

Asst. Year 1948-49

Decision in favour of:

Assessee

Counsel appeared:

S.K. Kapur with R.N. Sachthey, for the Appellant : Veda Vyasa with Naunit Lal, for the Respondent

SUBBA RAO, J.

  1. The question for decision in this appeal is whether when the ITO in his discretion assessed an AOP to income-tax, the AAC in appeal or the Tribunal in further appeal can set aside that order and direct him to assess the members of that association individually.
  2. The facts lie in a small compass and they are as follows: The assessee consisted of several persons combined together for the purpose of purchasing coal in order to supply the same to customers for domestic purposes and other small scale industries. For the asst. yr. 1948-49 the ITO levied tax upon the total income in the hands of the said AOP. The assessee claimed that in the circumstances of the case it should not be assessed to tax as an AOP, but the proportion of the income in the hand of each of the members of the association might be assessed to tax instead. As the ITO did not comply with this request, the assessee preferred an appeal to the AAC, but it was dismissed. On a further appeal to the Tribunal, the Tribunal held that though the ITO had the power to assess the income of the AOP as such or in the alternative on the individual members thereof in respect of their proportionate share in the income, it (the Tribunal) had no power under the Act to direct the ITO to exercise his power in one way or the other. The following question was referred to the High Court of Allahabad under s. 66(2) of the Indian IT Act, 1922 :

‘‘If in pursuance of s. 3 of the Indian IT Act the ITO levies the income-tax in respect of the total income of the previous year of an AOP upon the said AOP as a collective unit, whether the Tribunal is competent to direct the ITO to levy the income-tax proportionately upon the individual members of the said AOP in respect of the proportionate income of each of the members constituting the said AOP”.

  1. A Division Bench of the High Court held that the Appellate Tribunal had power to set aside the ITO’s assessment against the association and to give consequential and ancillary directions to the said officer to assess the individuals.
  2. Learned counsel for the Revenue contends that under the Indian IT Act, 1922, hereinafter called the Act, the ITO has no option but to assess the total income of the association of members, though the individual’s share in the income may be added to his individual income for the purposes of ascertaining his total income. He further argues that even if the ITO has the option to assess to income-tax the association of persons on its total income or the individual members thereof in respect of their proportionate share of the income, if he had exercised the option in one way or the other neither the AAC in appeal nor the Tribunal in further appeal has power to direct the ITO to exercise his discretion in a different way; and for this conclusion he seeks to draw strength from his further submission that no appeal lies at the instance of the AOP when they are assessed as one unit on the ground that the officer should have assessed the individual members of the said association.
  3. At the outset it will be convenient to read the relevant provisions of the Act.

‘‘3. Charge of income-tax.—Where any Central Act enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every individual, HUF, company and local authority, and of every firm and other AOP or the partners of the firm or the members of the association individually.

  1. (2) The tax shall not be payable by an assessee—….

(b) if a member of an AOP other than a Hindu undivided family, a company or a firm, in respect of any portion of the amount which he is entitled to receive from the association on which the tax has already been paid by the association.

  1. (1) Any assessee objecting to the amount of income assessed under s. 23….or the amount of tax determined under s. 23….or denying his liability to be assessed under this Act….may appeal to the AAC against the assessment or against such refusal or order.
  2. (3) In disposing of an appeal the AAC may, in the case of an order of assessment,—

(a) confirm, reduce, enhance or annual the assessment, or

(b) set aside the assessment and direct the ITO to make a fresh assessment after making such further inquiry as the ITO thinks fit or the AAC may direct, and the ITO shall thereupon proceed to make such fresh assessment and determine where necessary the amount of tax payable on the basis of such fresh assessment….

(4) Where as the result of an appeal any change is made in the assessment of a firm or AOP or a new assessment of a firm or AOP is ordered to be made, the AAC may authorise the ITO to amend accordingly any assessment made on any partner of the firm or any member of the association.”

  1. Section 3 imposes a tax upon a person in respect of this total income. The persons on whom such tax can be imposed are particularized therein, namely, HUF, company, local authority, firm, AOP, partners of firm or members of association individually. The section, therefore, does not in terms confer any power on any particular officer to assess one of the persons described therein, but is only a charging section imposing the levy of tax on the total income of an assessable entity described therein. The section expressly treats an AOP and the individual members of an association as two distinct and different assessable entities. On the terms of the section the tax can be levied on either of the said two entities according to the provisions of the Act. There is no scope for the argument that under s. 3 the assessment shall be only on the AOP as a unit though after such assessment the share of the income of a member of that association may be added to his other income under s. 14(2) of the Act. This construction would make the last words of the section, viz., ‘‘members of the association individually” a surplusage. This argument is also contrary to the express provisions of s. 3, which mark out the members of the association individually as a separate entity from the AOP. Income of every person whether he is a member of an association or not, is liable to the charge under the head ‘‘every individual”. Section 14(2)(b) only says that if such individual happens to be a member of an AOP which has already been assessed, the tax would not be payable in respect of the share of his income again. That under the Act an assessment can be made on an AOP as a unit or, alternatively, on the individual members thereof in respect of their respective shares of the income was assumed by this Court in CIT vs. Raja Reddy Mallaram (1964) 51 ITR 285 (SC). We therefore, hold that s. 3 impliedly gives an option to an appropriate authority to assess the total income of either the AOP or the members of such association individually.
  2. The next question is whether the said option is given only to the ITO and is denied to the AAC and the Appellate Tribunal. Under the Act the ITO, after following the procedure prescribed, makes an assessment under s. 23 of the Act. Doubtless in making an assessment at the first instance he has to exercise the option whether he should assess the AOP or the members thereof individually. It is not because that any section of the Act confers an exclusive power on him to do so, but because it is part of the process of assessment; that is to say, he has to ascertain who is the person liable to be assessed for the tax. If he seeks to assess an AOP as an assessable entity, the said entity can object to the assessment, inter alia, on the ground that in the circumstances of the case the assessment should be made on the members of the association individually. The ITO may reject its contention and may assess the total income of the association as such and impose the tax on it. Under s. 30 an assessee objecting to the amount of income assessed under s. 23 or the amount of tax determined under the said section or denying his liability to be assessed under the Act can prefer an appeal against the order of the ITO to the AAC. It is said that an order made by the ITO rejecting the plea of an association of persons that the members thereof shall be assessed individually does not fall under one or other of the three heads mentioned above. What is the substance of the objection of the assessee? The assessee denies his liability to be assessed under the Act in the circumstances of the case and pleads that the members of the association shall be assessed only individually. The expression ‘‘denial of liability” is comprehensive enough to take in not only the total denial of liability but also the liability to tax under particular circumstances. In either case the denial is a denial of liability to be assessed under the provisions of the Act. In one case the assessee says that he is not liable to be assessed to tax under the Act, and in the other case the assessee denies his liability to tax under the provisions of the Act if the option given to the appropriate officer under the provisions of the Act is judicially exercised. We, therefore, hold that such an assessee has a right of appeal under s. 30 of the Act against the order of the ITO assessing the association of members instead of the members thereof individually. If an appeal lies, s. 31 of the Act describes the powers of the AAC in such an appeal. Under s. 31(3)(a) in disposing of such an appeal the AAC may, in the case of an order of assessment, confirm, reduce, enhance or annul the assessment; under clause (b) thereof he may set aside the assessment and direct the ITO to make a fresh assessment. The AAC has, therefore, plenary powers in disposing of an appeal. The scope of his power is coterminous with that of the ITO. He can do what the ITO can do and also direct him to do what he has failed to do. If the ITO has the option to assess one or other of the entities in the alternative, the AAC can direct him to do what he should have done in the circumstances of a case. Under s. 33(1), an assessee objecting to an order passed by an AAC under s. 28 or s. 31 may appeal to the Appellate Tribunal within 60 days of the date on which such order is communicated to him. Under s. 33(4), ‘‘The Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, and shall communicate any such order to the assessee and to the Commissioner.” Under s. 33(5), “Where as the result of an appeal any change is made in the assessment of a firm or AOP or a new assessment of a firm or AOP is ordered to be made, the Appellate Tribunal may authorise the ITO to amend accordingly any assessment made on any partner of the firm or any member of the association.” Under this section the Appellate Tribunal has ample power to set aside the assessment made on the AOP and direct the ITO to assess the individuals or to direct the amendment of the assessment already made on the members. The comprehensive phraseology used both in s. 31 and s. 33 of the Act does not countenance the attempt of the Revenue to restrict the powers of the AAC or of the Appellate Tribunal: both of them have power to direct the appropriate authority to assess the members individually instead of the AOP as a unit.
  3. We, therefore, hold, agreeing with the High Court that the Appellate Tribunal has jurisdiction to give directions to the appropriate authority to cancel the assessment made on the AOP and to give appropriate directions to the authority concerned to make a fresh assessment on the members of that association individually. The answer given by the High Court to the question propounded is correct.

In the result, the appeal fails and is dismissed with costs.

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