THE COMMR. OF INCOME TAX,COCHIN vs. M/S.E.J.VARKEY & COMPANY

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ITR/8/1998HC KeralaKLHC01014679199814 February 2008Bench: HONOURABLE MR.JUSTICE T.R.RAMACHANDRAN NAIR,HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR8 pages
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What did the High Court hold?

The High Court held that the Tribunal was empowered to consider the question of the assessee's status in reassessment proceedings. The Court reasoned that the original assessment, made in the name of a legally invalid firm, did not make the order valid, even if accepted by the assessee. Reassessment under Section 147, when based on a flawed original assessment, merely perpetuates a mistake. The assessee is free to question the validity of such an order. The revenue did not contend that the partnership constituted with individuals and another firm as a partner was valid. The Court found that the challenge to the reassessment's validity was raised at the Tribunal stage by a partner, who is an aggrieved party and entitled to question the assessment. Therefore, the Court agreed with the Tribunal's finding that the partnership was invalid and that the reassessment was consequently invalid. The questions referred were answered against the revenue and in favour of the assessee.

What were the facts?

The assessee, M/s. E.J. Varkey & Company, was originally assessed as a registered partnership firm. A search on 27.05.83 revealed unaccounted income, leading to reassessment proceedings under Section 147 of the Income Tax Act. The assessee's appeal to the First Appellate Authority was unsuccessful. Subsequently, the respondent, a partner of the assessee-firm, appealed to the Tribunal. At the Tribunal, the respondent argued that the partnership was invalid because it included another firm as a partner. The Tribunal accepted this argument, citing a Supreme Court decision, and held that a firm cannot be a partner in another firm. Consequently, the Tribunal set aside the assessment and remanded the matter for fresh assessment.

What were the issues?

1. Whether, on the facts and in the circumstances, the assessee is entitled to raise the question of status and the Tribunal is empowered to consider it in reassessment proceedings initiated under Section 147, when the original assessment of the assessee was accepted as a firm by both the assessee and the revenue. 2. Whether, on the facts and in the circumstances, and in view of the bar of res judicata and estoppel, the assessee is entitled to reagitate the question of the status of the firm once it was determined and accepted. Assessee's contentions (as argued by the respondent partner before the Tribunal): - The partnership constituted with individuals and another firm as a partner is invalid. - The Tribunal accepted this contention, relying on the Supreme Court decision in Dulichand Laxminarayan v. Commissioner of Income-tax (29 ITR 535), which held that a firm does not have independent existence and cannot be a partner in another firm. Revenue's contentions: - The Tribunal has no authority to change the status of the assessee in reassessment proceedings under Section 147. - Relied on decisions reported in 37 ITR 224, 198 ITR 297, and 67 ITR 106 for the proposition that the status of the assessee cannot be changed in reassessment.

Which sections of the Income-tax Act were involved?

Section 147

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE T.R.RAMACHANDRAN NAIR THURSDAY, THE 14TH FEBRUARY 2008 / 25TH MAGHA 1929 ITR.No. 8 of 1998() ------------------- AGAINST THE ORDER IN ITA 522/COCH/89 IN RA.53/COCH/1991 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPLICANT: ------------ THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.P.K.R.MENON(SR.),SR.COUNSEL FOR IT SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENTS: ---------------- 1. M/S.E.J. VARKEY & COMPANY,(DISSOLVED) PARTNER OF M/S.FINE LIQUORS, THODUPUZHA. ADDL. 2. SRI.E.J. VARKEY, EDAKKATTUKUDY HOUSE, PUTHUPPADY, MUVATTUPUZHA. ADDL. 3. E.J. POULOSE, -DO- -DO- ADDL. 4. E.J. XAVIER, -DO- -DO- (DIED) ADDL. 5. E.J. PETER, -DO- -DO- ADDL. 6. K.V. SUNNY, EDAKKATTUKUDY HOUSE, ENANALLOOR, MUVATTUPUZHA. ADDL. 7. JOSE PAUL, EDAKKATTUKUDY HOUSE, PUTHUPPADY, MUVATTUPUZHA.

ITR No.8 OF 1998 ADDL. 8. THOMY, EDAKKATTUKUDY HOUSE, ENANALLOOR, MUVATTUPUZHA. (DIED) (ADDL. RESPONDENTS 2 TO 8 WHO ARE PARTNERS OF THE RESPONDENT COMPANY ARE IMPLEADED AS PER ORDER DT.16.12.03 ON CMP NO.1993/2003) ADDL. R3 BY ADV. SRI.C.KOCHUNNY NAIR SRI.DALE P.KURIEN THIS TAX REFERENCE HAVING BEEN FINALLY HEARD ON 14/02/2008,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

C.N. RAMACHANDRAN NAIR& T.R.RAMACHANDRAN NAIR, JJ. ------------------------------- I.T.R No. 8 OF 1998 ----------------------------------- Dated this the 14th day of February, 2008 JUDGMENT C.N.RAMACHANDRAN NAIR, JUDGE The reference is at the instance of the revenue and the questions referred are the following: 1.Whether, on the facts and in the circumstances of the case, the assessee is entitled to raise the question of status and the Tribunal empowered to consider the same in the reassessment proceedings initiated to bring to tax the Income that has escaped assessment in the original assessment of the assessee whose status according to the assessee and revenue was one of firm in the original assessment. 2.Whether, on the facts and in the circumstances of the case and also in view of the bar of the res judicata and estoppel, the assessee is entitled to reagitate the question of status of firm once determined and accepted by the assessee firm?”. 2. The respondent was a partner of M/s.Fine Liquors, a partnership firm constituted with two individuals and the respondent-firm as partners. The original assessment in the name

RC No. 8 OF 1998

2 of M/s.Fine Liquors was completed as a registered partnership, vide order dt.16.03.83. A search was carried out in the business premises of one of the partners of M/s.Fine Liquors, on 27.05.83. Consequent upon recovery of documents pertaining to unaccounted income, the assessment in the name of M/s.Fine Liquors was re-opened and reversed under Section 147 of the IT Act. The assessee's appeal before the First Appellate Authority was not successful. Therefore, a second appeal was filed by the respondent which was one of the partners of the Assessee-Firm, before the Tribunal. In the second appeal before the Tribunal, the respondent raised a contention that re-assessment in the name of M/s.Fine Liquors is not valid for the reason that the said partnership constituted with another Firm as a partner is invalid. Even though this was taken as a new ground before the Tribunal, the Tribunal accepted the same and following decision of the Supreme Court in Dulichand Laxminarayan v. Commissioner of Income-tax, reported in 29 ITR 535 held that the firm does not have independent existence and so it cannot be a partner in another firm. The Tribunal accepted the argument of the

RC No. 8 OF 1998

3 respondent, set aside the assessment and remanded the matter to the assessing officer for fresh assessment. We are not told as to what happened subsequently. 3. The case of the revenue is that the Tribunal has no authority to change the status of the assessee in reassessment proceedings under Section 147 of the IT Act. Senior counsel has relied on the decisions reported in 37 ITR 224, 198 ITR 297 and 67 ITR 106 for the proposition that the status of the assessee cannot be changed in re-assessment. We are unable to accept this contention for more than one reason. The fact that the original assessment made in the name of a Firm not legally constituted was accepted by the assessee does not mean that the order is valid. When such an order is revised and reassessment made under Section 147 of the IT Act, all what happens is only repetition of a mistake. When such an order is passed, the assessee is free to question the validity of the order. The Department has no case that the partnership constituted with the individuals and a partnership firm as partners is a valid firm and consequently the original assessment and re-assessment in the

RC No. 8 OF 1998

4 name of the said firm are not invalid. In this case, the contest against the validity of reassessment is seen raised only in the Tribunal-stage by the respondent-firm which is described by the assessing officer as a partner of the Assessee-firm. The effective grievance against assessment is only for the partners. Anyone styled or treated as a partner can question the assessment. Therefore, even if original assessment without involving tax was not contested by the partner, a repetition of mistake in reassessment can be contested by aggrieved persons whether it be assessee or its partners. We do not find this issue decided in any of the above cases cited by the Department. We, therefore, agree with the findings of the Tribunal and dispose of the reference case by answering the questions referred against the revenue and in favour of the assessee. C.N. RAMACHANDRAN NAIR, JUDGE T.R.RAMACHANDRAN NAIR, JUDGE ttb

RC No. 8 OF 1998

RC No. 8 OF 1998

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