Holding

Section 153(3)(ii) of the Income‑Tax Act, 1961 is not applicable because the order of the Appellate Assistant Commissioner did not contain a finding or a direction as required by the provision.

Summary

A Hindu undivided family transferred its business to a partnership firm, which debited construction costs to the accounts of the four co‑owners. The partnership firm appealed assessments that added concealed income, and the Appellate Assistant Commissioner held that the firm was not the owner of the properties, deleting the additions. The Income Tax Officer then reassessed the individual co‑owners under section 147(a), and the Assistant Commissioner attempted to invoke section 153(3)(ii) to remove the limitation bar. The Income‑Tax Appellate Tribunal held that the Assistant Commissioner’s order lacked a "finding" and a "direction" required by section 153(3)(ii). The Supreme Court affirmed that the order contained neither a finding nor a direction, and therefore section 153(3)(ii) could not be applied, setting aside the High Court judgment and allowing the assessees' appeals.

Issues considered

Whether the order of the Appellate Assistant Commissioner contained a "finding" and a "direction" within the meaning of section 153(3)(ii) of the Income‑Tax Act, enabling conversion of assessments under section 147(a) to those under section 153(3)(ii).
Whether section 153(3)(ii) of the Income‑Tax Act, 1961 is applicable to the present case to remove the limitation bar on the assessments.
Whether section 147(a) of the Income‑Tax Act is applicable to the assessment years in question (not finally decided).

Legislation cited

Income Tax Act, 1961s. 143, s. 144, s. 147(a), s. 153(3)(ii)

Subjects

Income TaxSection 153(3)(ii)Limitation periodFindingDirectionPartnership firmHindu undivided familyConcealed income

Judgment

272
1
RAJINDER NATH ETC.
v. •
COMMISSIONER OF INCOME TAX, DELHI j

August 13, 1979 l

B [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.

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
D 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 properties belonged to the four members of
E the family in their individual capacity, The Income Tax Officer however regarded
the propertiee as belonging to the partnership firm, ood in the assessment proceed-
ings of the firm for the ·said years, estitnated the cost of construction at a
higher figure, than the cost disclosed, and made additions accordingly tCJ the
returned income of the firm.

Allowing the ap.peals of the partnership firm the Appeliate Assistant Commi!i-
~;ioner deleted the additions hdlding that ~ the money was advanced by the
firm and debited to the account of each co-owner, the partnership firm wa~
not the owner of the properties and therefore it could not be said to- have
earned any concealed income.

The Income Tax Officer then initiated proceedings under s. 147(a) O:f the
I.T. Act 1961 against the individual <l!Ssessees for the assessment years 1955-56
and 1956-57 and the additions on account of concealed income originally made
G in tho assessments of the partnership firm were divided between the assessees •
and included in their individual assessment, rejecting the plea of the ass.euees '
that there was no case for invoking the said section, as they had already dis-
closed that ·they had invested in the properties when filing their origin.at irtdi-
vidual return!!:. •
On appeal the Appellate Assistant Commissioner though agreeing that th.ere
JI was no default on the part of the assessees to warrant proceedings under s. 147(3:)
and though ordinaf"ily the assessments would be barred by limitation, maintained.
the assessments on the ground that s. 153(3)(ii) of the Act applied.
RAJINDER NATH V. C.I.T. 273

The Income Tax Appellate Tribunal though rejecting the contention that il1e A
assessees were not covered by the expression "any person" in s. 153(3)(ii),
pointed out that the provision could not be availed of by the Income Tax
Officer as there was neither any "finding" nor a "direction" on the earlier order
\'" of the Appellaite Assistant Commissioner in consequence of which, or to give
~ effect to which, the impugned assessment could be said to have been made and
that no opportunity had been afforded to the assessees of being heard as was
required by Explanation 3 to s. 153(3) before that earlier order was made. B
It held that the Appellaite Assistant Commissioner had no jurisdiction to convert
the aasessments made by the Income Tax Officer under s. 147(a) to "assess111ents
paS!ed under '· 153(3)(ii)".
The High Court 011 Reference. by the Tribunal observed that the finding
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 C
iru:ome of the firm, 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-owner..
This necessitated the "direction" to the Income Tax Officer that he was free to
MSCU the excess amount in the hands of the co-owners. It held that the
Appellate Assistant Commissioner could convert the provisions of s. 147(i) into
those of s. 153(3)(ii) of the Act a<nd that the provisions of s. !53(3)(ii) of the
Act applied to the case. D

In llie asscssee'• appeals to thi• Court on the question whether •· 153(3)(ii)
can be invoked.

AHov.'ing the appeals,
HELD: (1) The provisions of s. 153(3)(ii) o[ the Income Tax Act, 1961
are not applicable to the instant case. [280 CJ E
(2) The expression "finding" and "direction" are limited in meaning. A
finding given in an appeal, revision or reference arising out of an assessment
must be a finding nec5.'!ary for the disposal of the particular case, that is to
say, in re,,pect of the particular asscsseo and in relation to the particular assess-
mmt year. To be a necessary finding, it must be directly involved in tho
dillpO!l!l of the case. [2770] · F
(3) Whero tho fact.< show that the inco111e can belong either to A or B and
to ao one else, a finding that it belongs te> B or does not belong to B would be
determinative of the issue wbother it can be taxed as A's income. A finding
reapeeting B is intimately involved as a step in the process of reaching the
ultimate fin.ding respecting A. If, however, the finding M to A'! li&b~lity can
be difee!ly arrived at without necessitating a finding in respect of B, then a G
fi~ made in respect of B is an incidental finding only. It i~ not a finding
neces&ary for tho disposal of the case pertaining to A. The .same principles
.apply when the question is whether the income under enquiry is taxable in the
BSSmJftmt year under consideration or any other assessment year. [278A-BJ
(4) It is now well settled that the cxpr<ISsion "direction" in s. 153(3)(ii)
<>f the Act must mean an express direction necessary for the disposal of the R
<:a.a More tho authority or court. It must also be a direction which the
atithority or court is empo\\·ered to give while deciding the case before it.
(278C]
274 SUPREME COURT REPORTS [1980] I S.C.R.

A 5. (i) Section 153 (3) (ii) is not a provision enlarging the jurisdiction of the
authority or court. It is a provision \Vhich merely raises the bar of limitation
for making an assessment order under s. 143 ors. 144 ors. 147. [278D]

I11con1e Tax Officer, A-Ward, Sitapur v. ~1urlidhar Bhagwan Das, 52 ITU:
335; /I./. Kt. Sivalingan1 Chettiar v. Conuni:isioner of Jnconie-tax, lvladras, 66 ITR
586 (SC); referred to.
8
In the instant case all that ha-s been recorded is the finding that the partner-
ship firm is not the owner of the properties. The finding proceeds on the basis.
that the cost has been debited in the accounts of the feiur co-owners. Ilut
that does not mean, thnt the excess over the disclosed cost of constn1ction
constitutes the concealed income of the assessees. The finding that the excess
represents their individual income· requires a proper enquiry and for that purpose
C an opportunity of being her~rd is needed to be given to the assessees. That
is plainly required by E.xplanation 3 to s. 153 ( 3). The finding conteu1plated
in Explanation 3, is a finding that the amount represents the incornc of another·.
pmon. [278H-279B, DJ

(ii) It is one thing for the partners of a firm to be required to explain·
the source of a receipt by the firm, it is quite another for them in theil' individual
D status to be asked to expla·in the source of amounts received by them. as separate
individuals. [279C]

(iii) The observation of the Appellate Assistant Commissioner cannot be.
described a:iii such a finding in relation to the assessee. [279D1

(iv) It is also not possible to say that the order of the Appellate A3sistant
Con1missioner contains a direction that the excess should be assessed ir1 the
E
hands of the co-owners. The observation that the l!lcome Tax Officer "is free
to take action" cannot be described as a "direction". A direction by a statutory
authority is in the nature of an order requiring positive compliance. When· it is·
left to the option and direction of the Tnco1ne Taix Officer whether or not to
take action it cannot be described as a direction. {279E-F]

(v) The order of the Appellate Assistant Comniisisoner contains neither a
'finding' nor a 'direction' ~1 ithin the meaning of s. 153 (3) (ii) of the ACt in
consequence of which or to give effect to which the impugned assessment
proceedings can be said to have been tnkcn. [279G]

Con1n1is.siu11cr <;j l11co111~·tax. Andhra Pradesh v. Vadde Pu!laiah & Co., 89
ITR 240; referred to.
G
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 1864-1869
of 1972.
1\ppeals by Special Leave from the Judgment and Order dated
17-9-1971 of the Delhi High Court in Income-Tax Reference Nos.
22, 25 and 26 of 1970.
H
S. C. Manchanda and A. D. Mathur for the Appellants.
T. A. Ramachnadran and Miss A. Subhashini for the Resp0ad~nt.
RAJINDER NATH v. C.I.T. (Pathak, !.) 275

The Judgment of the Court was delivered by A

PATHAK, J: These appeals, by special leave, are directed against
a judgment dated September 17, 1971 of the High Court of Delhi,
' <lisposing of an income tax reference.
I There was a Hindu undivided family consisting of the karta, Lala
B
Sham Nath and his three sons, Rajindcr 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 follow- c
ing year on a plot at Golf Links, New Delhi.
On March 18, 1950, there was a partial partition of the Hindu un-
<livided family, and its business was taken over by a partnership firm
Messrs. Faqir Chand Raghunath Dass consisting of Lala Sham Nath
and the two elder sons, Rajindcr Nath and Ram Chander Nath. The D
partnership firm debited a sum of Rs. 98,418/- in the building account
-0f the firm towards the cost of construction or the Sunder Nagar pro-
perty 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 Golf Links property.
E
The assessees, who are members of the partnership firm, field
·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
indi\'idual capacity. But the Income Tax Officer regarded the pro-
pertie' as belont;in~ to the partnership firm, and in the assessment F
proceedings of the firm for those years, he estimated the cost of cons-
truction at a higher figure than the cost disclosed, and made additions
accordingly to the returned income of tho firm. The partnership firm
appealed. Allowin~ the appeals, the Appellate Assistant Commis-
sion.er deleted the additions. He found that when the construction of
the buildings was commenced the moneys were advanced hy the New G
•1 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
• partne.rship firm was not the owaer of the properties, and, therefore,
it could not be said to have earned any concealed income.
H
The Income Te.x Officer then initiated proceedings under section
147(a) of the Income Tax Act, 1961 aga;nst the individual assessees
276 SUPREME COURT REPORTS [1980] 1 s.e.R.

A 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 bad
invested in the properties when filing their original individual returns
B
there was no case for invoking section 147(a). The Appellate Assis-
tant 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 beeu barred by limitation.
But he maintained the assessments on the ground that section 153(3)
c (ii) of the Act applied. In second appeal, the Income-tax Appellate
Tribunal, while rejecting the contention that tjie assessees were not
covered by the expression "any person" in section 153 (3 )(ii), point-
ed 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 of the Appellate Assistant Commis-
D sioner in consequence of which, or to give effect to which, the impugn-
ed 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 Ille
Appellate Assistant Commissioner had no jurisdiction in the appeal«
E before him to convert the assessments made by the Income Tax Offi-
cer under section 147(a) to "assessments passed under
. section 153(3)
. .

(ii)."

The Commissioner of Income Tax obtained a reference to the
High Court of Delhi on the following two questions : -
F
"l. Whether on the facts and in the circumstances of
the case, the Appellate Assistant Commissioner was legally
justified in holding that the provisions of section 147(a) of
the Income-tax Act, 1961, were not applicable to the case
for the assessment years 1955-56 and 1956-57 respecti-
G vely?
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(1) into those of Sec-
H tion 153 (3 )(ii) of the Income-tax Act, 1961 and that pro-
visions of section 153(3) (ii) of the Act were not applicable
to the instant case ?"
' RAJINDER NATH v. C.I.T. (Pathak, !.) 277

The High Court noted the finding of the Appellate Assistant A.
• Commissioner that the properties did not belong to the partnership
firm, and therefore the excess amount of the cost of construcion 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
)
of the appeals filed by the firm, and as a corollary it was held that
8
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-owners.

The High Court, taking the view that the co-owners were partners
of the firm and, therefore, covered by the expression "any person" in
secti0n 153(3) (ii) of the Income-tax Act, held that the bar of limi-
c
tation for making the impugned assessments was raised by that provi-
sion, and that the assessments could be sustained by reference to that
provJSJon. It answered the second question referred by the Tribunal
in favour of the Revenue and, iu the circumstances, considered it un-
necessary to answer the first question. D
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.
.. The case has been dealt with throughout on the basis that if sec- E
tion 153 (3) (ii) of the Act applies, and the bar of limitation thereby
removed, it is immaterial that the assessments have been made under
section 147(a) of the Act. The question, therefore, is whether section
153(3)(ii) can be invoked. It is not contended on behalf of the
assessees that they are not covered by the expression "any person" F
in section 153(3)(ii) of the Act. The only contention is that there
is no "finding" or "direction" within the meaning of section 153 (3)
(ii) of the Act in the order of the Appellate Assistant Commissioner
in consequence of which or to give effect to which the impugned
assessments have been made.
G
The expressions "finding" and "direction" are limited in meaning .
•1 A finding given in an appeal, revision or reference arising out of an
assessment must be a finding necessary for the disposal of the parti-
..., cular case, that is to say, in respect of the particular assessee and in
relation to the particular assessment year. To be a necessary finding,
it must be directly involved in the disposal of the case. It is possible H
ill certain cases that in order to render a finding in respect of A, a
finding in respect of B may be called for. For instance, where the
278 SUPREME COURT REPORTS [198/Jj [ S.C.R. •
A facts show that the income can belong either to A or B and to no
one else, a finding that it belongs to B or- does not belong to B would
be determiuative of the issue whether it can be taxed as A's income.
A finding respecting B is intimately involved as a step in the process
of reaching the ultimate finding respecting A. If, however, the finding
as to A's liability can be directly arrived at without necessitating a
8
finding in respect art' B, then a finding made in respect of B is an
incidental finding only. It is not a finding nece..ary for the disposal
of the case pertaining to A. The same principles seem to apply when
the question is whether the income under enquiry is taxable in the
assessment year under consideration or any other _assessment year. As
c regards the expression "direction" in section 153 (3) (ii) of the Act,
it is now well settled that it must be an express direction necessary
for the disposal of the case before the authority or court. It must
also be a direction which the authority or court is empowered to give
while deciding the case before it. The expressions "finding" and
"direction" in section 153 (3) (ii) of the Act must be accordingly con-
D fined. Section 153(3) (ii) is not a provision enlarging the jurisdiction
of the authority or court. It is a provision which merely raises the
bar of limitation of making an assessment order under section 143 or
section 144 or section 147. Income Tax Officer, A-Ward, Sitapur
v. Murlidhar Bhagwan Das(') and N. Kt. Sivalingam Chettiar v. Com-
missioner of Income-tax, Madras('). The question formulated by the
E Tribunal raises the point whether the Appellate Assistant Commis-
sioner could convert the provisions of section 147(1) into those of
section 153(3)(ii) of the Act. In view of section 153(3) (ii) deal-
ing with limitation merely, it is not easy to appreciate the relevance
or validity of the point.
F Jn the present case, the Appellate Assistant Commissioner found
that the cost of constructing the two buildings had not been met by
the partnership firm. The firm had merely advanced money to the
individual four co-owners, whose personal accounts in the books of
the firm had been debited accordingly. On that material the Appel-
late Assistant Commisoioner held that the partnership was not the
G owner of the property and consequently any excess over the disclosed
cost of construction could not be added in the assessments of the
firm. All that has been recorded is the finding that the partnership
••
firm is not the owner of the properties. It is true that the finding
•
)I
proceeds on the basis that the cost has been debited in the accounts
Df the four co-owners. But that does not mean, without anything
(1) 52 l.T.R. 335.
(2) 66 1.T.R. 586 (S.C.).
RAJ!NDER NATH V. C.!.T. (Pathak, J.) 279

more. that the excess over the disclosed cost of construction constitu- A
tes the concealed income of the assessees. The finding that the ex-
cess represents their individual income requires a proper enquiry and
for that purpose an opportunity of being heard is needed to be given
to the assessees. Indeed, that is now plainly required by Explana-
tion 3 to section 153(3). The expression "another person" in the
B
Explanation would include per_sons intimately connected with the per·
son in whose case the order is made in the sense explained by this
Court in Murlidhar Bhagwan Das (supra). It is one thing for the
partners of a firm to be required to explain the source of a receipt
by the firm, it is quite another for them in their individual status to
be asked to explain the source of amounts received by them as sepa- c
rate individuals. On such opportunity being provided it would have
been open to the assessees to show that the excess alleged over the
disclosed cost of construction did not constitute any taxable income.
The finding contemplated in Explanation 3, it will be noted is a find-
ing that the amount represents the income of another person. We
are unable to hold that the observation of the Appellate Assistant D
Commissioner can be described as such a finding in relation to the
~ssessees.

It is also not possible to say that the order of the Appellate
Assistan_t Commissioner contains a direction that the excess should be E
assessed in the hands of the co-owners. What is a "direction" for
the purposes of section !53(3)(ii) of the Act has already been dis-
cussed. In any' event, whatever else it may amount to, on its very
terms the observation that the Income Tax Officer "is free to take
action" to assess the excess in the hands of the co-owners cannot be
described as a "direction". A direction by a statutory authority is in F
the nature of an order requiring positive compliance. When it is left
to the option and discretion of the Income Tax Officer whether or not
to take action it cannot, in our opinion, be described as a direction.

Therefore, in our judgment the order of the Appellate Assistant
Commissioner contains neither a finding nor a direction within the G
meaning of section 153(3) (ii) of the Income Tax Act in consequence
of which or to give effect to which the impugned assessment proceed-
ings can be said to have been taken.

Reliance was placed by the Revenue on Commissioner of Income-
H
Tax, Andhra Pradesh v. Vadde Pullaiah & Co. (') In that case,
(!) 89 I.T.R. 240.
19-H5JSCI/79
'
280 ~UPREME COURT REPORTS I l 980] I s.c R.

A there were two appeals before the Appellate Assistant Commissioner,
an appeal by the firm and another by Pulliah, a partner of the firm,
filed in his individual status. The question was whether the business
was the business of the firm or that of Pullaiah. In order to decide
the appeal of the firm as well as that of Pullaiah, the Appellate Assis-
tant Commissioner had to decide whether the business was that of
B
the firm or that of Pullaiah. In finding that the business was that
of the firm and not of Pullaiah, the Appellate Assistant Commissioner
had necessarily to inquire into a matter which covered the subject
matter of both the appeals.
In the circumstances, differing from the High Court, we held that
c the provisions of section 153(3) (ii) of the Income Tax Act are not
applicable to the instant case. The question is answered in favour of
the assessees and against the Revenue.
The High Court did not enter into the first question formulated
for its opinion, that is to say, whether the provisions of section 147
D (a) of the Income Tax Act are applicable for the assessment years
1955-56 and 1956-57. It is agreed by the parties that if section 153
(3) (ii) of the Act cannot be invoked by the Revenue, it is necessary
to decide the first question formulated by the Tribunal. In view of
the opinion expressed by us on the application of section 153(3)(ii)
of the Act, the case must go back to the High Court for its opinion
E on the first question. ·
111c appeals are allowed, the judgment dated September 17. 1971
of the High Court governing the cases of the different assessces for
the assessment years 1955-56 and 1956-57 is set aside. The pro-
visions of section 153(3)(ii) of the Income Tax Act, 1961 arc not
F applicable to the instant case. Accordingly. the second question is
answered in favour of the assessees and against the Revenue. The
cases are remanded to the High Court for its opinion on the first
question formulated by the Income Tax Appellate Tribunal. The
assessees arc entitled to their costs of these appeals.

G
N.V.K. Appeals allowed.