RAJINDER NATH ETC. vs. COMMISSIONER OF INCOME TAX, DELHI

CIVIL APPEAL No. 1864/1972Supreme Court[1980] 1 S.C.R. 27213 August 1979Bench: 2 JudgesAuthor: P.N. BHAGWATI, R.S. PATHAK9 pages
AI SummaryRemanded

What were the facts?

A Hindu Undivided Family (HUF) business constructed two buildings. Following a partial partition, a partnership firm, comprising the Karta and two elder sons, took over the business. The firm debited sums to the building accounts for assessment years 1955-56 and 1956-57. The appellants, members of the firm, filed individual returns claiming ownership of the properties. The Income Tax Officer (ITO) treated the properties as belonging to the firm and made additions to its income. The Appellate Assistant Commissioner (AAC) deleted these additions, holding the firm was not the owner. Subsequently, the ITO initiated proceedings under Section 147(a) against the individual assessees for the same assessment years, dividing the additions. The AAC, while agreeing there was no default, upheld the assessments citing Section 153(3)(ii). The Income Tax Appellate Tribunal disagreed with the applicability of Section 153(3)(ii) due to the absence of a 'finding' or 'direction' in the AAC's order and the lack of a hearing. The High Court, however, found a 'direction' in the AAC's observation that the ITO was free to pursue the excess amount in the hands of co-owners, and upheld the applicability of Section 153(3)(ii).

What did the Supreme Court hold?

The Supreme Court held that Section 153(3)(ii) of the Income Tax Act, 1961, is not applicable to the instant case. The Court clarified that an expression 'finding' under Section 153(3)(ii) must be a finding necessary for the disposal of the particular case concerning the particular assessee and assessment year, directly involved in the case's disposal. An incidental finding is not sufficient. Similarly, a 'direction' must be an express direction necessary for the disposal of the case, which the authority is empowered to give. The Court found that the AAC's order merely stated that the partnership firm was not the owner of the properties, and the observation that the ITO "is free to take action" was not a 'direction' as it was left to the ITO's option. The Court also noted that no opportunity of being heard was given to the assessees, which is required by Explanation 3 to Section 153(3) when a finding is made that an amount represents the income of another person. Therefore, the impugned assessment proceedings could not be said to have been taken in consequence of or to give effect to any 'finding' or 'direction' within the meaning of Section 153(3)(ii). The appeals were allowed, and the case was remanded to the High Court for its opinion on the first question formulated by the Tribunal regarding the applicability of Section 147(a).

What were the issues?

1. Whether Section 153(3)(ii) of the Income Tax Act, 1961, is applicable to the instant case, considering the nature of the order passed by the Appellate Assistant Commissioner. Assessee's contentions: - The Appellate Assistant Commissioner's order did not contain a 'finding' or a 'direction' as contemplated by Section 153(3)(ii). - The observation that the Income Tax Officer "is free to take action" is not a 'direction' requiring positive compliance. - No opportunity of being heard was afforded to the assessees as required by Explanation 3 to Section 153(3) before the AAC's order. - The AAC had no jurisdiction to convert assessments made under Section 147(a) to assessments under Section 153(3)(ii). Revenue's contentions: - The High Court correctly interpreted the AAC's order as containing a 'direction' to the ITO to assess the excess amount in the hands of the co-owners. - The finding that the properties did not belong to the partnership firm necessitated a direction to the ITO to pursue the excess amount in the hands of the co-owners. - The provisions of Section 153(3)(ii) were applicable to the case.

Which sections of the Income-tax Act were involved?

Section 153(3)(ii),Section 147(a),Section 143,Section 144

AI-generated summary — verify with the full judgment below

B 272 RAJINDER NATH ETC. v. COMMISSIONER OF INCOME TAX, DELHI August 13, 1979 [P. N. BHAGWATI AND R. S. PATHAK, JJ.)

Income-Tax Act 1961 (43 of 1961)-S. 153(3)(ii)-Applicability of- "fi1uling" and "direction"_..Dif]erence betlveen-Observation that Income 1'nx Officer, "is free to take actioii" not a 'direction.' A Hindu undivided family consisting of the; f<~titer (Karta) and his three C son~ carried on business. Land was acquired in the name of the Karta and. the price wa~ paid out of the books of the family, and a building was con- structed on the land. Another building was constructed on another plot cf land. D E G JI On a partial partition of the above' Hindu undivided family its busi1Iess was taken over by a partnership firm consisting of the Kart a and the two e!der sons and the firm. debited a certain sum of money in the building account of the firm for the assessment year 1955-56 and a similar sum in respect of the other property for the assessment year 1956-57. The appellants (oosessees) who were members of the partnership firm, filed separate returns in their individual status for the assessment years 1955-56 and 1956-57 claiming that the two p

The order continues below.

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