Commissioner of Income Tax v. Swamy and Pathy — 1991 DIGILAW 401 (KAR)

JUDGMENT K. Shivashankar Bhat, J.—The question under section 256(1) of the Income Tax Act, 1961, read thus : "Whether, on the facts and in the circumstances of the case, the assessment of a reconstituted firm under section 187(2) requires the adoption of the same previous year, in the absence of any exercise of the option by the assessee to change the previous year ?" 2. The question assumes that no option was exercised by the assessee in changing its previous year after the reconstitution of the firm, though the assertion of the Revenue before us has been that, while filing the returns, the assessee has, by necessary implication, changed the previous year. 3. The firm admittedly, had its previous year ending on October 31, till the assessment year 1980-81, that is to say, there was no dispute till the end of the previous year ending on October 31, 1979. The next previous year, therefore, would commence on November 1, 1979. The firm continued as hitherto with its earlier constitution till April 15, 1980, on which date there was a change in the constitution of the firm by alterations with regard to share of profits. (Though the assessee claimed that, on April 15, 1980, the firm stood dissolved and a new firm came into existence, it is now too late to forms the firm to advance such a contention). For the assessment year 1981-82, the assessee filed two returns, on return (referred to here as the first return, for the sake of convenience). For the assessment year 1981-82, the assessee filed two returns, on return (referred to here as the first return, for the sake of convenience) was for the accounting period November 1, 1979, to April 15, 1980, and the second one for the accounting period November 1, 1970, to April 15, 1980, and the second one for the accounting period April 16, 1980, to March 31, 1981. The Income Tax Officer held that it was not possible to make two assessments on the assumption that the earlier firm was dissolved on April 15, 1980, and in the instant case, there had only been a reconstitution of the firm; therefore, he made an order of assessment for the entire accounting November 1, 1979, to March 31, 1981 (i.e. for 17 months). This order was affirmed by the Commissioner of Income Tax (Appeals). This order was affirmed by the Commissioner of Income Tax (Appeals). The said appellate authority held that the assessee adopted a different previous year ending with March 31, 1981, by filing two returns and the Income Tax Officer was competent to treat the entire period of 17 months as one previous year. He relied on the decision of the Punjab and Haryana High Court in KARNAL KAITHAL CO-OPERATIVE TRANSPORT SOCIETY LTD. Vs. COMMISSIONER OF Income Tax, PATIALA., (1972) 84 ITR 46 P&H ; therein it was held that the voluntary submission by the assessee of returns for a different previous year (i, e., changing the last date of the previous year, from the previous years of the assessee during the earlier assessment years), amounted to an application for change of the previous year and the acceptance of the returns by the Income Tax Officer had the effect of the latter's consent to the change. 4. The Appellate Tribunal did not agree with the above reasoning of the Appellate Assistant Commissioner. However, the assessee did not dispute the application of section 187(2) to the fact situation, in view of the decision of this court in Sangam Silks Vs. Commissioner of Income Tax, Karnataka, (1980) 122 ITR 479 KAR. The assessee contended that it was impermissible to tax the income for a period exceeding 12 months; it was further contended that no presumption can be raided that the assessee changed its previous year with the consent of the Income Tax Officer, in the absence of a specific request by the assessee in that regard; the change made by the assessee in the instant case was on the basis on its assumption that the firm had been dissolved and that a new firm had come into existence on April 15, 1980. 5 .The Tribunal held that, in spite of section 187, technically, there were two firms here, one, till April 15, 1980, and thereafter, there constituted firm, under the provisions of the Partnership Act. The legal fiction created by section 187(2) ought to be restricted for the purpose of the said section only and cannot be extended to treat (sic), that throughout the same assessee existed, for all purposes under the Act; therefore, the Income Tax Officer could not have assessed the income of the entire period of 17 months under single assessment. The legal fiction created by section 187(2) ought to be restricted for the purpose of the said section only and cannot be extended to treat (sic), that throughout the same assessee existed, for all purposes under the Act; therefore, the Income Tax Officer could not have assessed the income of the entire period of 17 months under single assessment. The Tribunal observed : "The submission of the second return disclosing the income from April 16, 1980, to March 31, 1981, cannot be construed as a voluntary act of the part of the assessee changing the previous year from October 31 to March 31, for, all along, the stand of the assessee had been that there were two separate firms." 6. In these circumstances, the Tribunal thought it fit to provide the assessee with an opportunity to exercise its option as to the previous year in the light of section 187(2). Consequently, the matter was remanded to the Income Tax Officer with a direction that, in case the assessee now makes a request that it would like to change the precious year to March 31, then the Income Tax Officer was competent to assess the entire income of 17 months under a single assessment. 7. From the above, it is clear that the Tribunal has given a definite finding as to the circumstances leading to the filing of two returns by the assessee. The assessee laboured under an erroneous view of the relevant provisions of the Act governing the "previous year" and "firm"; in these circumstances, an equitable order was made to enable the assessee to adopt a course it may choose in the light of the correct to position in law. 8. Learned counsel for the Revenue contended us that there can be no dispute that the assessee's case is covered by section 187 and if so, the assessment had to be made in the hands of the present partnership firm; in respect of a single assessment year, there cannot be two different previous years by splitting the said year as has been done by the assessee while filing the two returns and under the Act, a previous year may consist of more that 12 months. 9. 9. Learned counsel for the assessee, however, contended that a change of previous year by the assessee could be done at his option, and such an "option" could be found to be a proper option only when the assessee acted with full knowledge of the law in its proper perspective. Under section 3(4) of the Act, as it then stood during the relevant period, an assessee shall not be entitled to vary the "previous year" except with the assessee shall not be entitled to vary the "previous year" except with the consent of the "Assessing Officer"and the latter' consent could be upon such condition as he may think fit to impose. Here, the assessee never thought of exercising any option but proceeded to file two returns, only because the assessee thought that on April 15,1980, a new firm had come into existence and therefore, there ought to be returns - one, in respect of the earlier firm and the second, in respect of the new firm. Learned counsel urged that the legal fiction created by section 187(2) cannot go beyond its purpose, and, therefore, the legal implication of the reconstitution of a firm under the provisions of the Partnership Act cannot being owned for all other purposes under the Income Tax Act. 10. Therefore, we have to consider whether the assessee has exercised its option properly while altering the previous year and if so, whether the Income Tax Officer was justified in treating the entire period of 17 months as one unit for taxation and whether the Tribunal was justified in remanding the matter to the Income Tax Officer. 11. In Esthuri Aswanthiah Vs. Commissioner of Income Tax, Mysore, AIR 1968 SC 36 , there was a change in the previous year of the assessee. Earlier, the year ending on June 30, 1950, was the previous year for the assessment year 1951-52. However, for the next assessment year (1952-53), the assessee filed a return for 21 months commencing from July 1, 1950, to March 31, 1952. The Income Tax Officer accorded sanction to this change and assessed the income of 21 months for tax purposes. The assessee's contention, however, was that the income of 21 months should be assessed at the rate applicable to the proportionate income for a period of 12 months. This contention was not accepted. The Income Tax Officer accorded sanction to this change and assessed the income of 21 months for tax purposes. The assessee's contention, however, was that the income of 21 months should be assessed at the rate applicable to the proportionate income for a period of 12 months. This contention was not accepted. In this regard, the assessee contended before the Supreme Court that there cannot be a "previous year" consisting of 21 months. The question was considered in the light of section 2(11) of the Indian Income Tax Act, 1922, which was almost similar to the present section 3. It was held at page 415 : "The assessee has the option to choose his accounting year ending on any date within the preceding financial year as his precious year. Option, the meaning of the expression 'previous year' as applicable to him is determined, and he cannot exercise this option again 'so as to vary the meaning of the expression "Previous year" as then applicable to him except with the consent of the Income Tax Officer and option again 'so as to vary the meaning of the expression "previous year" as then applicable to him except with the consent of the Income Tax Officer and upon such conditions as the Income Tax Officer may think fit to imposed. If the assessee wants to change the meaning of the previous year as then applicable to him, he must obtain the consent of the Income Tax Officer, and the Income Tax Officer may accord such consent on proper terms. The Income Tax may refuse to give his consent, but if he does give his consent, he has ample power to impose the condition that the full period from the end of the 'previous year' for the preceding year's assessment to the end of the new accounting year should be taken as the previous year for the current assessment year. The Income Tax may refuse to give his consent, but if he does give his consent, he has ample power to impose the condition that the full period from the end of the 'previous year' for the preceding year's assessment to the end of the new accounting year should be taken as the previous year for the current assessment year. Thus, if the previous year at any given time applicable to the assessee end on June 30, and he wants to vary it so as to make it end on March 31 next, the Income Tax Officer has power to accord sanction to the change on the condition that the previous year would consist of the entire period of 21 months commencing on June 30 of the Year up to which his accounts were last made up to March 31 of the year up to which his account were last made up to March 31 of the year up to which his accounts are newly made up. This condition properly safeguards the interest of the Revenue. Had he sanctioned the change on the footing that the precious year of the assessee in relation to the current assessment year would be the period of 12 months from April 1 March 31, the income of the preceding 9 months from July 1 to March 31 would have escaped taxation altogether. Mr. Srinivasan submitted that the Income Tax Officer could grant the sanction on condition that the assessee should have two previous years, on consisting of a period of nine months from July 1 up to March 31, and the other of a period of 12 months from April 1 to the next succeeding March 31. This is an impossible contention. There cannot be toe previous years in repent of the same assessment year. The charge under section 3 for any assessment year is in repent of the income of the previous year. The concept of two previous years in relation to the same assessment year is repugnant to section 3." 12. Section 3 referred to there is comparable to section 4 of the present Act. The following flow out of the above observations : (1) While according consent for the change of the precious year. proper terms may be imposed by the Income Tax Officer or he may refuse to accord consent. Section 3 referred to there is comparable to section 4 of the present Act. The following flow out of the above observations : (1) While according consent for the change of the precious year. proper terms may be imposed by the Income Tax Officer or he may refuse to accord consent. (2) The entire period from the end of the earlier "previous year" may be treated as one previous year. (3) It is possible to have 'previous year' consisting of more than 12 months. (4) There cannot be two previous years in respect of the same assessment year. 13. In the instant case, two returns were filed for the assessment year 1981-82, one for the accounting year ending April 14, 1980, and another for the period April 15, 1980, to March 31, 1981. Both the periods fall within the same assessment year 1981-82. In other words, the assessee has split the previous year and hands created two previous years in respect of the same assessment year. This seems to be, prima facie, opposed to the principle stated by the Supreme Court in the above decision. 14. The contention of the assessee in Esthuri Aswanthiah Vs. Commissioner of Income Tax, Mysore, AIR 1968 SC 36 based on section 25(1) of the old Act (similar to the present section 176), to the effect that the said section provides for two previous years was rejected and the Supreme Court pointed out (at page 416); "Section 25(1) provides that in case of discontinuance of any business, profession or vocation in any assessment year, the Income Tax Officer may in that year make an accelerated assessment in respect of the income of the period between the end of the previous year and the date of such discontinuance, in addition to the usual assessment in respect of the income of the previous year. Section 25(1) contemplates, the usual assessment in repent of the income of the precious year and a special and separate assessment in the same assessment year in respect of the income of the broken period between the end of the previous year and the end of the discontinuance; it does not contemplate, as counsel submitted, assessment in the same assessment year in respect of two previous years." 15. Therefore, the provision made to assess a continued business can have no relevance to the question involved. 16. Therefore, the provision made to assess a continued business can have no relevance to the question involved. 16. The basis for filing two returns by the assessee, obviously, was to treat the earlier firm as different from the reconstituted firm. The assessee, instead of considering section 187 as applicable to its case, applied section 188. Section 188 provides that : "Where a firm carrying on a business or profession is succeeded by another firm and the case is not one covered by section 187, separate assessments shall be made on the predecessor firm and the successor firm in accordance with the provisions of section 170." 17. The assessee, here, has treated the date on which the firm was reconstituted, as the date from which the previous year commenced in respect of the second return filed; the first return pertained to the period when the original firm functioned. 18. But the case of the assessee does not fall within section 188. Here, it is a case of reconstitution of the firm and there can be no doubt that the situation is covered by section 187. This is not a case of a new firm succeeding to an earlier firm as envisaged by section 188. If so, a question would arise as to whether the assessee was justified in filing two returns, splitting the previous year into two returns, splitting the previous year into two periods, by which process the assessee has created to previous years in respect of a single assessment year. In view created two previous years in respect of a single assessment year. In Esthuri Aswanthiah Vs. Commissioner of Income Tax, Mysore, AIR 1968 SC 36 , the answer has to be that the returns filed by the assessee were not in accordance with law. It is quite obvious that the assessee were not in accordance with law. It is quite obvious that the assessee had not visualised the real situation and had acted under a misconception of the law when it filed the two returns. In Sangam Silks Vs. Commissioner of Income Tax, Karnataka, (1980) 122 ITR 479 KAR, this court had to consider the scope of section 187. A firm of three partner was reconstituted in the course of an accounting year, by the exit of on partner and the entry of two new partners. In Sangam Silks Vs. Commissioner of Income Tax, Karnataka, (1980) 122 ITR 479 KAR, this court had to consider the scope of section 187. A firm of three partner was reconstituted in the course of an accounting year, by the exit of on partner and the entry of two new partners. Two returns were filed, on up to the date of the earlier firm and another after the date of the reconstituted firm. This court held that it was a case falling within section 187. The further contention of the assessee that two assessments were permitted by section 187 was also negatived. At page 487, the Bench held : "... the object of section 187 is to treat the reconstituted firm same as the firm before its reconstitution notwithstanding the change of one or more partners. Obviously, this section is aimed at prevention of evasion of the liability of partnership firms to pay tax on the basis of the total income of a given year by merely substituting one or more partners in the middle of the years and creating two or more taxable entities and filing separate returns in the names of such firms. Section 187, therefore, provides that the reconstituted firm existing at the time of making the assessment alone should be assessed for the relevant assessment year." 19. Again at page 488, it was held : "There is no substance in the submission made for the assessee that section 187(1) only makes the reconstituted firm liable to pay tax of the firm before its reconstitution, but does not authorise the making the one assessment for the whole year on the reconstituted firm. In this behalf it is sufficient to point out that section 187(1) only speaks of making the assessment on the firm as reconstituted at the time of making the assessment and says nothing about the recovery of the tax due from the firm before its reconstitution. If the intention was that two assessments should be made, the Legislature would have also provided for collecting the tax due from the firm before its constitution from the firm as reconstituted. In this behalf, it is significant to not that under sub-clause (ii) to the proviso to section 187(1) a specific provision has been made for the recovery of tax assessed against a partner, from the reconstitued firm, if it cannot be recovered from him. In this behalf, it is significant to not that under sub-clause (ii) to the proviso to section 187(1) a specific provision has been made for the recovery of tax assessed against a partner, from the reconstitued firm, if it cannot be recovered from him. There is no such provision for the recovery of tax assessed against or payable by the firm before its reconstitution at the hands of the reconstituted firm. Absence of such provision is obviously for the reason that section 187(1) contemplates the making of only one assessment for the entire concerned previous year on the reconstituted firm. Therefore, there is nothing in the wording of section 187 which persuades us to take the view that two assessments should be made for the two periods, and the total tax assessed for both periods should be collected from the reconstituted firm." 20. There are a few instances where the very returns filed by the assessee in which the previous years were changed were acted upon by the assessing authority and, in such a situation, it was held that the very making of assessment resulted in the grant of consent for the change in the previous year. The decision of the Punjab and Haryana High Court in KARNAL KAITHAL CO-OPERATIVE TRANSPORT SOCIETY LTD. Vs. COMMISSIONER OF Income Tax, PATIALA., (1972) 84 ITR 46 P&H is one such instance. But, in all these causes, there was no change in the constitution of the firm during the course of an accounting year and the Income Tax Officer accepted the returns as filed by the assessee. There was no splitting up of the "previous year" in the returns. In all such case, it was held that since the Income Tax Officer made assessment orders, it resulted in the according of permission by him and, therefore, subsequently, the previous years cannot once again be changes, except in accordance with the provisions governing the change of previous year. It has been generally understood that a specific application, seeding consent for change of previous year need not be obtained at any stage anterior to the filling of the return. The very act of filing the return in which "previous year" has been changes has been taken as involving in application for the requisite consent (vide Rattan Lal Ved Prakash Vs. Commissioner of Income Tax, (1983) 144 ITR 135 All. The very act of filing the return in which "previous year" has been changes has been taken as involving in application for the requisite consent (vide Rattan Lal Ved Prakash Vs. Commissioner of Income Tax, (1983) 144 ITR 135 All. The Income Tax Officer cannot impose arbitrary condition while granting the requisite consent. Assam Frontier Tea Ltd. Vs. IAC of I.T.. 21. The several propositions advanced by learned counsel for the Revenue, no doubt, are legally sound and are to be accepted. But here, we are faced with a particular set of facts from which the Tribunal found that the assessee did not act voluntarily while changing the previous year. The assessee was guided by legal concepts as to the dissolution of a firm and the formation of a firm, by the change in its constitution; the assessee had obviously not thought about the legal implication of section 187(2). Throughout, its stand has been that there were two units which are to be taxed separately and, therefore, two returns were filed resulting in the splitting up of the previous year. In these circumstances, we are of the opinion that the Tribunal did not commit any error in law when it remanded the matter to afford an opportunity to the assessee to exercise the option specifically. In the light of the decision of the Supreme Court in Esthuri Aswanthiah Vs. Commissioner of Income Tax, Mysore, AIR 1968 SC 36 , the assessee could not have divided its previous year into two accounting years. It is, however, open to the assessee to have its "previous year" as adopted by the firm during the earlier year or exercise an option to change it to be in accordance with its system of accounting. Exercise of option is a deliberate act, fully conscious of what is being done; in the instant case, the assessee prepared its accounts for the two periods only because of the terms of the new deed of partnership that came into existence in April, 1980, and the technical dissolution of the earlier firm. The Concept of change of "previous year" under section 3 of the Income Tax Act was not at all thought of by the assessee and, therefore, it cannot be held that it had exercised its option one way or the other. 22. Consequently, we answer the question referred to us in the affirmative and against the Revenue. 23. The Concept of change of "previous year" under section 3 of the Income Tax Act was not at all thought of by the assessee and, therefore, it cannot be held that it had exercised its option one way or the other. 22. Consequently, we answer the question referred to us in the affirmative and against the Revenue. 23. References answered accordingly.