Kanga & Palkhivala IT Act 10th Ed Vol II CH 14A-16

Date and Time: 27 November 2020 21:59:00 IST
Job Number: 130974190
Documents (52)
1. S. 158A. Procedure when assessee claims identical question of law is pending before High Court or Supreme
Court
Client/Matter: -None-
2. S. 158B. Definitions
3. S. 158BA. Assessment of undisclosed income as a result of search
4. S. 158BB. Computation of undisclosed income of the block period
5. S. 158BC. Procedure for block assessment
6. S. 158BD. Undisclosed income of any other person
7. S. 158BE. Time limit for completion of block assessment
8. S. 158BF. Certain interests and penalties not to be levied or imposed
9. S. 158BFA. Levy of interest and penalty in certain cases
10. S. 158BG. Authority competent to make the block assessment
11. S. 158BH. Application of other provisions of this Act
12. S. 158BI. Chapter not to apply after certain date
13. S. 159. Legal representatives
14. S. 160. Representative assessee
15. S. 161. Liability of representative assessee
16. S. 162. Right of representative assessee to recover tax paid
17. S. 163. Who may be regarded as agent
18. S. 164. Charge of tax where share of beneficiaries unknown
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19. S. 164A. Charge of tax in case of oral trust
20. S. 165. Case where part of trust income is chargeable
21. S. 166. Direct assessment or recovery not barred
22. S. 167. Remedies against property in cases of representative assessees
23. S. 167A. Charge of tax in the case of a firm
24. S. 167B. Charge of tax where shares of members in association of persons or body of individuals unknown,
etc.
25. S. 167C. Liability of partners of limited liability partnership in liquidation
26. S. 168. Executors
27. S. 169. Right of executor to recover tax paid
28. S. 170. Succession to business otherwise than on death
29. S. 171 Assessment after partition of a Hindu undivided family
30. S. 172. Shipping business of non-residents
31. S. 173. Recovery of tax in respect of non-resident from his assets
32. S. 174. Assessment of persons leaving India
33. S. 174A. Assessment of association of persons or body of individuals or artificial juridical person formed for
a particular event or purpose
34. S. 175. Assessment of persons likely to transfer property to avoid tax
35. S. 176. Discontinued business
36. S. 177. Association dissolved or business discontinued
37. S. 178. Company in liquidation
38. S. 179. Liability of directors of private company in liquidation
39. S. 180. Royalties or copyright fees for literary or artistic work
40. S. 180A. Consideration for know-how
41. S. 181.
42. CHAPTER XVI Special Provisions Applicable to Firms
43. S. 182.
44. S. 183.
45. S. 184. Assessment as a firm
46. S. 185. Assessment when section 184 not complied with
47. S. 186.
48. S. 187. Change in constitution of a firm
49. S. 188. Succession of one firm by another firm
50. S. 188A. Joint and several liability of partners for tax payable by firm
51. S. 189. Firm dissolved or business discontinued
52. S. 189A. Provisions applicable to past assessments of firms
S. 158A. Procedure when assessee claims identical question of law is
pending before High Court or Supreme Court
Kanga & Palkhivala's: The Law and Practice of Income Tax, 10th Edition
Kanga & Palkhivala's: The Law and Practice of Income Tax, 10th Edition > Kanga & Palkhiwala -
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XIV-A Special Provision for Avoiding
Repetitive Appeals
THE INCOME-TAX ACT, 1961 (ACT NO. XLIII OF 1961)
CHAPTER XIV-A Special Provision for Avoiding Repetitive Appeals
S. 158A. Procedure when assessee claims identical question of law is pending before High Court or Supreme
Court
(1) 1[Notwithstanding anything contained in this Act, where an assessee claims that any question of law arising in his
case for an assessment year which is pending before the2[Assessing Officer] or any appellate authority (such
case being hereafter in this section referred to as the relevant case) is identical with a question of law arising in
his case for another assessment year which is pending before the High Court on a reference under section 256
or3[before the Supreme Court on a reference under section 257 or in appeal under section 260A before the High
Court or in appeal under section 261 before the Supreme Court] (such case being hereafter in this section
referred to as the other case), he may furnish to the2[Assessing Officer] or the appellate authority, as the case
may be, a declaration in the prescribed form and verified in the prescribed manner, that if the2[Assessing Officer]
or the appellate authority, as the case may be, agrees to apply to the relevant case the final decision on the
question of law in the other case, he shall not raise such question of law in the relevant case in appeal before any
appellate authority or4[in appeal before the High Court under section 260A or in appeal before the Supreme Court
under section 261 ].
(2) Where a declaration under sub-section (1) is furnished to any appellate authority, the appellate authority shall call
for a report from the2[Assessing Officer] on the correctness of the claim made by the assessee and, where
the2[Assessing Officer] makes a request to the appellate authority to give him an opportunity of being heard in the
matter, the appellate authority shall allow him such opportunity.
(3) The5[Assessing Officer] or the appellate authority, as the case may be, may, by order in writing,—
(i) admit the claim of the assessee if he or it is satisfied that the question of law arising in the relevant case is
identical with the question of law in the other case; or
(ii) reject the claim if he or it is not so satisfied.
(4) Where a claim is admitted under sub-section (3),—
(a) the5[Assessing Officer] or, as the case may be, the appellate authority may make an order disposing of the
relevant case without awaiting the final decision on the question of law in the other case; and
(b) the assessee shall not be entitled to raise, in relation to the relevant case, such question of law in appeal
before any appellate authority or6[in appeal before the High Court under section 260A or the Supreme Court
under section 261 ].
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Court
(5) When the decision on the question of law in the other case becomes final, it shall be applied to the relevant case
and the5[Assessing Officer] or the appellate authority, as the case may be, shall, if necessary, amend the order
referred to in clause (a) of sub-section (4) conformably to such decision.
(6) An order under sub-section (3) shall be final and shall not be called in question in any proceeding by way of
appeal, reference or revision under this Act.
Explanation.—In this section,—
(a) “appellate authority” means the7[Deputy Commissioner (Appeals)], the Commissioner (Appeals) or the
Appellate Tribunal;
(b) “case”, in relation to an assessee, means any proceeding under this Act for the assessment of the total
income of the assessee or for the imposition of any penalty or fine on him.]
1. Legislative History.—The section was introduced in 1984, with the ostensible intention of reducing repetitive
litigation between a taxpayer and the Department on the same point, year on year. Assessees in a particular business
tend to have the same points of difference with the department each year, and it was hoped that the number of
appeals filed to decide the same disputes could be minimised by bringing this section.8
2. Scope.—The section states that an assessee may make an application under this section to an assessing officer
or an appellate authority stating that the same question of law is pending in another assessment year before an
appellate authority, and that the assessee is willing to be bound by that decision in this year. The officer or authority to
whom this application is made shall consider this application and pass suitable orders thereon. Sadly, this section is
rarely used. Assessees prefer to take the safe route of filing a separate appeal for each year, possibly in the hope that
some distinguishing factor in a particular year will take their case out of the scope of taxation for that year, if not all the
years.
In one of the reported judgments where the assessee did make an attempt to use this provision, the Department
objected. It argued that the section would only apply if the Department “agrees” with the application of the assessee.
The Tribunal upheld the Department’s contention and disposed off the assessee’s appeal on merits. However, the
High Court, on appeal, held that the Tribunal had a duty to first pass an order under this section before passing an
order under s 254(1) . Further, it was held that the Department could refuse to “agree” only on clear and cogent
grounds.9
1 Chapter XIVA, containing section 158A, has been inserted by the Taxation Laws (Amendment) Act, 1984 (67 of 1984),
S 31 (w.e.f. 1-10-1984). See Circular No. 387, July 6, 1984, 152 ITR (St.) 1.
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Court
2 Subs., for “Income-tax Officer”, by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), s 2 (w.e.f. 1-4-1988).
3 Subs., for “before the Supreme Court on a reference under section 257 or in appeal under section 261 ”, by the
Finance Act, 2002 (20 of 2002), s 63(a)(i) (w.e.f. 1-6-2002). See Circular No. 8 of 2002, August 27, 2002, 258 ITR (St.)
13.
4 Subs., for “for a reference before the High Court under section 256 or the Supreme Court under section 257 or in
appeal before the Supreme Court under section 261 ”, by the Finance Act, 2002 (20 of 2002), s 63(a)(ii) (w.e.f. 1-6-
2002).
6 Subs., for “for a reference before the High Court under section 256 or the Supreme Court under section 257 or in
appeal before the Supreme Court under section 261 ”, by the Finance Act, 2002 (20 of 2002), s 63(b) (w.e.f. 1-6-2002).
See Circular No. 8 of 2002, August 27, 2002, 258 ITR (St.) 13.
7 Subs., for “Appellate Assistant Commissioner”, by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), s 2 (w.e.f.
1-4-1988).
8 Circular No. 394, September 14, 1984, 150 ITR (St.) 13.
9 Titanor Components Ltd. v CIT 323 ITR 266 .
End of Document
S. 158B. Definitions
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XIV-B Special Procedure for Assessment
of Search Cases
CHAPTER XIV-B Special Procedure for Assessment of Search Cases
1 2In this Chapter, unless the context otherwise requires,—
3Subs. by the Finance Act, 2001 (14 of 2001), s 66 (w.e.f. 1-6-2001), Circular No. 14 of 2001, 252 ITR
(St.) 65, for the following:— ‘(a) “block period” means the 1 [previous years relevant to ten assessment
years] preceding the previous year in which the search was conducted under section 132 or any
requisition was made under section 132A, and includes, in the previous year in which such search was
conducted or requisition made, the period up to the date of the commencement of such search or, as
the case may be, the date of such requisition;’. 1. Subs., for “period of ten previous years”, by the
Finance (No. 2) Act, 1996 (33 of 1996), s 45 (w.e.f. 1-7-1995). [“block period” means the period
comprising previous years relevant to six assessment years preceding the previous year in which the search
was conducted under section 132 or any requisition was made under section 132A and also includes the
period up to the date of the commencement of such search or date of such requisition in the previous year in
which the said search was conducted or requisition was made:
Provided that where the search is initiated or the requisition is made before the 1st day of June, 2001, the provisions of this
clause shall have effect as if for the words “six assessment years”, the words “ten assessment years” had been
substituted;]
(b) “undisclosed income” includes any money, bullion, jewellery or other valuable article or thing or any income based
on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery,
valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly
income or property which has not been or would not have been disclosed for the purposes of this Act4[, or any
expense, deduction or allowance claimed under this Act which is found to be false].
1. Legislative History.—A new scheme in Chapter XIV-B was introduced by the Finance Act 1995 for the
assessment of undisclosed income determined as a result of a search under s 132 or requisition under s 132A . Under
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the scheme of this chapter, the undisclosed income detected as a result of any search initiated, or requisition made,
after June 30, 1995 and before May 31, 2003 shall be assessed separately as income of a block of years (block
period). The Finance Act 2003 has inserted, with effect from June 1, 2003, ss 153A to 153C containing new provisions
for assessment in cases of search or requisition and made this chapter inoperative.
The provisions of this chapter are constitutionally valid and do not violate art 14, 19(1)(g) or 21 of the Constitution .5
The chapter is a self contained code applicable in certain special circumstances and is meant to apply notwithstanding
anything contained in any other provisions of the Act, and any other provisions of the Act cannot control the contents
of this chapter except to the extent provided for in this chapter.6 The application of the provisions of this chapter is
mandatory.7
The terms ‘block period’ and ‘undisclosed income’ are significant, and have been defined in s 158B .
2. Block Period.—The definition of “block period” uses the expression “means and includes” and is therefore
exhaustive.8 The undisclosed income of a person shall be assessed as the income of the block period consisting of a
period of six9 (earlier ten) previous years, preceding the previous year in which the search was conducted or the books
of account, assets, etc, were requisitioned.10 The period of the current year up to the date of the search will also form
part of the block period. Thus, seven (earlier eleven) previous years falling within the block period treated as a single
previous year, undisclosed income of which is subjected to tax and surcharge under s 113 .
3. Undisclosed Income.—The term ‘undisclosed income’ has been defined in cl (b) of s 158B . It includes any
money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or
other documents or transactions where such money, bullion, jewellery, valuable article, thing, entry in the books of
account or other document or transaction that has not been disclosed. An amendment was made via, Finance Act,
2002, retrospectively from July 1, 1995, which states that even expenses, deductions or allowances claimed under this
Act, found to be false, are covered under “undisclosed income”. Income disclosed to the assessing officer during the
block assessment remain undisclosed income.11
Under this provision, the word “such” used as a prefix to the word “money, bullion, jewellery, valuable article, thing,
entry in the books of account or other document” indicates that only the evidence found at the time of search or from
books of account or other documents requisitioned can form basis for computation of undisclosed income.12
Consequently, income other than undisclosed income has to be assessed under Chapter XIV as per the amendment
in s 158BA w.r.e.f July 1, 1995.13 The assessing officer must show the material discovered during the search which
formed the basis for assessment of that undisclosed income.14 There must be a clear link between the material and
the income.15 A mere loose sheet of paper found with a number cannot form the basis for the conclusion that such
amount was received by the assessee.16 The difference between the valuation given by the Departmental Valuation
Officer and the amount indicated by the assessee is not undisclosed income.17
It is submitted that, if, during the block assessment, the assessing officer finds that any other income, not forming a
part of the “undisclosed income” is chargeable to tax, he can issue a notice under s 148 to assess such income, if it is
within limitation. Else, the income cannot be brought to tax.
Before an addition of an “undisclosed income” can be made, the assessing officer has to bring on record the material
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to show that on evidence found as a result of search there is an undisclosed income.
On the admission of an application made to Settlement Commission before the date of the search, income disclosed
therein will not be treated as undisclosed income.18 However, if the application is filed, but has not been admitted, the
provisions of this Chapter will still apply. The notice under s 158BC cannot be stayed or quashed on the ground that
the assessee has made a disclosure under the Voluntary Disclosure of Income Scheme 1997, especially when the
disclosure is made after initiation of search.19
1 Chapter XIV-B, containing sections 158B, 158BA, 158BB, 158BC, 158BD, 158BE, 158BF, 158BG and 158BH, has
been inserted by the Finance Act, 1995 (22 of 1995), S 32 (w.e.f. 1-7-1995). See Circular No. 717, August 14, 1995,
215 ITR (St.) 70.
2 It is pertinent to note that a new Chapter XIVB (Charge of additional income-tax in certain cases) containing maiden
section 158B (Additional income-tax) was purported to be inserted by SECTION 63 of the Direct Tax Laws
(Amendment) Act, 1987, with effect from 1st April, 1989. The effect of such insertion has been set at naught as a result
of the omission of that SECTION 63 by SECTION 95(j) of the Direct Tax Laws (Amendment) Act, 1989, with effect from
1st April, 1989. Thus, the provisions of Chapter XIV-B (section 158B ) were still-born. However, with effect from 1st
April, 1989, the provisions about charge of additional income-tax in certain cases were contained in sections 143(1A)
and 143(1B), which remained operative upto 31-5-1999, as a result of their omission (w.e.f. 1-6-1999) by the Finance
Act, 1999 (27 of 1999). See Circular No. 779, September 14, 1999, 240 ITR (St.) 3.
3 Subs. by the Finance Act, 2001 (14 of 2001), s 66 (w.e.f. 1-6-2001), Circular No. 14 of 2001, 252 ITR (St.) 65, for the
following:—
‘(a) “block period” means the 1 [previous years relevant to ten assessment years] preceding the previous year in which the
search was conducted under section 132 or any requisition was made under section 132A, and includes, in the previous year in
which such search was conducted or requisition made, the period up to the date of the commencement of such search or, as the
case may be, the date of such requisition;’.
1. Subs., for “period of ten previous years”, by the Finance (No. 2) Act, 1996 (33 of 1996), s 45 (w.e.f. 1-7-1995).
4 Ins. by the Finance Act, 2002 (20 of 2002), s 64 (w.r.e.f. 1-7-1995). See Circular No. 8, August 27, 2002, 258 ITR (St.)
13.
5 Khandubhai Vasanji v DCIT 236 ITR 73 ; Noorsingh v UOI 249 ITR 378 .
6 Noorsingh v UOI 249 ITR 378 ; Raja Ram v ACIT 227 ITR 187 .
7 Rushil Inds v Harsh Prakash 251 ITR 608 ; Manish Maheshwari v ACIT, 289 ITR 341 (SC), AIR 2007 SC 1696,
(2007) 208 CTR 97 (SC), (2007) 3 SCC 794 .
8 CIT v Don Bosco Card Centre 289 ITR 329, relying on Jagir Singh v State of Bihar [1976] SCC (Tax) 204; AIR 1976
SC 997, (1976) 2 SCC 942 .
9 Finance Act, 2001 w.e.f. 1-6-2001.

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10 Jai Kumar Jain v ACIT 331 ITR 339 .
11 CIT v Smt. Kamala Devi Jain 330 ITR 153 .
12 CIT v s Ajit Kumar 300 ITR 152 ; CIT v Templeton Asset Management India (P) Ltd. 337 ITR 541 .
13 CIT v Shambhulal 245 ITR 488 .
14 CIT v Ashok Khetrapal 294 ITR 143 .
15 CIT v V.B. Aggarwal 296 ITR 750 ; CIT v Ravi Kant Jain 250 ITR 141 ; CIT v R. M. Patel (HUF) 298 ITR 274 .
16 CIT v Girish Chaudhary 298 ITR 619 .
17 CIT v Bimal Auto Agency 314 ITR 191 ; CIT v Vinod Dhanchand Ghodawat 247 ITR 448 .
18 Parag Nivesh Private Limited v DCIT 240 ITR 419 .
19 Nilesh Hemani v CIT 255 ITR 267 (SC), (2002) 175 CTR 603 (SC), (2002) 10 SCC 383 .
End of Document
S. 158BA. Assessment of undisclosed income as a result of search
of Search Cases
(1) Notwithstanding anything contained in any other provisions of this Act, where after the 30th day of June, 1995, a
search is initiated under section 132 or books of account, other documents or any assets are requisitioned under
section 132A in the case of any person, then, the Assessing Officer shall proceed to assess the undisclosed
income in accordance with the provisions of this Chapter.
(2) The total undisclosed income relating to the block period shall be charged to tax, at the rate specified in section
113, as income of the block period irrespective of the previous year or years to which such income relates and
irrespective of the fact whether regular assessment for any one or more of the relevant assessment years is
pending or not.
20[Explanation.—For the removal of doubts, it is hereby declared that—
(a) the assessment made under this Chapter shall be in addition to the regular assessment in respect of each
previous year included in the block period;
(b) the total undisclosed income relating to the block period shall not include the income assessed in any regular
assessment as income of such block period;
(c) the income assessed in this Chapter shall not be included in the regular assessment of any previous year
included in the block period.]
(3) Where the assessee proves to the satisfaction of the Assessing Officer that any part of income referred to in sub-
section (1) relates to an assessment year for which the previous year has not ended or the date of filing the return
of income under sub-section (1) of section 139 for any previous year has not expired, and such income or the
transactions relating to such income are recorded on or before the date of the search or requisition in the books of
account or other documents maintained in the normal course relating to such previous years, the said income
shall not be included in the block period.
1. Valid Search is Required.—The special procedure for assessment of search cases as prescribed in this chapter
shall apply in cases where a search is initiated under s 132 or a requisition is made under s 132A after June 30, 1995
and before May 31, 2003. A valid search or requisition between July 1, 1995 and May 31, 2003 is a prerequisite for
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assessing the undisclosed income of the block period under this chapter.21 While onus to prove validity of search lies
with the Revenue, the onus to plead and prove the absence of conditions precedent for issue of warrant and
consequently proceeding under s 158BC lies on the assessee.22
2. Explanation to Sub-section (2).—Explanation to s 158BA, which was held to be constitutional, was inserted with
retrospective effect from July 1, 1995 to clarify that the block assessment is in addition to the regular assessment in
respect of the return of income filed by the assessee.23 This is the correct position of law, since the block assessment
is only in respect of “undisclosed income”. It does not efface the regular assessment proceedings; they operate in their
separate fields.
The Explanation also clarifies that once an income has been included in a regular assessment, it shall not be included
in the block assessment. Hence, once the assessing officer has accepted the vires of a loan transaction in the regular
assessment, he cannot reconsider the same in the block assessment.24 Similarly, if all the documents and receipts
regarding a transaction were before the assessing officer in the regular assessment, they cannot be assessed in a
block assessment.25 The salary income on which tax has been deducted at source cannot be treated as undisclosed
income.26
Clause (iii) of the Explanation clarifies the converse - that income assessed as “undisclosed income” cannot be
assessed in a regular assessment.
3. Sub-section (3).—Sub-section (3) states that if a search has been made before the due date for filing a return, no
“undisclosed income” can arise.27 The assessee must, however, in his books of account, reflect all the income.28 If the
assessee has not shown certain items pertaining to dates before the search in his books as on the date of the search,
then the expression “would not have been disclosed” in s 158B(b) will be relevant, and such income can be treated as
undisclosed income even if the due date for filing the return has not passed.29 If the books of account contain certain
cash credits and in the return filed after the search the cash credits are not disclosed, then the said cash credits can
be treated as undisclosed income.30 In case of a search after the return has been filed, any amount not appearing in
the return, even if it appears in the assessee’s books of accounts, will be treated as undisclosed income. The
assessee cannot cure this by filing a revised return.31 If he has not filed a return before, he cannot cure the defect by
filing a return.32 The assessee is not absolved of his duty to file a return by a response to a notice under s 131 .33
However, if the assessee has disclosed all the income,34 even in a belated return,35 the assessing officer cannot
conduct a search based on the return and characterise the income as undisclosed.
If an assessee had disclosed the entire amount while paying advance tax, it will not amount to the income having been
disclosed to the Department.36 The Supreme Court held that advance tax is paid on “current income” which is only a
tentative payment. The actual liability of the assessee has not been ascertained at this stage. That can be done only
when the return is filed and the “total income” is assessed to tax. The Supreme Court decision seems correct on a
technical reading of the Act, but could lead to harsh consequences in cases where the assessee’s return is delayed for
bona fide reasons. In any case, while estimating the amount of advance tax to be paid, the assessee needs to make a
fairly certain estimate - s 234B states that if the estimate is not within 90 per cent of the income, interest is chargeable.
The decision may, hence, require review.
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20 Ins. by the Finance (No. 2) Act, 1998 (21 of 1998), s 44 (w.r.e.f. 1-7-1995). See Circular No. 772, December 23, 1998,
235 ITR (St.) 35.
21 UOI v Ajit Jain 260 ITR 80 (SC), (2003) 181 CTR 22 (SC), affirming Ajit Jain v UOI 242 ITR 302 ; CIT v Rakesh
Kumar 313 ITR 305 . (For the requirements for a valid search, see commentary under ss 132 and 132A.
22 Raghuraj Pratap Singh & Ors v ACIT 307 ITR 450 .
23 CIT v N.T. John 259 ITR 224 ; DCIT v Shaw Wallace 248 ITR 81 ; Malayi Baker v ACIT 236 ITR 869 ; CIT v NR
Paper & Board 248 ITR 526 ; NR Paper v DCIT 234 ITR 733 ; CIT v John 259 ITR 224 ; Bhagwati v CIT 248 ITR 562
; Caltradeco v DCIT 243 ITR 643 ; CIT v Md. Rizwan 316 ITR 317 .
24 Bhagwati Prasad Kedia v CIT 248 ITR 562 .
25 Mukundray K. Shah v CIT 277 ITR 128 .
26 CIT v Ashok Taksali 257 ITR 352 ; CIT v H.E. Mynuddin Pasha 338 ITR 533 ; Surendra Kumar Lahoti v ACIT 300
ITR 124 .
27 CIT v Nitin Munje 264 ITR 628 .
28 CIT v Arman Sheikh 293 ITR 266 .
29 Smt. Harbans Kaur Bhatia v CIT 274 ITR 298 ; CIT v Don Bosco Card Centre 289 ITR 329 ; CIT v Binoy Mathai 311
ITR 226 ; Rajesh Syal v CIT 344 ITR 482 .
30 CIT v Elegant Homes 124 Taxman 819 ; CIT v Ajay Kumar 124 Taxman 814 .
31 Dr. Brijesh Lahoti v CIT 282 ITR 349 ; M.R. Singhal v ACIT 290 ITR 162 ; CIT v K.P. Chandradasan 331 ITR 443 .
32 CIT v AT Infovin India P. Ltd. 335 ITR 370 .
33 CIT v Sivabala Devi 330 ITR 510 .
34 CIT v Vivek Dougall 305 ITR 270 .
35 CIT v K. Ramasamy 296 ITR 358 ; CIT v J.K. Narayanan 293 ITR 179 .
36 ACIT v AR Enterprises 350 ITR 489 (SC) ; reversing ACIT v A.R. Enterprises 274 ITR 110 ; CIT v N. Vellaiyan 287
ITR 520 ; CIT v P.S. Mani 311 ITR 463 ; CIT v Kerala Roadways Ltd. 322 ITR 609 .
Page 4 of 4
End of Document
S. 158BB. Computation of undisclosed income of the block period
of Search Cases
(1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling
within the block period computed,37[in accordance with the provisions of this Act, on the basis of evidence found
as a result of search or requisition of books of account or other documents and such other materials or
information as are available with the Assessing Officer and relatable to such evidence] as reduced by the
aggregate of the total income, or as the case may be, as increased by the aggregate of the losses of such
previous years, determined,—
(a) where assessments under section 143 or section 144 or section 147 38[have been concluded prior to the date
of commencement of the search or the date of requisition], on the basis of such assessments;
(b) where returns of income have been filed under section 139 39[or in response to a notice issued under sub-
section (1) of section 142 or section 148 ] but assessments have not been made till the date of search or
requisition, on the basis of the income disclosed in such returns;
(c) 40[where the due date for filing a return of income has expired, but no return of income has been filed,—
(A) on the basis of entries as recorded in the books of account and other documents maintained in the
normal course on or before the date of the search or requisition where such entries result in computation
of loss for any previous year falling in the block period; or
(B) on the basis of entries as recorded in the books of account and other documents maintained in the
normal course on or before the date of the search or requisition where such income does not exceed the
maximum amount not chargeable to tax for any previous year falling in the block period;
(ca)where the due date for filing a return of income has expired, but no return of income has been filed, as nil, in
cases not falling under clause (c);]
(d) where the previous year has not ended or the date of filing the return of income under sub-section (1) of
section 139 has not expired, on the basis of entries relating to such income or transactions as recorded in the
books of account and other documents maintained in the normal course on or before the date of the search
or requisition relating to such previous years;
(e) where any order of settlement has been made under sub-section (4) of section 245D, on the basis of such
order;
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(f) where an assessment of undisclosed income had been made earlier under clause (c) of section 158BC, on the
basis of such assessment.
Explanation.—For the purposes of determination of undisclosed income,—
(a) the total income or loss of each previous year shall, for the purpose of aggregation, be taken as the total
income or loss computed in accordance with the provisions of41[this Act] without giving effect to set off of
brought forward losses under Chapter VI or unabsorbed depreciation under sub-section (2) of section 32
:
42[Provided that in computing deductions under Chapter VI-A for the purposes of the said
aggregation, effect shall be given to set-off of brought forward losses under Chapter VI or
unabsorbed depreciation under sub-section (2) of section 32 ;]
(b) 43[ofa firm, returned income and total income assessed for each of the previous years falling within the
block period shall be the income determined before allowing deduction of salary, interest, commission,
bonus or remuneration by whatever name called44[to any partner not being a working partner]:
Provided that undisclosed income of the firm so determined shall not be chargeable to tax in the
hands of the partners, whether on allocation or on account of enhancement.]
(c) assessment under section 143 includes determination of income under sub-section (1) or sub-section
(1B) of section 143 .
(2) In computing the undisclosed income of the block period, the provisions of sections 68, 69, 69A, 69B and 69C
shall, so far as may be, apply and references to “financial year” in those sections shall be construed as references
to the relevant previous year falling in the block period including the previous year ending with the date of search
or of the requisition.
(3) The burden of proving to the satisfaction of the Assessing Officer that any undisclosed income had already been
disclosed in any return of income filed by the assessee before the commencement of search or of the requisition,
as the case may be, shall be on the assessee.
(4) For the purpose of assessment under this Chapter, losses brought forward from the previous year under Chapter
VI or unabsorbed depreciation under sub-section (2) of section 32 shall not be set off against the undisclosed
income determined in the block assessment under this Chapter, but may be carried forward for being set off in the
regular assessments.
1. Sub-section (1),—In simple terms, sub-section (1) states that the total undisclosed income of the block period is
the aggregate of the total income of all the years of the block period pursuant to the search, reduced by the aggregate
of the total incomes of all the years of the block period in the regular assessment. In case the income in the regular
assessment was a loss, then the amount of the aggregate of the losses must be added to the aggregate total income
Page 3 of 8
pursuant to the block assessment.
(a) “Income” means “Positive Income”.— An analysis of the provision reveals that its first limb only mentions
aggregate “income”, whereas the second limb mentions both “income” and “loss”. It is significant to note that the terms
“income” and “loss” have always been kept separate in the Act, and “income” never refers to a negative income.45
Hence, it is submitted the Chapter only deals with cases where, after a search, there is a positive aggregate income
for the block period. If the undisclosed income only results in the aggregate losses being reduced to another loss
figure, then, there can be no assessment under this Chapter. However, under s 158BB(4), the amount of unabsorbed
depreciation or the amount of aggregate losses brought forward to be set off against the period after the block period
will be reduced.
This is made clear by the following three examples:
(a) If the aggregate income of the block period is Rs. 25 crores, whereas the aggregate income for those years in
the original assessments was Rs. 20 crores, then the undisclosed income is Rs. 5 crores.
(b) Now, if the aggregate total income post-search is Rs. 5 crores, and in the regular assessments, the aggregate
loss was Rs. 2 crores, then the undisclosed income for the block period is Rs. 7 crores.
(c) If there is no aggregate total income after the search, but only an aggregate loss of Rs. 5 crores, as against an
aggregate loss of Rs. 7 crores in the regular assessment, the assessee will only be able to carry forward Rs.
5 crores to the period after the block. There will be no undisclosed income for the block period.
(b) “Such other Material” and “Relatable”.— This expression has been qualified by the latter expression “and
relatable to such evidence”. Hence, only evidence that has been gathered under ss 132 or 132A can be relied upon,
and not evidence under a survey under s 133A .46 Similarly, evidence gathered in an investigation after the search
cannot be relied upon unless it is relatable to the evidence found in the search.47
It has been held that since the assessing officer is supposed to compute the total income for the block period, he can
make a “roving enquiry”.48 This might not be correct, since his powers are restricted to questioning material relating to
the search. Ultimately, the term “relatable to such evidence” will mean that if something is found as a result of the
search, it can be corroborated or explained by other material with the assessing officer.49 But if the material with the
assessing officer is independent of what is found in the search, it cannot be used to determine any undisclosed
income. Of course, as discussed earlier, the assessing officer may issue a notice under s 148 for reassessment, or
even base another search on the material with him, subject to the limits under those sections.
(c) Block Period Income in Accordance with the Act.—Sub-section (1) earlier stated that the income of the block
shall be computed in accordance with the provisions of Chapter IV. Based on this, the Department refused to take into
consideration the deductions available under Chapter VI-A. The provision was amended with retrospective effect to
state that the computation must be in accordance with the Act. Hence, Chapter VI-A deductions must now be taken
into consideration while computing undisclosed income under this Chapter.50 Further, no additions can be made in
respect of undisclosed agricultural income.51
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(d) Income below Taxable Limit.—Even if the income of one particular year in the block is below the taxable limit,
there is no provision to exclude taxation on that year’s income. Section 113 applies a fixed rate for any undisclosed
income. The High Court decisions to the contrary are erroneous.52 The Kerala High Court has wrongly relied on s
158BB(1)(c)(B) to grant relief to the assessee.53 The Rajasthan High Court has erroneously held that the undisclosed
income in the block period must be taxed at the rate prevalent in that assessment year, and hence, there is no liability
in a year in which the income is below the taxable limit.54 It has failed to note that tax liability on undisclosed income is
at the flat rate mentioned in s 113 and not as per the rates in each year of the block period.
(e) Retrospective Amendment.—Clause (c) and (ca) to sub-s (1) were introduced retrospectively, and will not apply
to concluded assessments or appeals.55
(f) Burden of Proof.—The burden of proof for showing that an income was already disclosed is with the assessee.56
2. Computing Income from Regular Assessments.—Where assessments under s 143, 144 or 147 have been
concluded or determination of income has been made under s 143(1A) or 143(1B), the same will be reduced while
determining the undisclosed income [ s 158BB(1)(a) ]. Where returns of income have been filed under any sub-section
of s 139 or in response to a notice issued under s 142(1) or under s 148, but assessments have not been made till the
date of search, the incomes disclosed in such returns of income shall be reduced while computing the undisclosed
income [ s 158BB(1)(b) ]. In a case where the due date for filing a return of income has expired, but no return of
income has been filed, there will be no reduction of any amount for determining the undisclosed income stated above.
Where the previous year has not ended or the date of filing the return of income under s 139(1) for any previous year
has not expired, the income determined on the basis of transactions recorded on or before the date of search in the
books of account or other documents maintained in the normal course relating to such previous years shall be reduced
[ s 158BB(1)(c) ]. In a case where undisclosed income has been determined in any earlier block assessment, the
same will be reduced from the total income for determining the undisclosed income [ s 158BB(1)(f) ]. Where any order
of settlement under s 245D has been passed by the settlement commission, the income determined in such order
shall be reduced accordingly[ s 158BB(1)(e) ].
3. Computing Income of the Block Period.—In block assessment proceedings, the AO cannot arbitrarily make an
unreasonable estimate of undisclosed income57 and the estimate if any should have some rational connection with the
addition being made.58 Where there is concrete evidence that the income was a donation to a political party collected
from party workers, the AO cannot make an addition in this respect.59 But when there is no proof that certain fixed
deposit receipts were genuine, the AO was correct in adding the same to the assessee’s income.60 When the
assessee does not maintain a stock register, additions on the basis of undervaluation of stock is valid.61
The AO cannot make an addition on the basis of the report of the departmental valuer, valuing the property higher
than the actual cost of construction disclosed by the assessee, in the absence of any other evidence.62 The income,
expenditure, loans, jewellery, valuable articles or instruments recorded in the books of account of the assessee prior to
the search are not to be treated as undisclosed income.63 In respect of these items, enquiry in regular assessment is
permissible, but enquiry in block assessment is not permissible.
Genuine expenditure unearthed during search would still have to be assessed in the light of the other provisions and
cannot be completely ignored merely because it ceased to become undisclosed income. There could be cases where
even genuine expenditure which remains undisclosed and which is unearthed because of the search could be taken
Page 5 of 8
as income on the part of the assessee so as to increase his tax liability.64 Expenditure can be disallowed invoking
provisions of s 40A(3) read with r 6DD .65
Additions based on admissions of the assessee are valid.66 A retracted statement cannot normally be relied upon, but
it can be used to corroborate other evidence.67 In case the assessee makes an admission and passes away, his legal
representatives cannot retract the admission.68 Since there is a presumption under s 132(4A) that anything found in
the premises of the person searched belongs to him, additions based on this presumption are valid.69 A diary found at
the assessee’s premises with accounting entries, for instance, can form the basis for an addition in the hands of the
assessee.70 However, when the assessee and his father reside at a place and the father accepts that the document
belongs to him, it cannot be used to make an addition in the hands of the assessee.71 When a document found at the
assessee’s premises, evidencing certain income, was not signed, it could not have been presumed that such
transaction would have gone through and income earned.72
4. Carry-forward Losses and Unabsorbed Depreciation.—Explanation (a) states that in computing the total income
of each year in the block period, the carry-forward losses or the unabsorbed depreciation under s 32(2) cannot be
given effect to. This suggests that the income of each year must be computed separately, uninfluenced by any
allowances or set-offs of any item from previous years, and then aggregated to compute the income of the block
period.
It was understood that this does not preclude the allowance of current-year depreciation while calculating the total
income. The Supreme Court has now gone one step further, stating that the depreciation or loss of any year of the
block may be set-off inter-se against the income of any year of the block, since the entire block is taken as one unit.73
This does not follow from the language of s 158BB, which implies that the total income of each year must be computed
and then aggregated.
5. Sub-section (2).—In computing the undisclosed income for the block period, the provisions of ss 68, 69, 69A, 69B
and 69C shall, apply mutatis mutandis, and the term ‘financial year’ mentioned in these sections shall be taken to
mean the relevant financial years falling within the block period. The provisions of ss 68 and 69 can be invoked at the
time of issue of notice under s 158BD .74
Where the assessee offers no explanation about the source of acquisition of certain assets or the explanation offered
by him is not, in the opinion of the Assessing Officer, satisfactory, the value of such assets may be deemed to be the
income of the relevant previous year as mentioned in s 158BB(2) . The onus of proving to the satisfaction of the
Assessing Officer that any undisclosed assets including the income from undisclosed property has already been
disclosed in any return of income filed by the assessee before the initiation of the search is on the assessee.
37 Subs., for “in accordance with the provisions of Chapter IV, on the basis of evidence found as a result of search or
requisition of books of account or documents and such other materials or information as are available with the
Assessing Officer”, by the Finance Act, 2002 (20 of 2002), s 65(i) (w.r.e.f. 1-7-1995). See Circular No. 8 of 2002,
August 27, 2002, 258 ITR (St.) 13.
38 Subs., for “have been concluded”, by the Finance Act, 2002 (20 of 2002), s 65(ii) (w.r.e.f. 1-7-1995).
Page 6 of 8
39 Subs., for “or section 147 ”, by the Finance Act, 2002 (20 of 2002), s 65(iii) (w.r.e.f. 1-7-1995).
40 New clauses (c) and (ca) have been substituted by the Finance Act, 2002 (20 of 2002), s 65(iv) (w.r.e.f. 1-7-1995), for
the following clause (c):—
‘(c) where the due date for filing a return of income has expired but no return of income has been filed, as nil;’.
41 Subs., for “Chapter IV”, by the Finance Act, 2002 (20 of 2002), s 65(v)(i) (w.r.e.f. 1-7-1995). See Circular No. 8 of
2002, August 27, 2002, 258 ITR (St.) 13.
42 Ins. by the Finance Act, 2002 (20 of 2002), s 65(v)(ii) (w.r.e.f. 1-7-1995). See Circular No. 762, February 18, 1998, 230
ITR (St.) 12.
43 Subs. by the Finance (No. 2) Act, 1996 (33 of 1996), s 46 (w.r.e.f. 1-7-1995), for the following clause (b):—
‘(b) of a firm, or its partners, the method of computation of undisclosed income and its allocation to the partners shall be in
accordance with the method adopted for determining the assessed income or returned income for each of the previous years
falling within the block period;’.
44 Ins. by the Finance (No. 2) Act, 1998 (21 of 1998), s 45 (w.e.f. 1-4-1999). See Circular No. 772, December 23, 1998,
235 ITR (St.) 35.
45 Indo-gulf Fertilisers and Chemicals Corporation Ltd. v UOI 195 ITR 485 .
46 CIT v GK Senniappan 284 ITR 220 ; CIT v s Ajit Kumar 300 ITR 152 .
47 CIT v P.K. Ganeshwar 308 ITR 124 .
48 CIT v M.K. Shanmugam 349 ITR 369 . In the facts of this case, all the questions were relatable to what arose in the
course of the search. Hence, it is arguable that this proposition is obiter.
49 CIT v K.V Sudhakaran 344 ITR 25 .
50 Anbu Textiles v ACIT 262 ITR 684 . DCIT v Harishkumar J Gupta 215 Taxman 41 ; CIT v Anil Sarin 29
Taxmann.com 20; CIT v V Subramanian (Late) 305 ITR 289 ; CIT v N.R. Paper and Board Ltd. 313 ITR 359 .
51 CIT v Mrs. Kulandai Theresa 329 ITR 275 .
52 CIT v Vimla Khatri 288 ITR 168 ; CIT v Smt. Maya Chotrani 288 ITR 175 ; Rameshwar Soni v ACIT 316 ITR 361 ;
CIT v Manohar Lal Soni 316 ITR 365 .
53 CIT v M.M. Thomas 265 ITR 327 .

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54 Chain Sukh Rathi v CIT 270 ITR 368 ; see also CIT v Asandas Khatri 283 ITR 346 .
55 CIT v Pankaj Kumar Jain 294 ITR 331 ; CIT v Dr. Sangeetha Varma 294 ITR 334 .
56 Jyoti Kumari v ACIT 344 ITR 60 .
57 CIT v Menon 248 ITR 310 ; CIT v Rajendra Prasad 248 ITR 350 ; CIT v Usha Tripathi 249 ITR 4 ; CIT v Faqir Chand
Chaman 262 ITR 295 -SLP dismissed in 268 ITR 215.
58 Surinder Kumar v CIT 340 ITR 173 .
59 CIT v M. Chinnasamy 350 ITR 694 .
60 Hastalloy India Ltd. v DCIT 350 ITR 52 .
61 Rella Ram Sant Ram v CIT 301 ITR 392 .
62 CIT v Vinod Danchand 247 ITR 448 . CIT v Pramod Kumar Gupta 320 ITR 408 ; CIT v Smt. C. Sabira 338 ITR 226 -
SLP dismissed 336 ITR (St.) 13; s K. Bahadur v UOI 345 ITR 95, following DSP v K.Inbasagaran 282 ITR 435 (SC),
AIR 2006 SC 552, (2006) 1 SCC 420 ; Dhirajlal Girdharilal v CIT 26 ITR 736 (SC), AIR 1955 SC 271, (1954) 26 CTR
736 (SC); CIT v Ashok Khetrapal 294 ITR 143 ; CIT v V B. Aggarwal 296 ITR 750 .
63 ACIT v Radhe Developers India Ltd. and Another 329 ITR 1 .
64 G. Pictures (Madras) Ltd. v ACIT 263 ITR 83 .
65 CIT v Sai Metal Works 54 DTR 327 /241 CTR 377; M.G. Pictures (Madras) Ltd. v ACIT 263 ITR 83 SLP granted 273
ITR (St.) 236; Ganesh Foundry and Casting Ltd. v ITAT 328 ITR 202 .
66 Dinesh B. Parikh v CIT 347 ITR 420 ; C.K.K. Catering Services v ACIT 346 ITR 92 ; Smt. Ratpaulkaur v ACIT 294
ITR 273 .
67 CIT v Ashok Kumar Soni 291 ITR 172 .
68 CIT v Late H.R. Basaavraj 339 ITR 63 .
69 CIT v Ambika Appalam Depot 340 ITR 497 .
70 CIT v Mukundray K. Shah 290 ITR 433 (SC), AIR 2007 SC 1963, (2007) 4 SCR 1104, (2007) 4 SCC 327 .
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71 CIT v Shiv Prakash Agarwal 306 ITR 324 .
72 CIT v Kulwant Rai 291 ITR 36 .
73 E.K. Lingamurthy v Settlement Commission (IT and WT) 314 ITR 305 (SC), (2009) 222 CTR 1 (SC); E. K.
Lingamurthy v Settlement Commissioner (IT and WT) 293 ITR 76 .
74 Priya Blue v JCIT 251 ITR 615 ; Premjibhai v JCIT 251 ITR 625 ; CIT v Radhika Creation 47 DTR 60 .
End of Document
S. 158BC. Procedure for block assessment
of Search Cases
Where any search has been conducted under section 132 or books of account, other documents or assets are requisitioned
under section 132A, in the case of any person, then,—
(a) 75[the Assessing Officer shall—
(i) in respect of search initiated or books of account or other documents or any assets requisitioned after the 30th
day of June, 1995, but before the 1st day of January, 1997, serve a notice to such person requiring him to furnish
within such time not being less than fifteen days;
(ii) in respect of search initiated or books of account or other documents or any assets requisitioned on or after the
1st day of January, 1997, serve a notice to such person requiring him to furnish within such time not being less
than fifteen days but not more than forty-five days,
as may be specified in the notice, a return in the prescribed form and verified in the same manner as a return under clause
(i) of sub-section (1) of section 142, setting forth his total income including the undisclosed income for the block period:
Providedthat no notice under section 148 is required to be issued for the purpose of proceeding under this Chapter:
Provided further that a person who has furnished a return under this clause shall not be entitled to file a revised return;]
(b) the Assessing Officer shall proceed to determine the undisclosed income of the block period in the manner laid
down in section 158BB and the provisions of section 142, sub-sections (2) and (3) of section 143 76[ section 144
and section 145 ] shall, so far as may be, apply;
Page 2 of 5
(c) the Assessing Officer, on determination of the undisclosed income of the block period in accordance with this
Chapter, shall pass an order of assessment and determine the tax payable by him on the basis of such
assessment;
(d)77[the assets seized under section 132 or requisitioned under section 132A shall be dealt with in accordance with the
provisions of section 132B .]
1. Notice of Block Assessment Proceedings.—The assessing officer shall, under s 158BC(a) serve a notice on the
assessee requiring him to furnish within such time as may be specified in the notice, a return in the prescribed form
and verified in the same manner as a return under s 142(1)(i) setting forth his total income including undisclosed
income for the block period. The issue of a notice under s 158BC is a condition precedent for passing the block
assessment order,78 else it would be invalid.79 If a notice is served after office hours on the last date, it is invalid.80
The time period under the notice shall be at least 15 days, but not more than 45 days. However, the assessment
proceedings cannot be quashed merely on the ground that period mentioned in the notice was lesser than the
statutory period specified under section 158BC(a) .81 It was held that any procedural violation must be judged on the
touchstone of whether it causes prejudice to the other party.82 A contrary view has also been taken on a literal
interpretation of the statute.83 It is submitted that if the notice states a period less than 15 days for filing a return, the
assessee can avail of the period until 15 days irrespective of the fact that the notice mentions a shorter period. A
notice cannot take away an assessee’s statutory right, but at the same time, a small defect in the notice will be
condoned under s 292B .
Similarly, a wrong mention of block period in notice and non-service of notice, being curable, cannot render entire
assessment a nullity. Second notice containing all particulars issued and acted upon by assessee is protected by s
292B .84 On the dismissal of writ petition filed against transfer of case after issue of notice by transferee officer, fresh
notice need not be issued.85 Since return under s 158BC has to be picked up for scrutiny, as per the Board’s
Circular,86 the requirement of a notice under s 143(2) cannot be dispensed with for block assessment.87
Though the block period can be extended up to six (earlier ten) years in a case where the assessee has not disclosed
undisclosed income in any one or more of the previous years in the block periods and the Assessing Officer also does
not find any material indicating undisclosed income in any one or more previous years comprised in the block period, it
will not be necessary to do the exercise of computing the undisclosed income for the relevant years and the exercise
may be limited to the years in respect of which the undisclosed income has been found. It follows that evidence of
concealment need not be found in each year of the block period.88
2. Block Assessment Not a Reassessment.—This Chapter is not a reopening of assessment, and no notice under
s 148 needs to be served for initiating proceedings under this section.89 The difference between a block assessment
and a reassessment is that a block assessment can be done only in pursuance of a search, and to bring to tax the
items that have come to light during the search. A reassessment, on the other hand, is a much wider jurisdiction to
bring to tax any income, that the assessing officer feels, has escaped assessment. It is not necessary that a search
must be conducted for a reassessment. It is not even necessary that the assessing officer must come across anything
that was not disclosed to him in the regular assessment.90 However, once it has been held that there is no undisclosed
income for the period under this section, it cannot be said that there was a failure to “disclose fully and truly all material
Page 3 of 5
facts” for the purposes of the Explanation to s 147 .91 This case must be confined to the facts of its case since the
material relied upon in the reasons for reassessment related to the search and the block assessment proceedings. In
a case where, say, the block assessment was on some material found during a search, but the reassessment is on
other material, the reassessment cannot be struck down merely because the block assessment was completed.1
3. Block Assessment is Quasi-judicial.—The proceedings under this section are quasi-judicial in nature, just like a
regular assessment under Chapter XIV. Hence, all the requirements of a quasi-judicial proceeding, including the right
to notice, the right to hearing, etc. will apply to block assessments. All assessees, for instance, have the right to cross
examine any witness whose statement is relied upon by the Department.2 However, the assessing officer cannot look
into the validity of the authorization of a search. It can only be looked into by the High Court in a writ proceeding.3
4. Protective Assessment.—The Supreme Court held4 that even when there is no specific provision in the Act for
“protective assessments”, the power lies with the assessing officer to make such an assessment under certain
circumstances. The principle of law equally applies to block assessments also.5 [See further under ss 222-223].
5. Best Judgment Assessment.—When the assessee does not respond to a notice under this section, the
assessing officer may make a best judgment assessment.6
6. Appointment of Special Auditor.—The assessing officer may appoint a special auditor under s 142(2A) while
making a block assessment.7 But the assessing officer must give notice to the assessee before making any such
appointment.8
75 Subs. by the Income-tax (Amendment) Act, 1997 (14 of 1997), s 4 (w.r.e.f. 1-1-1997), Circular No. 763, February 18,
1998, 230 ITR (St.) 54, for the following clause (a):—
‘(a) the Assessing Officer shall serve a notice to such person requiring him to furnish, within such time, not being less than
fifteen days, as may be specified in the notice, a return in the prescribed form and verified in the same manner as a return under
clause (i) of sub-section (1) of section 142, setting forth his total income including the undisclosed income for the block period:
Provided that no notice under section 148 is required to be issued for the purposes of proceeding under this Chapter;’.
76 Subs., for “and section 144 ”, by the Finance Act, 2002 (20 of 2002), s 66(a) (w.r.e.f. 1-7-1995). See Circular No. 8 of
2002, August 27, 2002, 258 ITR (St.) 13.
77 Subs. by the Finance Act, 2002 (20 of 2002), s 66(b) (w.e.f. 1-6-2002), for the following:—
‘(d) the assets seized under section 132 or requisitioned under section 132A shall be retained to the extent necessary and the
provisions of section 132B shall apply subject to such modifications as may be necessary and the references to “regular
assessment” or “reassessment” in section 132B shall be construed as references to “block assessment”.’.
78 Manish Maheshwari v ACIT 289 ITR 341 (SC), AIR 2007 SC 1696, (2007) 3 SCR 61, (2007) 3 SCC 794 ; Tinwari
Automobiles v UOI 125 Taxman 1104 .
79 CIT v Pawan Gupta 318 ITR 322 .

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80 CIT v Vishnu and CO. P. Ltd. 319 ITR 151 .
81 CIT v Naveen Verma 346 ITR 100 .
82 Relying on State Bank of Patiala v S. K. Sharma (1996) 3 SCC 364, AIR 1996 SC 1669 .
83 CIT v Micro Labs Ltd. 348 ITR 75 .
84 Shirish Madhukar Dalvi v ACIT 287 ITR 242 .
85 V Dhivakaran v Deputy CIT 282 ITR 225 .
86 CBDT Circular No. 717 dated August 14, 1995, 215 ITR (St.) 70.
87 Smt. Bandana Gogoi v CIT 289 ITR 28 ; CIT v Rajeev Sharma 336 ITR 678 ; Pai Vinod v DCIT 353 ITR 622 ;
Virendra Dev Dixit v ACIT 331 ITR 483 ; ACIT v Hotel Blue Moon 321 ITR 362 (SC), (2010) 3 SCC 259 ; CIT v Pawan
Gupta 318 ITR 322 .
88 CIT v Hotel Meriya 332 ITR 537 .
89 Priya Blue v JCIT 251 ITR 615 .
90 See discussion under ss 147 and 148 for a more detailed study of the law of reassessment.
91 Vishwanath Prasad Ashok Kumar Saraf v CIT 327 ITR 190 .
1 CIT v HB Stock Holdings Ltd. (No. 2) 325 ITR 320 .
2 CIT v M. Chinnasamy 350 ITR 694 ; CIT v Ashwani Gupta 322 ITR 396 ; CIT v Smc Share Brokers Ltd. 288 ITR 345
.
3 CIT v Dr. A.K. Bansal 355 ITR 513 ; CIT v Paras Rice Mills 313 ITR 182 ; Raghu Raj Pratap Singh v ACIT 307 ITR
450 ; Gaya Prasad Pathak v ACIT 290 ITR 128 .
4 Lalji Haridas v ITO 43 ITR 387 (SC) .
5 CIT v Mahindra Finlease P. Ltd. 343 ITR 464 .
6 Alok Todi v CIT 339 ITR 102 ; Contra: CIT v R.M.L. Mehrotra 320 ITR 403 .
Page 5 of 5
7 Madhurapuri Chits and Finance Co. P. Ltd. v CIT 338 ITR 202 ; B.N. Reddy v ACIT 284 ITR 245 .
8 Rajesh Kumar v DCIT 287 ITR 91 (SC), AIR 2007 SC 181, (2007) 2 SCC 181 .
End of Document
S. 158BD. Undisclosed income of any other person
of Search Cases
Where the Assessing Officer is satisfied that any undisclosed income belongs to any person, other than the person with
respect to whom search was made under section 132 or whose books of account or other documents or any assets were
requisitioned under section 132A, then, the books of account, other documents or assets seized or requisitioned shall be
handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall
proceed9[under section 158BC ] against such other person and the provisions of this Chapter shall apply accordingly.
1. Undisclosed Income of Other Assessee.—During the course of assessment of a person under this Chapter, if
the AO is satisfied that any undisclosed income belongs to any other person, then the books of account, other
documents or assets seized or requisition can be handed over to the AO who has jurisdiction over such other person.
That assessing officer will proceed with the assessment under s 158BC, as if that other person were the assessee.
The proceedings under s 158BD must be initiated pending the proceedings under s 158BC .10 If undisclosed income
belonging to the other person can be computed from the seized material, the conditions under s 158BD are deemed to
be satisfied.11 There is no requirement of offering opportunity of hearing to a party before recording the satisfaction
under s 158BD .12
2. Recording of Satisfaction: Essential.—The assessing officer must not only be satisfied that a third party’s
income is undisclosed,13 he must also record such satisfaction.14
In the matter before the Supreme Court, the residential premises of a director and his wife were searched under s 132
to unearth undisclosed income in relation to the Company. During the search incriminating material revealing
undisclosed income of the director’s son was found, on this background it was held that the Assessing Officer had to
(i) record his satisfaction that undisclosed income belonged to the director's son and (ii) hand over the books of
accounts and other documents and assets seized to the Assessing Officer having jurisdiction over the director's son.
Page 2 of 4
Mere handing over the documents or assets concerned without recording of satisfaction will not be sufficient.15
The material available to come to the conclusion that the conditions of s 132(1) are satisfied is entirely different than
the material for the satisfaction of the Assessing Officer for proceeding against other person as stipulated under s
158BD ; the requirement of both the sections are entirely different.16 But it is submitted that for making an assessment
under s 158BD, the assessing officer must record his satisfaction that the undisclosed income belonged to any person
other than the person who was searched under s 132 . The assessing officer may even impliedly record his
satisfaction.17
If the case records of the other person against whom proceedings are to be initiated under s 158BD are to be
transferred to any other Assessing Officer, then an opportunity of hearing must be given to the other person.18
Mere mention of the word ‘satisfaction’ in the order or note will not meet the requirement without a clear conclusion
that good ground exists to initiate proceedings and without forwarding the material that shows or would establish
“undisclosed income” of third person.19 In forming satisfaction, mere failure by assessee to file return does not lead to
inference that any deposit in bank account would be chargeable to tax.
The recording of satisfaction has to be between initiation proceedings under s 158BC and before completion of block
assessment under s 158BC in case of person searched.20 Material found must have connection with belief that income
has escaped assessment. Once the material has been used in the case of one assessee, the same document cannot
be attributed to another.21
It was held that the decision in Manish Maheshwari has no application if both the assessments one under s 158BC
and the other under s 158BD are completed by the same officer.22 This is erroneous, because if the satisfaction under
s 132 has been recorded in the case of one assessee, and the satisfaction that another assessee’s income is
undisclosed has not been recorded in the case of the other, merely because they are assessed by the same officer or
because they reside in the same premises, they cannot be assessed under s 158BD without a separate recording of
satisfaction.
Satisfaction recorded after completion of s 158BC assessment is bad in law.23
3. Conditions for Satisfaction.—Material must be found in respect of the other assessee to justify the satisfaction.24
When the third party has admitted the income in the regular return, the satisfaction for starting proceedings under s
158BD is invalid.25
4. Notice: How to be Served.—Service of notice by affixture without any evidence of association of any local person
for identifying the place of business of the assessee and the report not duly witnessed at all was not valid.26 Serving of
notice on a person as an agent of the non-resident assessee, without proper authority, and granting due opportunity of
Page 3 of 4
hearing to him is a nullity.27
9 Ins. by the Finance Act, 2002 (20 of 2002), s 67 (w.e.f. 1-6-2002). See Circular No. 8 of 2002, August 27, 2002, 258
ITR (St.) 13.
10 Priya Blue v JCIT 251 ITR 615 ; Premjibhai v JCIT 251 ITR 625 .
11 Priya Blue v JCIT 251 ITR 615 ; Premjibhai v JCIT 251 ITR 625 ; Rushi Ind v Harsh Prakash 251 ITR 608 ; Sujatha
v UOI 239 ITR 488 .
12 Digvijay Chemicals v ACIT 248 ITR 381 .
13 Manish Maheshwari v ACIT 289 ITR 341 (SC), AIR 2007 SC 1696, (2007) 208 CTR 97 (SC), (2007) 3 SCC 794 ;
Chandrakantbhai Amratlal Thakkar v CIT 337 ITR 258 ; CIT v Raj Pal Bhatia 333 ITR 315 ; CIT v Ramesh Kumar 338
ITR 126 .
14 CIT v Mridula, Prop. Dhruv Fabrics 335 ITR 266 .
15 Manish Maheshwari v ACIT 289 ITR 341 (SC), AIR 2007 SC 1696, (2007) 208 CTR 97 (SC), (2007) 3 SCC 794,
reversing 279 ITR 545 (detail facts have been discussed in the High Court decision); approving Rushil Industries Ltd. v
Harsh Prakash 251 ITR 608 ; Priya Blue Industries P. Ltd. v JCIT 251 ITR 615 ; Premjibhai and Sons v JCIT 251 ITR
625 ; CIT v Deep Arts (2005) 274 ITR 571 (Ker); CIT v Don Bosco Card Centre (2007) 289 ITR 329 (Ker) and CIT v
Smt. Maya Chotrani (2007) 288 ITR 175 (MP); CIT v Girdhari Lal Bansal 336 ITR 255 .
16 Khandubhai Vasanji v DCIT 236 ITR 73 .
17 Dr. Tridip Kumar Sarma v CIT 286 ITR 482 .
18 Mukatia Lalita v CIT 226 ITR 23 .
19 CIT v Sunil Bhala 336 ITR 550 ; CIT v Radhey Shyam Bansal 337 ITR 217 following Manish Maheshwari v ACIT
289 ITR 341 (SC), AIR 2007 SC 1696, (2007) 208 CTR 97 (SC), (2007) 3 SCC 794 .
20 CIT v Late Raj Pal Bhatia 49 DTR 9, 333 ITR 315 .
21 Superhouse Overseas Ltd. v DCIT 325 ITR 448 ; CIT v Anupam Sweets 321 ITR 485 .
Page 4 of 4
22 CIT v T.M. Kuriachan(Dr) 79 DTR 447 recalling decision in 79 DTR 443.
23 CIT v Intercontinental Trading and Investment Co. Ltd. 350 ITR 316 ; Chandrakantbhai Amratlal Thakkar v Dy CIT 55
DTR 249, 337 ITR 258 ; CIT v Mridula, Prop Dhruv Fabrics 335 ITR 266 ; CIT v Parveen Fabrics P. Ltd. 198 Taxman
463 ;. CIT v Anupam Sweets 321 ITR 485 ; CIT v Calcutta Knitwears 338 ITR 239 .
24 CIT v Ram Singh 351 ITR 391 .
25 Smt. Subha Prasad v DCIT 344 ITR 402 .
26 CIT v Annapoornamma Chandrashekar(Smt) 250 CTR 387, 69 DTR 31, 353 ITR 55 .
27 CIT v Mukesh B. Shah 40 DTR 297 .
End of Document
S. 158BE. Time limit for completion of block assessment
of Search Cases
(1) 28[The order under section 158BC shall be passed—
(a) within one year from the end of the month in which the last of the authorisations for search under section 132
or for requisition under section 132A, as the case may be, was executed in cases where a search is initiated
or books of account or other documents or any assets are requisitioned after the 30th day of June, 1995, but
before the 1st day of January, 1997;
(b) within two years from the end of the month in which the last of the authorisations for search under section 132
or for requisition under section 132A, as the case may be, was executed in cases where a search is initiated
or books of account or other documents or any assets are requisitioned on or after the 1st day of January,
1997.
(2) The period of limitation for completion of block assessment in the case of the other person referred to in section
158BD shall be—
(a) one year from the end of the month in which the notice under this Chapter was served on such other person in
respect of search initiated or books of account or other documents or any assets requisitioned after the 30th
day of June, 1995, but before the 1st day of January, 1997; and
(b) two years from the end of the month in which the notice under this Chapter was served on such other person
in respect of search initiated or books of account or other documents or any assets requisitioned on or after
the 1st day of January, 1997.]
29[Explanation 1.—In computing the period of limitation for the purposes of this section,—
(i) the period during which the assessment proceeding is stayed by an order or injunction of any court; or
(ii) the period commencing from the day on which the Assessing Officer directs the assessee to get his
accounts audited under sub-section (2A) of section 142 and ending on the day on which the assessee is
required to furnish a report of such audit under that sub-section; or
Page 2 of 5
(iii) the time taken in reopening the whole or any part of the proceeding or giving an opportunity to the
assessee to be re-heard under the proviso to section 129 ; or
(iv) in a case where an application made before the Settlement Commission under section 245C is rejected
by it or is not allowed to be proceeded with by it, the period commencing on the date on which such
application is made and ending with the date on which the order under sub-section (1) of section 245D is
received by the Commissioner under sub-section (2) of that section,
shall be excluded:
Provided that where immediately after the exclusion of the aforesaid period, the period of limitation
referred to in sub-section (1) or sub-section (2) available to the Assessing Officer for making an
order under clause (c) of section 158BC is less than sixty days, such remaining period shall be
extended to sixty days and the aforesaid period of limitation shall be deemed to be extended
accordingly.]
30[Explanation 2.—For the removal of doubts, it is hereby declared that the authorisation referred to
in sub-section (1) shall be deemed to have been executed,—
(a) in the case of search, on the conclusion of search as recorded in the last panchnama drawn in
relation to any person in whose case the warrant of authorisation has been issued;
(b) in the case of requisition under section 132A, on the actual receipt of the books of account or other
documents or assets by the Authorised Officer.]
1. Time Limits Prescribed.—Sub-section(1) contemplates that the assessment under this chapter must be complete
within two years from the date on which the last authorisation for search under s 132 or requisition under s 132A was
executed. It is clear, therefore, that where consequential searches or requisitions have been made, the period of
limitation starts from the end of the month in which the last of such consequential operations were concluded.31 If the
order is not passed within the stipulated time limit, then it will be bad in law.32 If the demand notice is sent in time, but
the assessment order is signed beyond time, then the assessment does not violate this section.33
It has been held that the time limit prescribed under s 158BE is directory, and the court may, in an appropriate case,
extend the time limit for block assessment.34 This decision is contrary to the plain words of the statute and cannot be
taken as precedent. It was made, oddly, in an application under s 482 of the Code of Criminal Procedure, 1973, and
the assessee was still given the right to challenge the assessment on the grounds of limitation. It has now been held
that the Tribunal has no power to extend the period of limitation by treating the assessment made beyond limitation as
bona fide mistake on the part of Assessing Officer and liable to be condoned.35
The appellate authority has the power to remand the matter and to require the original authority to make a fresh order,
which could be beyond the time limit prescribed in s 158BE .36 For the same reason, the Settlement Commission is not
Page 3 of 5
bound by this time limit.
2. Meaning of “Executed”.—In 1998, with retrospective effect from July 1, 1995, Explanation 2 was added. It states
that an authorisation is deemed to have been “executed” when the last panchnama is drawn, and in the case of a
requisition, when the last books of accounts or documents or assets are received by the assessing officer.37 This need
not be a panchnama relating to the last of the searches.38 Hence, if the panchnama in respect of the first authorisation
is drawn up second, and the panchnama in respect of the second authorisation is drawn up first, the limitation will run
from the date of the second panchnama. However, the assessing officer cannot extend the time limit by not preparing
the panchnama for a long time after having completed the search.39 Similarly, if a search has been conducted, under
the same requisition on three separate occasions, unless the assessing officer can show a reason for the gap in the
search, it will be taken for the purposes of limitation that the search was complete on the first occasion.40
A panchnama, generally speaking, records what has happened in the presence of the witnesses. But, the panchnama
mentioned in Explanation 2(a) is a document of the conclusion of a search. If a panchnama does not, from the facts
recorded therein, reveal that a search was at all carried out on the day to which it relates, then it would not be a
panchnama relating to a search and, consequently, it would not be a panchnama of the type which finds mention in
Explanation 2(a) to s 158BE .41
3. Explanation 1-Interim Stay, Special Audit, etc.—Explanation 1 states that when a court stays a proceeding, or
when the assessing officer refers the matter to a special audit under s 142(2A), or when the assessee must be given
an opportunity under s 129, or when an application is made before the Settlement Comission, but is rejected, the time
taken for these circumstances is excluded in calculating limitation. This provision is similar to Explanation 1 to s 153,
where various time periods have been excluded in the time limit for completing an assessment.
The arrest of the limitation by an interim order passed by the High Court gets released as soon as the order was
vacated and the limitation will restart from that date and not from the date of its receipt by the Assessing Officer.42
When no notice has been given before starting proceedings under s 142(2A), such proceedings are invalid, and the
time taken to complete them cannot be excluded for the purposes of Explanation 1.43
4. Time Limit for Assessment Under s 158BD .—The time limit for assessment under s 158BD, prescribed under s
158BE(2) is two years from the end of the month in which the notice under s 158BD was sent to the assessee. If the
notice is given first under s 158BC, and then correctly given under s 158BD, limitation runs from the date of the first
notice.44
28 Sub-sections (1) and (2) have been substituted by the Income-tax (Amendment) Act, 1997 (14 of 1997), s 5 (w.r.e.f. 1-
1-1997), for the following:—
‘(1) The order under section 158BC shall be passed within one year from the end of the month in which the last of the
authorisations for search under section 132 or for requisition under section 132A, as the case may be, in the case of an
assessee, was executed.
Page 4 of 5
(2) The period of limitation for completion of block assessment in the case of the other person referred to in section 158BD shall
be one year from the end of the month in which the notice under this Chapter was served on such other person.’.
29 Subs. by the Finance Act, 2002 (20 of 2002), s 68 (w.e.f. 1-6-2002), Circular No. 8 of 2002, August 27, 2002, 258 ITR
(St.) 13, for the following:—
‘1 [Explanation 2 [1].—In computing the period of limitation for the purposes of this section, the period—
(i) during which the assessment proceeding is stayed by an order or injunction of any court, or
(ii) commencing from the day on which the Assessing Officer directs the assessee to get his accounts audited under sub-section
(2A) of section 142 and ending on the day on which the assessee is required to furnish a report of such audit under that sub-
section,
shall be excluded.]’.
1. Ins. by the Finance (No. 2) Act, 1996 (33 of 1996), s 47 (w.r.e.f. 1-7-1995).
2. The Explanation has been renumbered as Explanation 1 and after Explanation 1 as so renumbered, a new Explanation 2 has
been inserted by the Finance (No. 2) Act, 1998 (21 of 1998), s 46 (w.r.e.f. 1-7-1995).
30 The Explanation has been renumbered as Explanation 1 and after Explanation 1 as so renumbered, a new Explanation
2 has been inserted by the Finance (No. 2) Act, 1998 (21 of 1998), s 46 (w.r.e.f. 1-7-1995). see Circular No. 772,
December 23, 1998, 235 ITR (St.) 35.
31 Abraham v ADIT 238 ITR 501 .
32 CIT v Sandhya Naik 253 ITR 534 .
33 CIT v T. O. Abraham & Co. 54 DTR 105, 333 ITR 182 ; Sree Rama Medical and Surgical Agencies v CIT 243 ITR
425 .
34 CIT v State of Rajasthan 234 ITR 637 .
35 K.M. Tiwari and Sons (HUF) v ACIT 325 ITR 389 .
36 Sakthivel Bankers v ACIT 255 ITR 144 ; Lakshmi Jewellary v DCIT 252 ITR 712 .
37 CIT v Durga Shankara Kansara 305 ITR 249 .
38 CIT v P. Shanthi (Smt.) LR of Minor P.Balaji 251 CTR 418 CIT v Anil Minda & Ors. 328 ITR 320 M. B. Lal v CIT 279
ITR 298 .
39 CIT v White & White Minerals (P) Ltd. 330 ITR 172 - SLP dismissed in 322 ITR (St.) 4; CIT v Mangala Marbles and
Granites P. Ltd. 308 ITR 116 ; CIT v D. D. Axles (P) Ltd. 323 ITR 558 ; A. Rakesh Kumar Jain v Jt. CIT 80 DTR 25 :
SLP granted 217 Taxman 153(Mag.)(SC). C. Ramaiah Reddy v ACIT (Inv) 339 ITR 210 .
40 Rakesh Sarin v DCIT 333 ITR 451 .
41 CIT vs K. Katyal 308 ITR 168.

Page 5 of 5
42 CIT v Drs. X-Ray and Pathology Institute Pvt. Ltd 358 ITR 27 .
43 Rajesh Kumar v CIT 320 ITR 731, following Sahara India (Firm) v CIT 300 ITR 403 (SC), (2008) 14 SCC 151 .
44 CIT v K.M. Ganesan 333 ITR 562 .
End of Document
S. 158BF. Certain interests and penalties not to be levied or imposed
of Search Cases
S. 158BF. Certain interests and penalties not to be levied or imposed
No interest under the provisions of sections 234A, 234B or 234C or penalty under the provisions of clause (c) of sub-
section (1) of section 271 or section 271A or section 271B shall be levied or imposed upon the assessee in respect of the
undisclosed income determined in the block assessment.
End of Document
S. 158BFA. Levy of interest and penalty in certain cases
of Search Cases
(1) 45[Where the return of total income including undisclosed income for the block period, in respect of search initiated
under section 132 or books of account, other documents or any assets requisitioned under section 132A on or
after the 1st day of January, 1997, as required by a notice under clause (a) of section 158BC, is furnished after
the expiry of the period specified in such notice, or is not furnished, the assessee shall be liable to pay simple
interest at the rate of46[one per cent.] of the tax on undisclosed income, determined under clause (c) of section
158BC, for every month or part of a month comprised in the period commencing on the day immediately following
the expiry of the time specified in the notice, and—
(a) where the return is furnished after the expiry of the time aforesaid, ending on the date of furnishing the return;
or
(b) where no return has been furnished, ending on the date of completion of assessment under clause (c) of
section 158BC .
(2) The Assessing Officer or the Commissioner (Appeals), in the course of any proceedings under this Chapter, may
direct that a person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but
which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income determined
by the Assessing Officer under clause (c) of section 158BC :
Provided that no order imposing penalty shall be made in respect of a person, if—
(i) such person has furnished a return under clause (a) of section 158BC ;
(ii) the tax payable on the basis of such return has been paid or, if the assets seized consist of money, the
assessee offers the money so seized to be adjusted against the tax payable;
(iii) evidence of tax paid is furnished along with the return; and
(iv) an appeal is not filed against the assessment of that part of income which is shown in the return:
Provided further that the provisions of the preceding proviso shall not apply where the undisclosed
income determined by the Assessing Officer is in excess of the income shown in the return and in such
cases the penalty shall be imposed on that portion of undisclosed income determined which is in excess
Page 2 of 5
of the amount of undisclosed income shown in the return.
(3) No order imposing a penalty under sub-section (2) shall be made,—
(a) unless an assessee has been given a reasonable opportunity of being heard;
(b) by the47[Assistant Commissioner or Deputy Commissioner] or the48[Assistant Director or Deputy Director], as

the case may be, where the amount of penalty exceeds twenty thousand rupees except with the previous
approval of the49[Joint Commissioner] or the50[Joint Director], as the case may be;
(c) in a case where the assessment is the subject-matter of an appeal to the Commissioner (Appeals) under
section 246 51 52[or section 246A ] or an appeal to the Appellate Tribunal under section 253, after the expiry of
the financial year in which the proceedings, in the course of which action for the imposition of penalty has
been initiated, are completed, or six months from the end of the month in which the order of the
Commissioner (Appeals) or, as the case may be, the Appellate Tribunal is received by the Chief
Commissioner or the Commissioner, whichever period expires later;
(d) in a case where the assessment is the subject-matter of revision under section 263, after the expiry of six
months from the end of the month in which such order of revision is passed;
(e) in any case other than those mentioned in clauses (c) and (d), after the expiry of the financial year in which the
proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or
six months from the end of the month in which action for imposition of penalty is initiated, whichever period
expires later;
(f) in respect of search initiated under section 132 or books of account, other documents or any assets
requisitioned under section 132A, after the 30th day of June, 1995, but before the 1st day of January, 1997.
Explanation.—In computing the period of limitation for the purpose of this section,—
(i) the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 ;
(ii) the period during which the immunity granted under section 245H remained in force; and
(iii) the period during which the proceedings under sub-section (2) are stayed by an order or injunction of any
court,
shall be excluded.
(4) An income-tax authority on making an order under sub-section (2) imposing a penalty, unless he is himself an
Assessing Officer, shall forthwith send a copy of such order to the Assessing Officer.]
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1. Interest Under Sub-section (1).—Unless block assessment is not otherwise annulled on the ground of invalid
search or a defective notice,53 interest is payable on the undisclosed income from the date on which the return was
due, until the date on which it is filed.54 But the time taken by the Department in supplying documents to the assessee
must be excluded from this period, since that delay is not attributable to the assessee.55 Liability to interest may be
denied by the assessee by contending that he has no undisclosed income or that he has submitted the return within
the time prescribed by the notice excluding the time taken by Department to supply documents.56 These are,
ultimately, factual questions. When there is no appeal against the assessment itself, since interest is automatic on the
delay of filing a return, no question of filing an appeal only on the interest will arise.57
The liability must be reduced by the tax paid prior to the due date of the filing of the return of income.58 The liability
must also be ascertained only after adjustment of the cash seized by the Department.59
The CBDT had issued a Circular dated May 23, 199660 for waiver of interest under ss 234A, 234B and 234C, but this
circular is not applicable to interest under s 158BF(1) .61 The power to waive interest cannot be exercised when the
matter has been dealt with by the Settlement Commission.62
2. Penalty Under Sub-section (2).—This provision is constitutionally valid.63 As per the provisions of s 158BF, no
penalty under s 271(1)(c), 271A or 271B is leviable on block assessments. But penalties under all other sections
wherever applicable and interest on delayed payment under s 220 will be leviable. It must be noted that if the
assessment is not under this Chapter, this section is not applicable. Hence, when an assessee, even before notice
under s 158BD, pays tax on the entire undisclosed income, there is no question of penalty under this section since the
assessment itself is not under s 158BC .64 Similarly, if the difference between the returned income and the assessed
income did not relate to the block period, then there can be no penalty under this section.65
Penalty here is not leviable, under the proviso to sub-section (2) if the assessee has furnished a return, has paid tax
on the basis of such return,66 has produced evidence that the tax has been paid as per the return, and has not filed an
appeal against the portion of the income shown in his return.67 Even an appeal against the rate of tax, and not the
quantum of income, would take the assessee out of the ambit of this proviso.68 The second proviso states that if any
undisclosed income is discovered over and above the undisclosed income disclosed by the assessee in his return
under s 158BC(a), penalty may be levied on such income. The assessing officer must give reasons in his order for
levying a penalty.69
The fact that the Commissioner (Appeals) allowed the assessee to pay the tax in instalments is not relevant to the levy
of penalty.70
3. Penalty is Not Mandatory.—It has been held that the penalty under this section is mandatory, and that it is the
“general rule” to levy a penalty in such cases.71 This is incorrect. The language of s 158BFA(1) is permissive; it uses
“may” and not “shall”.72 Hence, clearly, there is a discretion vested in the assessing officer to levy penalty or not.
Further, the penalty can range from the total tax liability to three times such liability. Hence, the assessing officer, on
making a determination regarding the severity of the assessee’s subterfuge in not disclosing the income, can decide
on a penalty. That s 273B of the Act which provides that penalty shall not be imposed in certain cases on the
assessee proving that there was reasonable cause for failure to pay tax refers to several provisions but makes no
mention of s 158BFA(2) still does not mean that penalty under s 158BFA(2) is mandatory.73
Page 4 of 5
In the context of the old s 276, it was held that a mere failure to file return within time does not attract penalty, unless it
is deliberate and conscious or without reasonable cause or excuse.74 Similarly, a mere failure to explain cash credits
would not automatically lead to a penalty.75
45 Ins. by the Income-tax (Amendment) Act, 1997 (14 of 1997), s 6 (w.r.e.f. 1-1-1997). See Circular No. 763, February 18,
1998, 230 ITR (St.) 54.
46 Subs., for “one and one-fourth per cent.”, by the Taxation Laws (Amendment) Act, 2003 (54 of 2003), s 7 (w.e.f. 8-9-
2003). Earlier, the above words, etc., were substituted, for “two per cent.”, by the Finance Act, 2001 (14 of 2001), s 67
(w.e.f. 1-6-2001). See Circular No. 14, 252 ITR (St.) 65.
47 Subs., for “Assistant Commissioner”, by the Finance (No. 2) Act, 1998 (21 of 1998), s 3 (w.e.f. 1-10-1998). see Circular
No. 772, December 23, 1998, 235 ITR (St.) 35.
48 Subs., for “Assistant Director”, by the Finance (No. 2) Act, 1998 (21 of 1998), s 3 (w.e.f. 1-10-1998).
49 Subs., for “Deputy Commissioner”, by the Finance (No. 2) Act, 1998 (21 of 1998), s 3 (w.e.f. 1-10-1998).
50 Subs., for “Deputy Director”, by the Finance (No. 2) Act, 1998 (21 of 1998), s 3 (w.e.f. 1-10-1998).
51 Here, reference ought also to have been made to section 246A, newly inserted (w.e.f. 1-10-1998) by the Finance (No.
2) Act, 1998.
52 Ins. by the Finance Act, 2000 (10 of 2000), s 59 (w.e.f. 1-6-2000). See Circular No. 794, August 9, 2000, 245 ITR (St.)
21.
53 CIT v Micro Nova Pharmaceuticals P. Ltd. 340 ITR 118 .
54 CITv K. L. Srihari 335 ITR 215.
55 CIT v Mesco Airlines Ltd. 327 ITR 554 .
56 CIT v Mesco Airlines Ltd. 327 ITR 554 .
57 Sk. Muneer Sk. Mannu Choudhary v CIT 300 ITR 216 .
58 CIT v Sire Kanwar Bai 330 ITR 134 .

Page 5 of 5
59 CIT v N. Leela Kumar 37 DTR 70 .
60 225 ITR (St.) 101.
61 New Punjab Skin v UOI 254 ITR 68 (SC), (2002) 10 SCC 469, (2002) 122 Taxman 117 (SC), affirming New Punjab
Skin v UOI 242 ITR 401 .
62 Dinesh Sharma v CCIT 321 ITR 89 .
63 P.P. Ummerkutty v ACIT 279 ITR 213 .
64 CIT v Harkaran Das Ved Pal 336 ITR 8 .
65 CIT v Satyendra Kumar Dosi 315 ITR 172 .
66 CIT v Mallinath Sharnayya Swami 323 ITR 562 .
67 The return referred to here is the block return under s 158BC(a), and not the regular return under s 139 .
68 CIT v Smt. Anju R. Innani 323 ITR 626 .
69 CIT v Nemichand 344 ITR 495 .
70 CIT v Heera Construction Co. P. Ltd. 337 ITR 359 .
71 CIT v P.D. Abraham 349 ITR 442 .
72 Khandoi Bhogilal Mulchand v DCIT 341 ITR 271 .
73 CIT v Becharbai P. Parmar 341 ITR 499 .
74 ITO v Taurus Equipment (P.) Ltd. 118 ITR 982 .
75 CIT v Rayalaseema Oil Mills, Tadapatri 78 ITR 682 .
End of Document
S. 158BG. Authority competent to make the block assessment
of Search Cases
76[The order of assessment for the block period shall be passed by an Assessing Officer not below the rank of77[an
Assistant Commissioner or a Deputy Commissioner] or78[an Assistant Director or a Deputy Director], as the case may be:
Provided that no such order shall be passed without the previous approval of—
(a) the Commissioner or the Director, as the case may be, in respect of search initiated under section 132 or books of
account, other documents or any assets requisitioned under section 132A, after the 30th day of June, 1995, but
before the 1st day of January, 1997;
(b) the79[Joint Commissioner] or the80[Joint Director], as the case may be, in respect of search initiated under section
132 or books of account, other documents or any assets requisitioned under section 132A, on or after the 1st day
of January, 1997.]
S 158BG: Competent Authority.—The assessment order for the block period is to be passed by an assessing officer
not below the rank of Assistant Commissioner with the prior approval of the Commissioner in respect of a search
under s 132 or requisition under s 132A between July 1, 1995 and December 31, 1996. In respect of a search initiated
after January 1, 1997, the approval of a Joint Commissioner is necessary. Reading the word “any” in s 127 as “all”,
transfer cases from one Assessing Officer to another under s 127 is permissible in respect of block assessments.81
The powers of the Assistant CIT vested in the Assessing Officer (regularly promoted to the post of the Assistant CIT
subsequently) by the officiating arrangement made by the CIT is permissible.82 Assessee is not entitled to opportunity
of being heard before grant of approval under s 158BG .83
76 Subs. by the Income-tax (Amendment) Act, 1997 (14 of 1997), s 7 (w.r.e.f. 1-1-1997), for the following section 158BG
:—
‘ S. 158BG . Authority competent to make the block assessment.—The order of assessment for the block period shall be
passed by an Assessing Officer not below the rank of an Assistant Commissioner:
Page 2 of 2
‡[Provided that no such order shall be passed without the previous approval of the Commissioner or Director, as the case may
be.]’.
The above section 158BG was originally inserted by the Finance Act, 1995 (22 of 1995), s 32 (w.e.f. 1-7-1995). See Circular No.
717, August 14, 1995, 215 ITR (St.) 70.
In the above section 158BG, the proviso (put within the parentheses marked ‡) was substituted by the Finance (No. 2) Act, 1996
(33 of 1996), s 48 (w.e.f. 1-10-1996), Circular No. 762, February 18, 1998, 230 ITR (St.) 12, for the following proviso:—
“Provided that no such order shall be passed without the previous approval of the Commissioner.”.
Subs. by the Income-tax (Amendment) Act, 1997 (14 of 1997), s 7 (w.r.e.f. 1-1-1997), for the following section 158BG
:—
‘ S. 158BG . Authority competent to make the block assessment.—The order of assessment for the block period shall be
passed by an Assessing Officer not below the rank of an Assistant Commissioner:
‡[Provided that no such order shall be passed without the previous approval of the Commissioner or Director, as the case may
be.]’.
The above section 158BG was originally inserted by the Finance Act, 1995 (22 of 1995), s 32 (w.e.f. 1-7-1995). See Circular No.
717, August 14, 1995, 215 ITR (St.) 70.
In the above section 158BG, the proviso (put within the parentheses marked ‡) was substituted by the Finance (No. 2) Act, 1996
(33 of 1996), s 48 (w.e.f. 1-10-1996), Circular No. 762, February 18, 1998, 230 ITR (St.) 12, for the following proviso:—
“Provided that no such order shall be passed without the previous approval of the Commissioner.”.
77 Subs., for “an Assistant Commissioner”, by the Finance (No. 2) Act, 1998 (21 of 1998), s 3 (w.e.f. 1-10-1998). See
Circular No. 772, December 23, 1998, 235 ITR (St.) 35.
78 Subs. for “an Assistant Director”, by the Finance (No. 2) Act, 1998 (21 of 1998), s 3 (w.e.f. 1-10-1998).
79 Subs., for “Deputy Commissioner”, by the Finance (No. 2) Act, 1998 (21 of 1998), s 3 (w.e.f. 1-10-1998). See Circular
No. 772, December 23, 1998, 235 ITR (St.) 35.
80 Subs., for “Deputy Director”, by the Finance (No. 2) Act, 1998 (21 of 1998), s 3 (w.e.f. 1-10-1998).
81 K. P. Mohammed Salim v CIT 300 ITR 302 SC, (2008) 11 SCC 573 .
82 CIT v Narendra Narayan Banik,CIT v Smt. Kalyani Debnath,CIT v Rakhal Debnath,CIT v Shree Bhandar 320 ITR 436
.
83 Rishabchand Bhansali v DCIT(Inv) 267 ITR 577 ; CIT v Radhika Creation 47 DTR 60 .
End of Document
S. 158BH. Application of other provisions of this Act
of Search Cases
S. 158BH. Application of other provisions of this Act
Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessment made under this
Chapter.
Section 158BH .—This section provides that all procedural provisions in the Act shall apply to block assessment as
well. In other words, provisions relating to regular income-tax proceedings, obligation for payment of self-assessment
tax under s 140A before filing return showing undisclosed income, recovery proceedings, appellate proceedings, etc,
shall be applicable. Except for those mentioned in s 158BF, penalties under all other sections wherever applicable and
interest on delayed payment under s 220 shall, however, be leviable. Wherever it is considered necessary, the
prosecution proceedings can also be initiated against the persons searched.
End of Document
S. 158BI. Chapter not to apply after certain date
of Search Cases
S. 158BI. Chapter not to apply after certain date
84[The
provisions of this Chapter shall not apply where a search is initiated under section 132, or books of account, other
documents or any assets are requisitioned under section 132A after the 31st day of May, 2003.]
Section 158BI .—The provisions of this chapter cease to apply from May 31, 2003. From June 1, 2003 provisions of
ss 153A to 153D will apply for assessment in case of search or requisition.
84 Ins. by the Finance Act, 2003 (32 of 2003), s 67 (w.e.f. 1-6-2003). See Circular No. 7, September 5, 2003, 263 ITR
(St.) 62.
End of Document
S. 159. Legal representatives
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > A. —Legal
representatives
CHAPTER XV Liability in Special Cases
A. —Legal representatives
(1) Where a person dies, his legal representative shall be liable to pay any sum which the deceased would have been
liable to pay if he had not died, in the like manner and to the same extent as the deceased.
(2) For the purpose of making an assessment (including an assessment, reassessment or recomputation under
section 147 ) of the income of the deceased and for the purpose of levying any sum in the hands of the legal
representative in accordance with the provisions of sub-section (1),—
(a) any proceeding taken against the deceased before his death shall be deemed to have been taken against the
legal representative and may be continued against the legal representative from the stage at which it stood
on the date of the death of the deceased;
(b) any proceeding which could have been taken against the deceased if he had survived, may be taken against
the legal representative; and
(c) all the provisions of this Act shall apply accordingly.
(3) The legal representative of the deceased shall, for the purposes of this Act, be deemed to be an assessee.
(4) Every legal representative shall be personally liable for any tax payable by him in his capacity as legal
representative if, while his liability for tax remains undischarged, he creates a charge on or disposes of or parts
with any assets of the estate of the deceased, which are in, or may come into, his possession, but such liability
shall be limited to the value of the asset so charged, disposed of or parted with.
(5) The provisions of sub-section (2) of section 161, section 162 and section 167, shall, so far as may be and to the
extent to which they are not inconsistent with the provisions of this section, apply in relation to a legal
representative.
(6) The liability of a legal representative under this section shall, subject to the provisions of sub-section (4) and sub-
section (5), be limited to the extent to which the estate is capable of meeting the liability.
1. Section 159 [ Section 24B of 1922 Act]: Object and Scope of Section.—The Bombay High Court held in Ellis
Page 2 of 7
Reid v CIT,1 that where a person died after the commencement of the assessment year but before his income of the
previous year was assessed, his executor was not liable to pay the tax and that if the death occurred while
assessment proceedings were pending, the proceedings could not be continued and the assessment could not be
made after the person’s death.2 With a view to removing the difficulties pointed out in that case, s 24B (which
corresponded to this section) was introduced in the 1922 Act in 1933. That section was held not to be retrospective
and not to apply to cases in which death took place prior to the date when that section came into force.3 This section is
a machinery section, and cannot be so construed as to impose tax liability in respect of what is not the income of the
deceased.4 Section 238(2) entitles the legal representative to claim a refund due to the deceased.
A Hindu undivided family continues to exist as an assessable unit despite changes in its composition including the
change of its karta by death or otherwise, and consequently there is no scope or necessity for invoking this section
when a karta dies.5
A legal representative assessed under this section is different from a representative assessee to whom ss 160 to 167
apply. A legal representative does not fall within any of the categories of representative assessees enumerated in s
160 .
2.Sub-section (1): Liability of Legal Representative of Deceased Person.—The definition of ‘legal representative’
has been dealt with under s 2(29) . The term includes an heir6 but not a receiver appointed on the death of a prior
receiver.7 Under this section, the executor, administrator8 or other legal representative is made liable to pay out of the
estate of the deceased, any sum payable by the deceased.9 This liability is subject to two limitations:
(i) The liability under this section is only in respect of the tax or any other sum which the deceased would have
been liable to pay under this Act if he had not died.
(ii) The liability of the legal representative is limited to the extent to which the estate is capable of meeting the
liability10 [sub-s (6)]. The word ‘estate’ includes income accruing after death from the corpus left by the
deceased.11
This section applies irrespective of whether the assessment proceedings had not been started, or were pending, or
were completed and the assessment made, before the death of the deceased. A broad construction was placed upon
the words ‘if he had not died’ in an English statute, and it was held under that statute that a ‘terminal sum’ payable
upon the death of an employee to his representatives was assessable in the hands of the representative.12
For cases of succession to business on death, see under s 170 .
As regards the priority to which the state is entitled in respect of income-tax dues, see under s 222 .
3. Income of Deceased till Date of Death and Income of Estate after that Date.—The Supreme Court held in CIT
Page 3 of 7
v Amarchand Shroff 13 and CIT v James Anderson 14 that s 24B of the 1922 Act (which corresponded to this section)
authorised assessment on the legal representatives in respect of the income of the deceased till the time of his death
and also the income received after his death by his legal representatives in the accounting year in which he died, but
not in respect of any amount received by the legal representatives after the end of the accounting year in which the
death occurred. In other words, there could be no assessment under the old s 24B in respect of any accounting year
subsequent to the year of death. This proposition holds good under the present Act15 but with one variation effected by
s 168(3) . In the light of that section, s 159 should be construed as applying in respect of the income of the deceased
only up to the date of his death and not up to the end of the accounting year in which the death occurs. The income of
the estate for the period from the date of death up to the end of the accounting year in which the death occurs should
be assessed under s 168 . Thus, in respect of the year of death two separate and distinct assessments would have to
be made—one on the legal representatives under s 159 in respect of the income of the deceased up to the date of
death, and the other on the ‘executors’ under s 168 in respect of the income of the estate for the rest of the year.16
This may result in lowering the rate and incidence of tax for the year. This position would not be affected by the fact
that the legal representatives assessable under s 159 may be the same individuals who are assessable as executors
under s 168 . Assessments for the years subsequent to the year of death should be made on the executors till the
administration of the estate is completed [ s 168(3) ].
4. Apportionment Up to Date of Deaths.—In assessing the legal representative under this section in respect of the
income of the deceased for the year of death, the income may be apportioned up to the date of death, and the legal
representative may be charged in respect of the income which accrued to the deceased de die in diem up to the date
of death.17 But certain incomes like dividends and interest do not accrue from day to day. If a dividend or interest
becomes payable after the death, a part thereof, apportioned to the period up to the date of death, cannot be treated
as the income of the deceased.18 Similarly, if under the terms of a partnership the profits are to be ascertained only at
the end of the accounting year (and consequently, accrue only at that time), in the case of a partner’s death the share
from the firm cannot be apportioned to the period up to the date of death and taxed under this section as his income.19
5. Sub-section (2): Assessment on Legal Representative.—If the assessee died before the proceedings for
assessment were completed, it is incumbent on the AO to bring the legal representative of the deceased on record
and proceed from the stage where it was left at the time of death of the deceased.20 Where the death occurs between
the conclusion of the hearing and the making of the assessment order, the non-issuance of notices to the legal
representatives does not invalidate the order, and at best it is a defect liable to be corrected.21 If, on the date of death
of the deceased, a return of income had not been made under s 139(1) and a notice under s 142(1)(i) or 148, as the
case may be, had not been served on him, the AO should first issue the notice under s 142(1)(i) or 148 to the legal
representative of the deceased and then proceed to assess the income of the deceased in the hands of the
representative as if the representative were the assessee.22 If there are more legal representatives than one, the
notice should be served on all of them;23 but it would be sufficient if the notice is served on one or more who effectively
represent the estate or who are ascertained, after diligent and bona fide inquiry by the AO, to be the legal
representatives.24 However, an omission to serve the notice or any defect in its service may render the order irregular,
but not void or illegal, and an infraction can be waived by the assessee.25 The proceedings for the recovery of tax
initiated during the lifetime of defaulter can continue after the notice is served on the legal representative.26 A notice
under s 148 addressed to a person who is dead to the knowledge of the AO is invalid and proceedings cannot be
taken against the legal representative pursuant to such notice27 unless the legal representative appears in such
proceedings without raising any objection.28 It is obligatory upon the representative to comply with the notice served on
him under s 142(1)(i) or 148 . Assessment may be made on the representative under s 147 read with this section in
respect of income of the deceased which had escaped assessment in the relevant years.29
In Maharaja of Patiala v CIT ,30 BeaumontBeaumon CJ and Kania Kania J. laid down that: (i) a notice served on the
legal representative under this section should state on the face of it that it was issued to that person in his
representative capacity, but if this is not done the irregularity would not invalidate the notice if it was in fact served on
the legal representative and was understood and acted upon by him as served on him in that character, and (ii) an
assessment should be made on the legal representative in respect of the income of the deceased, and if an
Page 4 of 7
assessment is made on the deceased it would, as a general rule, be a nullity. An exception to this rule is provided by
the case where the legal representative permits proceedings to continue, and the assessment order to be made, in the
name of the deceased without raising any objection.31 An assessment made on ‘the successors in interest’ to the
deceased, without specifying the names of the legal representatives, is invalid.32 Any proceeding taken against the
deceased before his death may be continued against the legal representatives from the stage at which it stood at the
death of the deceased.33 Any appeal preferred against the order of the appellate authority does not abate on account
of the death of the assessee.34
Section 292B which came into force on 1 October 1975 provides that no notice or assessment shall be deemed to be
invalid merely by reason of any mistake, defect or omission therein if the assessment or notice ‘is in substance and
effect in conformity with or according to their intent and purpose of this Act’.
6. Penalty on Legal Representative.— Section 24B of the 1922 Act imposed a liability on the legal representative
only in respect of the tax payable by the deceased, and not penalty or any other sum. Therefore, penalty proceedings
could not be started or continued against the legal representative for any default committed by the deceased.35 But
now penalty proceeding for a default committed by the deceased can be started or continued against the legal
representative under this section which applies not only in respect of tax but also any other sum, i.e. penalty, fine or
interest.36 Further, under this Act as under the 1922 Act, the legal representative, being an assessee for the purposes
for the purposes of the Act, is liable to a penalty for his own default, eg penalty under s 221(1) for his own default in
paying the tax assessed on him or on the deceased,37 or penalty under s 271(1) for having himself submitted an
incorrect return of the income of the deceased38 or for having failed to file the return on time.39 A penalty already
imposed on the deceased prior to his death may be demanded from the legal representative and collected out of the
estate.40 The Madras High Court41 has held that the penal proceedings can be intiated against the minor who has
attained majority, as the guardian of the minor can no longer be considered a representative assessee on the attaining
of the majority by the minor. A legal representative is not liable to the prosecution and offences falling under Chapter
XXII of the Act.42
7. Sub-sections (4), (5) and (6): Rights and Liabilities of Legal Representative.—The liability of the legal
representative is ‘limited to the extent to which the estate is capable of meeting the liability’ [sub-s (6)]. [See under
sub-s (1).] However, the legal representative becomes personally liable to the extent of the value of any asset of the
estate which he disposes of while the liability for tax remains undischarged. This personal liability is imposed by sub-s
(4) only in respect of tax and not in respect of penalty, fine or interest which are also covered by sub-s (1). [Cf ss
178(4) and 179.]
Sub-section (5) makes the provisions of ss 161(2), 162 and 167 applicable to legal representative. Income falling
under s 159 can be assessed only under this section [ s 161(2) ]; the legal representative has the right of
reimbursement and retention conferred by s 162 ; though the department has no right to adjust the tax dues of the
deceased from the tax refund due to the legal representative from his personal assessment,43 it has the right of
recovering all dues from the property under the control and management of the legal representative (s 167 ).
[See further ss 222-23, under ‘Recovery from legal representative’.]
1 5 ITC 100.
Page 5 of 7
2 Mitchell v McNeill 2 ITC 298
3 CIT v Mehta 3 ITR 147 . Decision of the Supreme Court to the contrary in Sharma v Vijayakunverba 59 ITR 746 on
identical question arising under Expenditure Tax Act, 1957 requires reconsideration.
4 Arvind v CIT 105 ITR 764 .
5 Vidyasagar v ITO 31 ITR 173, on appeal ITO v Vidyasagar 44 ITR 732 (SC) .
6 Ramanathan v CIT 49 ITR 881 . See s 2(11) of Code of Civil Procedure, and Mulla’s Code of Civil Procedure 14th
edn. pp 27-28. Cf Ramarao v CIT 42 ITR 80 (son who got nothing under his parent’s will was not an heir).
7 Premnarain v ITO 61 ITR 57 .
8 Jagadamba v CIT 143 ITR 527 .
9 Re. Usharani 10 ITR 199.
10 Banu Asan v ITO 47 ITR 99 ; Abdul Rahim v ITO 59 ITR 273 .
11 Ram Lakhan v ITO 46 ITR 613, also reported as 47 ITR 311.
12 Allen v Trehearne 22 TC 15 (CA) .
13 48 ITR (SC) 59 followed in CIT v Miller 57 ITR 478 ; Kunhi v State of Kerala 93 ITR 193 ; CIT v Summersgill 112
ITR 617 . Cf. CIT v Taraprasad 51 ITR 98 ; CIT v Paruck 113 ITR 869 .
14 51 ITR 345.
15 CIT v Hukumchand 82 ITR 624 (SC) .
16 Raghunathdas v CIT 122 ITR 952 was wrongly decided on this point. Cf. CIT v Viswanathan 121 ITR 270 . See
Chandran v CIT 248 ITR 761 (interest on refund of tax on assessment revised long after the date of death held to have
accrued after the death).
17 Palmer v Cattermole 21 TC 191 .
18 IR v Henderson 16 TC 282 followed in Bryan v Cassin 24 TC 468 (annuity) . See also deleted s 18, under
‘Securities sold cum-interest: No apportionment of interest’, and s 56(2), under ‘Shares sold cum-dividend’.
Page 6 of 7
19 Arvind v CIT 105 ITR 764 ; CIT v Paruck 113 ITR 869 .
20 CIT v Prabhawati 231 ITR 188 .
21 Md Zafrulla v CIT 72 Taxman 231 .
22 Cf. Chandanben v Joshi 74 ITR 448 . Braham Prakash v ITO 275 ITR 242 — notice under s 148 was neither served
on the original assessee nor on the deemed (representative) assessee.
23 Chaturbhuj v Recovery Officer 199 ITR 739 ; Md Abdul v CIT 216 ITR 841 ; CIT v Chandra Mohan 244 ITR 430 .
24 ITO v Suseela 57 ITR 168 (SC) ; Alfred v ITO 32 ITR 401 ; Ramanathan v CIT 49 ITR 881, 890 ; CIT v Mandagi 63
ITR 173 ; Chooharmal v CIT 69 ITR 88 and 80 ITR 360; Abdul Sattar v Dis Coll 40 ITR 27 ; Shewaram v CIT 82 ITR
638 ; CIT v Rahima 107 ITR 810 ; ITO v Maramreddy 79 ITR 1 (SC) ; Mathew v Ag ITO 96 ITR 121 ; Muniyammal v
ITO 38 ITR 664, 670-71 ; Shibani v CIT 217 ITR 93 ; CIT v Chandra Mohan 244 ITR 430 .
25 CIT v Jai Prakash 219 ITR 737 (SC); Vijay v ITO 202 ITR 249 ; CIT v Narain 249 ITR 148 ; CIT v Pushpa 250 ITR
495 .
26 Mariam v TRO 211 ITR 807 .
27 Abdul Kadar v ITO 34 ITR 451 ; CIT v Dalumal Shyamumal 276 ITR 62 —an assessment order passed against a
person who the AO was aware is dead is void.
28 CIT v Sumantbhai 128 ITR 142 .
29 Palmer v Cattermole 21 TC 191 .
30 11 ITR 202.
31 CIT v Sumantbhai 128 ITR 142 ; CIT v Roshanlal 134 ITR 145 ; Swaran v CIT 176 ITR 291 .
32 Sahasrangshu v Coll 47 ITR 754 .
33 Kamakesh v CIT 106 ITR 855 ; Jatia v CIT 122 ITR 1023 ; Ashok v CIT 162 ITR 543 . Cf. Rangalal v CIT 79 ITR
505 (SC) .
34 CIT v Rukmini V 331 ITR 102 .
35 Ellis Reid v CIT 5 ITC 100 ; Att-Gen v Canter 22 TC 422 (CA) .

Page 7 of 7
36 Tapati Pal v CIT 241 ITR 468 .
37 ITO v Alfred 44 ITR 442 (SC) ; ITO v Abdul Kassim 46 ITR 149 (SC) ; Rajkumar v ITO 47 ITR 510 . Contrary
decision in CIT v Abdul Rahiman 42 ITR 631 must be treated as overruled.
38 Sukumar v CIT 33 ITR 231 .
39 CIT v Srinivasan 228 ITR 214 .
40 Maddula v ITO 36 ITR 140 . Cf. Att-Gen v Midland Bank 19 TC 136 .
41 Ravi v CIT 235 ITR 208 .
42 Syed Ibrahim v ITO 235 ITR 394 ; ITO v Arihant Trust 214 ITR 306 ; ML Family v State of Gujarat 213 ITR 152 .
43 HasmukhalaI v ITO 251 ITR 511 .
End of Document
S. 160. Representative assessee
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > B.—
Representative assessee—General provisions
B.—Representative assessee—General provisions
(1)
For the purposes of this Act, “representative assessee” means—
(i) in respect of the income of a non-resident specified in44[* *] sub-section (1) of section 9, the agent of the non-
resident, including a person who is treated as an agent under section 163 ;
(ii) in respect of the income of a minor, lunatic or idiot, the guardian or manager who is entitled to receive or is in
receipt of such income on behalf of such minor, lunatic or idiot;
(iii) in respect of income which the Court of Wards, the Administrator-General, the Official Trustee or any receiver
or manager (including any person, whatever his designation, who in fact manages property on behalf of
another) appointed by or under any order of a court, receives or is entitled to receive, on behalf or for the
benefit of any person, such Court of Wards, Administrator-General, Official Trustee, receiver or manager;
(iv) in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing
whether testamentary or otherwise [including any wakf deed which is valid under the Mussalman Wakf
Validating Act, 1913 (VI of 1913)], receives or is entitled to receive on behalf or for the benefit of any person,
such trustee or trustees;
(v) 45[inrespect of income which a trustee appointed under an oral trust receives or is entitled to receive on behalf
or for the benefit of any person, such trustee or trustees.
Explanation 1.—A trust which is not declared by a duly executed instrument in writing [including any
wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (VI of 1913)], shall be deemed,
for the purposes of clause (iv), to be a trust declared by a duly executed instrument in writing if a
statement in writing, signed by the trustee or trustees, setting out the purpose or purposes of the trust,
particulars as to the trustee or trustees, the beneficiary or beneficiaries and the trust property, is
forwarded to the46[Assessing Officer],—
Page 2 of 2
(i) where the trust has been declared before the 1st day of June, 1981, within a period of three months from
that day; and
(ii) in any other case, within three months from the date of declaration of the trust.
Explanation 2.—For the purposes of clause (v), “oral trust” means a trust which is not declared by a
duly executed instrument in writing [including any wakf deed which is valid under the Mussalman
Wakf Validating Act, 1913 (VI of 1913)], and which is not deemed under Explanation 1 to be a trust
declared by a duly executed instrument in writing.]
Explanation 2.—For the purposes of clause (v), “oral trust” means a trust which is not
declared by a duly executed instrument in writing [including any wakf deed which is valid under
the Mussalman Wakf Validating Act, 1913 (VI of 1913)], and which is not deemed under
Explanation 1 to be a trust declared by a duly executed instrument in writing.]
(2) Every representative assessee shall be deemed to be an assessee for the purposes of this Act.
44 The words “clause (i) of” were omitted by the Finance Act, 1976 (66 of 1976), s 26(d) (w.e.f. 1-6-1976). See Circular
No. 202, July 5, 1976; 105 ITR (St.) 17.
45 Ins. by the Finance Act, 1981 (16 of 1981), s 14 (w.e.f. 1-4-1981). See Circular No. 308, June 29, 1981, 131 ITR (St.)
119.
46 Subs., for “Income-tax Officer”, by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), s 2 (w.e.f. 1-4-1988). See
Circular No. 545, September 21, 1989; 181 ITR (St.) 198.
End of Document
S. 161. Liability of representative assessee
(1) Every representative assessee, as regards the income in respect of which he is a representative assessee, shall
be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing
to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but
any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall,
subject to the other provisions contained in this Chapter, be levied upon and recovered from him in like manner
and to the same extent as it would be leviable upon and recoverable from the person represented by him.
(1A) 47[Notwithstanding anything contained in sub-section (1), where any income in respect of which the person
mentioned in clause (iv) of sub-section (1) of section 160 is liable as representative assessee consists of, or
includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which
such person is so liable at the maximum marginal rate:
Provided that the provisions of this sub-section shall not apply where such profits and gains are
receivable under a trust declared by any person by will exclusively for the benefit of any relative
dependent on him for support and maintenance, and such trust is the only trust so declared by him.
48[* * * *]
(2) Where any person is, in respect of any income, assessable under this Chapter in the capacity of a representative
assessee, he shall not, in respect of that income, be assessed under any other provision of this Act.
1. Sections 160 and 161 [ Sections 40, 41 and 42 of 1922 Act]: Representative Assessee.—In view of the new
categories of income deemed to accrue in India, added in s 9, by the Finance Act 1976 with effect from June 1, 19761
June 1976, the words ‘cl. (i) of’ were deleted from s 160(1)(i) by the same Act with effect from the same date.
Page 2 of 16
Sections 159 and 168 deal with assessment on the legal representative or other person administering the estate of a
deceased person. But the legal representative is not a ‘representative assessee’ within the meaning of this Act.
Section 160 enumerates the five categories of representative assessees who are assessable in respect of the income
which beneficially belongs to other persons—
(i) the agent of a non-resident,
(ii) the guardian or manager of a minor, lunatic or idiot,
(iii) the court of wards, the administrator-general, the official trustee or any receiver or manager appointed by or
under an order of a court,
(iv) a trustee appointed under a trust declared by a duly executed instrument in writing, and
(v) a trustee appointed under an oral trust.
A person appointed as an ‘Authorised Controller’ under the Industries (Development and Regulation) Act, 1951 is not
a representative assessee under sub-cl (1)(iii).49 Similarly, a guarantor for the assessee is not covered under s 161 .50
Where a trust is a partner in a firm through its trustee, an assessment cannot be made on the trustee in his individual
capacity.51
Every representative assessee is defined by s 160 in relation to certain income; it is only ‘in respect of income’
specified in that section that any person may be held to be a representative assessee.52 Section 161, which is the only
section in the Act imposing a substantive liability on the representative assessee, expressly confines the liability to ‘the
income in respect of which he is a representative assessee’. This point is of particular significance in the case of
agents of non-residents. [See further s 163, under ‘Agent is chargeable as representative assessee only in respect of
income specified in s 9(1) ’.] Section 2(24)(iv-a) defines ‘income’ as including the value of any benefit or perquisite,
whether convertible into money or not, obtained by a representative assessee mentioned in ss 160(1)(iii) and (iv) or by
a beneficiary, and any sum paid by the representative assessee in respect of any obligation of the beneficiary. Section
238(2) entitles a representative assessee in certain cases to claim or receive a refund due to the person he
represents.
2. Sections 160 and 161 are Enabling Sections: Department’s Option to Assess Representative Assessee or
Person Beneficially Entitled to Income.— Section 166 makes it clears that ss 160 and 161 are enabling sections,
i.e. the department has the option to make an assessment on the representative assessee or a direct assessment on
the person beneficially entitled to the income.53 The AO may assess the agent or the non-resident;54 he may assess
the guardian, manager, receiver or trustee, or assess the beneficiary direct.55 For instance, if an incapacitated person
has no trustee or guardian56 or if the trustee or guardian is non-resident in India and cannot be contacted,57 the
assessment may conveniently be made directly on the incapacitated person. But once the department has exercised
its option and assessed either the representative assessee or the beneficial recipient of the income, it cannot
thereafter assess the same income in the hands of the other,58 nor can it take such income into account for
determining the rate of tax applicable to that other.59 However, the fact that a non-resident is directly assessed in
respect of some income does not debar the department from assessing the agent in respect of other income.60 [See
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further s 147, under ‘Assessment on non-resident or agent’.]
Section 166 further provides that even in a case where the assessment has been made on the representative
assessee, the tax may be recovered from the person beneficially entitled to the income.61 Section 167 enables the
department to recover the tax assessed on the beneficiary from the property vested in or under the control or
management of the representative assessee in his representative capacity. The combined effect of ss 166 and 167 is
that the department has two options: (i) to assess the representative assessee or the person beneficially entitled to the
income and (ii) having assessed either of the two, to recover the tax from the property held by him or by the other.62
The conferment of these options on the department is not in violation of any of the Fundamental Rights.63 [See also s
173 which deals with recovery of tax in respect of non-residents.]
3. Mandatory Basis of Assessment on Representative Assessee.— Sections 160 and 161 are enabling sections
in the sense that they leave the option with the department to tax either the representative assessee or the beneficial
owner of the income; but they are not enabling in the sense that it is the option of the department to make an
assessment on the representative assessee on a basis different from that enjoined by the provisions contained in this
chapter. This is now made clear by s 161(2) . The language of s 161 is mandatory; if the department chooses to
assess a representative assessee, irrespective of the question as to the head under which the income falls, the tax
must be levied only on the basis contemplated by s 161, viz. ‘in like manner and to the same extent’ as it would be
leviable upon the person beneficially entitled to the income.64 The same principle applied under the 1922 Act,65
although that Act did not contain an express provision corresponding to s 161(2) . An exception to this principle is
contained in s 161(1A) . [See further under s 161(1) ‘…In like manner and to the same extent’.]
4. Sections 160 and 161 are Machinery Sections and not Exhaustive.— Sections 160 and 161 are merely
machinery section and do not affect the incidence of taxation under ss 4 and 5 which are the charging sections.66
‘Sections merely providing a machinery for the collection of a charge which is imposed in general terms elsewhere,
cannot restrict the attachment of the charge, being in aid and not in derogation of it’.67 Sections 160 and 161 are not
exhaustive of cases where trustees are liable to charge in respect of the income received by them on behalf of the
beneficiary.68 As Viscount Cave said in Williams v Singer ,69 even apart from the special provisions contained in the
Act, ‘there are many cases in which a trustee in receipt of trust income may be chargeable with the tax upon such
income. For instance, a trustee carrying on a trade for the benefit of creditors or beneficiaries, a trustee for charitable
purposes, or a trustee who is under an obligation to apply the trust income in satisfaction of charges or to accumulate
it for future distribution, appears to come within this category and other similar cases may be imagined. The fact is
that, if the Income-tax Acts are examined, it will be found that the person charged with tax is neither the trustee nor the
beneficiary as such, but the person in actual receipt and control of the income which it is sought to reach. The object of
the Act is to secure for the state, a proportion of the profits chargeable, and this end is attained (speaking generally) by
the simple and effective expedient of taxing the profits where they are found. If the beneficiary receives them, he is
liable to be assessed upon them. If the trustee receives and controls them, he is primarily so liable. If they are under
the control of a guardian or committee for a person not sui juris or of an agent or receiver for persons resident abroad,
they are taxed in his hands’.70 These principles would apply with equal force under this Act71 and they underlie the
provisions of ss 160 to 167.
Thus, apart from the provisions of ss 40 and 41 of the 1922 Act (which corresponded to these sections), in Currimbhoy
Ibrahim Baronetcy Trust v CIT ,72 the income employed by the incorporated body of trustees of a baronetcy trust in
maintaining a sinking fund and a repair fund and in defraying outgoings, as well as the balance of income paid by them
to the baronet as the beneficiary, was held by the Privy Council to be assessable in the hands of the corporation of
trustees. Similarly, though the case did not fall within the old ss 40 and 41 as they stood then, it was held in Hotz Trust
v CIT 73 that where the trustees carried on a business under a testamentary trust the assessment in respect of the
business profits should be made not on the beneficiaries in respect of their individual net shares of the profits but on
the trustees as an ‘association of persons’74 within the meaning of the charging section, the old s 3 . ‘For it is obvious
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that, if what goes to each beneficiary every year only can be taxed, much of the income acquired by the business will
altogether escape taxation, and that the income received by the beneficiaries is not the true assessable income as
many of the expenses incurred by the trustees, which would be paid out before the distribution takes place, would not
be admissible under the Act’.75 Again where a trustee was in actual receipt and control of the income of a farm held in
trust for non-charitable purposes, he was held to be assessable in respect of such income.76 [See further under
‘Executors and trustees’.]
5. Section 160(1)(i) : Agent of Non-resident.— Sections 160 and 161 are the only sections which impose a
vicarious liability on an agent to be assessed in respect of the income of the principal. The liability is in respect of the
income of non-resident principals only; and secondly, it is only in respect of income falling within s 9(1) and not any
other income. However, the person assessable as agent may not be an agent in fact or under the general law. The
principles regulating the appointment and liability of agents are discussed under s 163 . The difference between the
1922 Act and the present Act regarding the liability of the agent of a non-resident is noted under s 163, under ‘Agent is
chargeable as representative assessee only in respect of income specified in s 9(1) ’.
6. Section 160(1)(ii) : Guardian or Manager of Minor, Lunatic or Idiot.—The guardian or manager of a minor,
lunatic or idiot is chargeable to tax in respect of the income which he receives or is entitled to receive on behalf of the
beneficiary. It is immaterial whether the beneficiary is resident or non-resident in India. It is equally immaterial whether
the guardian is a de facto guardian or a de jure guardian.
The tax is levied upon and recoverable from the guardian or manager in like manner and to the same extent as it
would be leviable on and recoverable from the beneficiary77 [ s 161(1) ].
Under s 4(1) the tax is chargeable in respect of the total income of ‘every person’. The word ‘person’ includes a minor
or a person of unsound mind.78 In the case of such an incapacitated person the tax should be assessed, generally
speaking, not on such individual but on his guardian or manager. [See further under ‘ Sections 160 and 161 are
enabling sections’.]
Where executors have fully administered of cleared the estate and hold it merely as trustees for the residuary legatee
who is a minor, they would be assessable under s 161 .79 [See further below, ‘Executors and trustees’, and s 168,
under ‘ Income of estate of deceased person: Executor carrying on business’, and ‘Specific and residuary legacies’.]
If the guardian of a minor is entitled to receive, or is in receipt of, income on behalf of the minor, the guardian would be
chargeable under s 161 even if he does not control or hold the property from which the income is derived.80
7. Sections 160(1)(iii) to (v) : Court of Wards, Administrator-General, Receiver, Manager or Trustee.—Where

income is receivable on behalf of or for the benefit81 of any person by—
(i) the court of wards,

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(ii) the administrator-general,82
(iii) the official trustee,83
(iv) any receiver or manager appointed by or under any order of a court, any trustee or trustees appointed under a
trust declared by a duly executed instrument in writing,84 whether testamentary or otherwise, and including
any trustees appointed under a wakf deed which is valid under the Mussalman Wakf Validating Act 1913, or
(vi) any trustee appointed under an oral trust,
An assessment may be made and the tax levied upon the court of wards or the other persons enumerated above in
like manner and to the same extent as the tax would be leviable upon and recoverable from the beneficiary.
Only those receivers and managers fall within this section who are appointed by or under any order of a court.85 The
fact that one of the parties is a minor and therefore, the law requires the court to give leave to the guardian to enter
into a compromise on behalf of the minor, does not alter the position.86 A receiver cannot be assessed in respect of
the income of a year prior to his appointment.87
8. Official Assignee and Liquidator.—When upon an insolvency the property of the insolvent becomes vested in the
official assignee, an assessment may be made on the official assignee in respect of the income derived from the
property.88 A company in liquidation is a ‘company’ for the purposes of this Act, and the AO is entitled (without the
leave of the winding-up court) to call upon the liquidator of the company which is being wound-up to make a return of
the company’s income.89 The liquidator may be included in the word ‘manager’ used in this section, but since an
assessment may be made directly on the company in liquidation it would not be necessary to have recourse to ss 160
and 161.90
9. Executors and Trustees.—Sub-section (1)(iv) applies to trustees appointed under a trust declared by a duly
executed instrument in writing, whether testamentary or otherwise. A deed of trust executed by a debtor for the benefit
of the general body of creditors is covered by the section.91
An executor as such is not a trustee; after he has fully administered the estate and ceased to be an executor,92 he
may become a trustee for certain purposes and may be assessed as such under s 161, bull not till then.93 He may, in
some cases, cease to be an executor and become a trustee and the administration may be regarded as completed,
even while some liabilities due by the estate remain undischarged.94 Where the executors pay an amount to a legatee,
not in discharge of any trust but in the course of administration of the estate, this section would not apply in respect of
the amount so paid over to the legatee.95 But if the executors purchase and hold securities for the purpose of giving
the interest thereon by way of annuity to a beneficiary as directed by the will, they may, after the estate is
administered, become trustees for the beneficiary in respect of such investments and the interest thereon may
become taxable in their hands under s 161 .96 Executors are not covered by this section; the income received by them
from the estate is assessable in their hands under s 168 .97 [See further under s 168 .] As regards application of the
income of the estate by executors, see s 4, under ‘Application of income and its diversion by overriding title’.
The word ‘trustee’ includes the shebait of a Hindu deity.98 The section is expressly made applicable to trustees or
mutawallis appointed under a valid wakf deed,99 who are assessable as holding the property on behalf of the
beneficiaries and not the Almighty.100
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Sub-section (1)(iv) applies to testamentary as well as non-testamentary trusts, but the trust must be one which is
declared by a duly executed instrument in writing.101
(a) Oral Trust.— Prior to April 1, 19811 April, 1981, the section did not apply to oral trusts. But the section was held
not exhaustive of cases where trustees were liable to charge in respect of income received by them on behalf of
beneficiaries; and therefore, the trustee of an oral trust, who was in actual receipt and control of the trust income, was,
apart from this section, assessable in respect of such income under the general charging sections.102 [See further ‘
Sections 160 and 161 are machinery sections and are not exhaustive’.]
The Finance Act, 1981, with effect from April 1, 19811 April, 1981, expressly made the section applicable to oral trusts
[ s 160(1), cl. (v) and Expln. 2]. A trustee appointed under an oral trust is liable to tax at the maximum marginal rate [ s
2(29C) ] in respect of the trust income (s 164A ), unless he furnishes to the AO within the prescribed period, a
statement in writing setting out the prescribed particulars. If such a statement is furnished, the oral trust would be
treated like a trust declared by a duly executed instrument in writing [Expln. 1 to s 160(1) ], the trustees are to be
treated as ‘representative assessees’,103 and the relevant provisions of the Act would apply accordingly. Where the
trust deed authorised receipt of gifts by the trustee, such receipts would not create a new oral trust.104
(b) Two or more Trustees.— Where there are more trustees than one, they should be assessed in the status of
‘individual’, or ‘association of persons’, depending on the status of the beneficiaries, since the tax must be levied on
them to the same extent as it would be leviable upon the beneficiaries.105 But persons appointed merely to manage
property which is bequeathed to and vests in legatees who are minors, cannot be regarded as either executors or
trustees and cannot be taxed as if they constituted an association of persons to whom the income belonged.106
10. Section 161(1) : Measure of Representative Assessee’s Liability—‘In like Manner and to the Same
Extent’.—This section imposes a liability to tax on the trustee or other representative assessee in respect of all
income which reaches his hands, whether it is from investments in securities and immovable properties,107 or from a
business which he conducts on behalf of the beneficiaries108 or from capital gains.109
An assessment on a representative assessee under this section is separate and distinct from his personal
assessment. Every representative assessee is liable to tax under this section ‘ in like manner and to the same extent’
as the person beneficially entitled to the income. The Supreme Court laid down in CWT v Nizam’s Family Trust 110
that the words ‘in like manner and to the same extent’ have three consequences. First, there would have to be as
many assessments on the trustee as there are beneficiaries with determinate and known shares, though, for the sake
of convenience, there may be only one assessment order specifying separately the tax due in respect of the income of
each beneficiary. Secondly, the assessment of the trustee would have to be made in the same status as that of the
beneficiary whose interest is sought to be taxed in the hands of the trustee.111 Thirdly, the amount of tax payable by
the trustee would be the same as that payable by each beneficiary in respect of his beneficial interest if he were
assessed directly. Since the liability of the trustee or guardian is co-extensive with that of the beneficiary, in the
assessment on the trustee or guardian all such exemptions,112 deductions113 and abatements should be given as the
beneficiary would have been entitled to in case of direct assessment.114 Similarly, where the beneficiary is assessed
directly, the AO must allow set off of the capital loss which had arisen in the hands of the trust.115 The trustee or
guardian is also entitled to claim a refund where the total income of the ward or beneficiary justifies such claim.116 If
the beneficiary has made advance payment of tax and the assessment is subsequently made on the trustees, credit
must be given to the trustees for the tax so paid in advance by the beneficiary.117 Thus, the interposition of the trustee
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does not affect, generally speaking, the incidence of tax on the beneficiary.118
If a person is assessed as the statutory agent of a non-resident in respect of certain income, the tax recoverable from
him would be at the rate applicable to such income and not at the rate applicable to the non-resident’s total income
which may include income chargeable in the hands of other agents.119
Where the beneficiary is not liable to tax at all in respect of certain income, there would be no liability to tax on the
trustee or guardian in respect of that income.120 If income from investments is received abroad by a beneficiary who is
non-resident in this country, he would not be chargeable in respect of that income under this Act merely by reason of
the fact that the investments stand in the names of trustees who are resident here and under whose mandate the
income is paid directly to the beneficiary abroad. Since the beneficiary would not be chargeable in respect of such
income, the trustees would not be chargeable either in respect thereof.121 Conversely, if the beneficiary is a resident in
this country and is entitled to income arising from a foreign trust estate held by foreign trustees, he would nevertheless
be chargeable in respect of such income,122 and since the beneficiary, unlike the trustees, would be resident in the
country the assessment in such case may conveniently be made on the beneficiary direct123 or on his guardian in this
country, in case the beneficiary is a minor.124
If, as frequently happens, the entire income accruing to the trustees is not passed on to the beneficiary but
administration charges and expenses are paid or a capital debt is discharged out of the trust income, the entire trust
income would be assessable in the hands of the trustees and not merely the net income which reaches the
beneficiary, just as the entire income would have been assessable in the hands of the beneficiary, if he had been in
direct receipt of such income.125 If a beneficiary has no present beneficiary right to any part of the income of the trust
but has only a contingent interest, the trustees would be assessable in respect of the trust income even though the
beneficiary’s total income might be below the minimum taxable limit,126 for in such a case no part of the trust income
can be held to be the income of the beneficiary.127
An exception to the above principles is contained in s 161(1A) which taxes at the maximum marginal rate, the whole
income of a trust which carries on a business. [See under ‘ Section 161 (1A) : Where trustee carries on business’.]
Tax-free Payment made to Non-resident.— Where a non-resident receives a tax-free payment, it would depend on
the facts of the case whether for the purpose of assessing the representative assessee as his agent the amount
should not be grossed up by adopting the method of tax-on-tax. [See the items of tax-free receipts enumerated under
s 4 .]
11. Assessment on Representative Assessee where Several Persons are Beneficially Entitled to Income:
Joint Representative Assessee.—The decision of the Supreme Court in Shanmugham & Co. v CIT 128 establishes
the important principle (which had been overlooked in some earlier cases) that the mere fact that there are joint
representative assessees—e.g. co-trustees or co-receivers—will not make them assessable as an association of
persons. Representative assessees take their status from the beneficiaries they represent, and it is wholly immaterial
whether there is one representative assessee or there are two or more of them representing the same beneficial
interest or interests. For instance, co-trustees would be assessable in the status of ‘individual’ where they represent
beneficiaries who are assessable separately in the status of ‘individual’, and likewise, they would be assessable in the
status of ‘association of persons’ where they represent beneficiaries who constitute an association of persons.129
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Since the tax is to be levied on the representative assessee in like manner and to the same extent as it would be
leviable upon the persons beneficially entitled to the income, in a case where several persons are beneficially entitled
to the income, the assessment on the representative assessee should be at the individual rates of tax applicable
separately to the total income of each beneficiary.130 However, this principle would not apply in the exceptional case
where the persons beneficially entitled to the income constitute an association of persons. In such an exceptional
case, the representative assessee would be chargeable at the rate appropriate to the total income received on behalf
of all the beneficiaries as constituting a unit of assessment, and consequently the incidence of tax may be higher. But
in order to constitute an association of persons the beneficiaries must voluntarily join in a common purpose or
common action and the object of the association must be to produce income; it is not enough that the income is
received jointly. [See s 2(31), under ‘Association of persons’.] Thus, where income is merely received from
investments, the beneficiaries cannot be said to have joined together to produce income; and likewise, where a
business is carried on by a guardian or trustee and the beneficiaries have not, of their volition or free will, joined
together in having the business conducted through their common representative, they cannot be treated as
constituting an association of persons.
In Meera & Co v CIT ,131 the Supreme Court held that where a business is inherited by the widow and minor children
of the deceased owner and the widow carries on the business on behalf of herself and of her minor children as their
guardian or trustee, it is one business carried on by an ‘association of individuals’ and a single assessment should be
made on the entire income from the business in the hands of widow as a representative assessee.
When a person carries on a business on behalf of an estate of which he has been appointed the receiver by an order
of the court, the parties who have a beneficial interest in the business may or may not constitute an ‘association of
persons’. If they do constitute an association of persons, the assessment may be made on the receiver at the rate
appropriate to the total income of the business.132 If they do not constitute an association of persons, the assessment
may be made separately on each party having a beneficial interest in the business; or an assessment may be made
under this section on the receiver, not as the principal officer of an association of persons but as the representative of
the parties, and the tax should be levied upon the receiver only to the extent as it would be leviable upon and
recoverable from each of the beneficial owners separately.133 Similarly, where a business is carried on by the
mutawalli of a wakf or the trustee of a trust comprising several beneficiaries, the mutawalli 134 or a trustee135 may be
taxable on the basis of the profits falling to the share of each beneficiary and not on the footing of all the beneficiaries
constituting an association of persons.
What is stated above is now subject to the provisions of s 161(1A), which applies where a business is carried on by a
trustee who is assessable as a representative assessee under s 160(1)(iv) .
The guardian of minors who constitute a joint family,136 or the receiver of the properties of a disrupted Hindu family
which is deemed to continue to be joint under s 171,137 should be assessed as representing the joint family and not as
representing the individual members. A receiver appointed by the court to manage the estate of a deceased person
pending the grant of probate to the executors, receives the income on behalf of the executors and not the beneficiaries
under the will, and therefore, tax is leviable on him in like manner and to the same extent as it would be leviable on the
executors as an association of persons, i.e. at the rate applicable to the total income of the estate.138
Where a deed of trust is executed by a debtor for the benefit of the general body of creditors, the income is received
by the trustees on behalf of the general body of creditors and therefore, the tax should be levied on the trustees as
representing the general body of creditors and not as if the debtor was the beneficiary under the trust.139
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The beneficiary under a trust may in his turn be himself a trustee. For instance, if under a deed of trust the income is
payable by the trustee to a person for the maintenance of himself, his wife and children, the income he receives is
impressed with a trust in favour of his wife and children; and in respect of such income he can be assessed not in his
individual capacity but as a trustee and in accordance with the provisions of this section.140 Just as there may be a
trust within a trust, there may be two or more different trusts created under a single document; in that case a separate
assessment should be made on the trustees in respect of each trust.141
If the shares of the beneficiaries are indeterminate or unknown, the assessment should be made on the basis laid
down in s 164 .
12. Section 161(1A) : Where Trustee Carries on Business.—The Gujarat High Court held in Doctor v CIT 142 that if
the assessee, in exercise of the power conferred upon him by a deed of trust, carries on business in his capacity as
the trustee, the income from the business must be treated as the income of the trust; the department cannot invoke
the principle of ‘lifting or piercing the veil’ and tax the income as his personal income on the ground that the trust fund
is a paltry sum and the business is carried on only with the skill and knowledge of the assessee.
To supersede the tax effect of this judgment, s 161(1A) was introduced with effect from 1 April, 1985. Under that
section where a trustee appointed under a duly executed written instrument carries on business as trustee, and is
assessable as a representative assessee under s 160(1)(iv), the entire income of the trust (and not only the business
income) would be chargeable at the maximum marginal rate [ s 2(29C) ].143 From this harsh provision, the exemption
is granted only in respect of a trust which fulfils all the three conditions: (i) It is testamentary, (ii) it is for the benefit of a
dependent relative, and (iii) it is the only trust so declared by the testator. [See further the second proviso to s 164(1)
and the second proviso to s 164(3) ].
13. Section 161(2) .—The effect of this sub-section is that if the department chooses to assess a representative
assessee, the assessment can be made only on the basis laid down in this section. [See under ‘Mandatory basis of
assessment on representative assessee’.] The provisions of this sub-section are made applicable also to the legal
representatives of a deceased person [ s 159(5) ].
14. Reference and Appeal.—In the context of s 161, the undernoted cases held that referable questions of law
arose144 or did not arise145 under s 256 .
It was held that there were no substantial questions of law146 or substantial questions of law did arise147 in the context
of s 161(1A) .
47 Ins. by the Finance Act, 1984 (21 of 1984), s 20 (w.e.f. 1-4-1985). See Circular No. 387, July 6, 1984; 152 ITR (St.) 1
Page 10 of 16
48 Explanation to section 161(1A) has been omitted by the Finance (No. 2) Act, 1991 (49 of 1991), s 49 (w.r.e.f. 1-4-
1991). See Circular No. 621, December 19, 1991; 195 ITR (St.) 154. Prior to its omission, the Explanation to section
161(1A) stood as under:—
‘Explanation.—For the purposes of this sub-section, “maximum marginal rate” shall have the meaning assigned to it in
Explanation 2 ‡ below sub-section (3) of section 164 .’.
‡It is pertinent to note that Explanation 2 below section 164(3) has been omitted by the Direct Tax Laws (Amendment) Act, 1987
(4 of 1988), with effect from 1st April, 1989. With effect from 1st April, 1989, the definition of the expression “maximum marginal
rate” is contained in the newly inserted section 2(29C) by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988). In this view of
the matter, Explanation to section 161(1A) ought to have been omitted with effect from 1st April, 1989. In fact, the said
Explanation has been omitted (w.r.e.f. 1-4-1991) by the Finance (No. 2) Act, 1991 (49 of 1991).
49 CIT v Tamil Nadu Textile 240 ITR 390 .
50 Jogender v ITO 246 ITR 269 (ss. 134 and 139 of the Contract Act).
51 CIT v Mangaldas 236 ITR 574 .
52 CIT v Anwar Begum 174 ITR 407 .
53 CIT v Kamalini Khatau 209 ITR 101 (SC) ; Jyotendrasinhji v S.I. Tripathi 201 ITR 611 (SC); CIT v Karelal 148 ITR
412 ; Saldhana v CIT 6 ITC 114, 117 ; CIT v Arvind 73 ITR 490, 497 ; CIT v Duduwala 160 ITR 170, 175 . But see
CIT v Manoranjitham 260 ITR 143 . See further ‘Mandatory basis of assessment…’ and ‘…Joint representative
assessees’.
54 Abdul Azeez v CIT 33 ITR 154 ; Maharaja of Patiala v CIT 11 ITR 202, 224-26 ; CIT v Bhanjee 1 ITR 147 ; Whitney
v IR 10 TC 88 (HL) ; Tischler v Apthorpe 2 TC 89 ; Werle v Colquhoun 2 TC 402 ; IR v Huni 8 TC 466 .
55 CIT v Anand Sarabhai 231 ITR 529 ; Mahanth v State of Bihar 42 ITR 770 (SC) (Bihar Ag IT Act); Govindrao v CIT
48 ITR 54 ; Satya Paul v ITO 62 ITR 147 ; Hamabai v CIT 16 ITR 115 .Cf. Keshavlal v CIT 141 ITR 466 (mere
protective assessment).
56 Rex v Newmarket Comrs 7 TC 49 (CA) ; Shridhar v CIT 45 ITR 577 .
57 Archer-Shee v Baker 11 TC 749 (HL) ; Nelson v Adamson 24 TC 36 .
58 Claggett v CIT 177 ITR 409, 413 (SC) ; Chaturbhuj v CIT 50 ITR 693 ; CIT v Alfred 159 ITR 583 ; CWT v Nizam ’s
Trust 167 ITR 688; CIT v David 214 ITR 658 . Decision in Barium Chemicals v ITO 100 ITR 637 that assessment
proceedings can be taken simultaneously against both the non-resident and his agent resulting in assessments on
both, is incorrect, and was dissented from in Alfred.
59 CIT v Gargiben 130 ITR 479 .
60 CIT v Fertilizers & Chemicals 166 ITR 823 .

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61 Ganeshchandra v CIT 35 ITR 84 .
62 Union of India v Bibhuti 51 ITR 88 (SC) (under 1922 Act).
63 Satya Paul v ITO 62 ITR 147 .
64 CIT v Karelal 148 ITR 412, 414, 416; CIT v Kumaraswamy 138 ITR 808 ; Arundhati v CIT 177 ITR 275, 278-79 (SC).
65 CIT v Mir Osman Ali 59 ITR 666, 682 (SC) ; CIT v Nandlal 59 ITR 758, 762 (SC) ; Nagappa v CIT 73 ITR 626, 632-
33 (SC); CIT v Balwantrai 34 ITR 187 ; Birendra v CIT 42 ITR 661 ; Razzak v CIT 48 ITR 276 ; Hobbs v CagIT 49
ITR 811 ; CWT v Nizam ’s Trust 108 ITR 555 (SC). Ramaswamy v CIT 40 ITR 377 must be regarded as overruled.
66 Meera v CIT 224 ITR 635 (SC) ; Mahanth v State of Bihar 42 ITR 770 (SC) (Bihar AgIT Act); CIT v Ashok Match 244
ITR 104 ; CIT v Duduwala 160 ITR 170, 175 ; Hotz v CIT 5 ITC 8, 15-16 ; Saldhana v CIT 6 ITC 114 ; Re.
Probynabad 4 ITR 114.
67 IR v Countess of Longford 13 TC 573, 608, 620 (HL); Tischler v Apthorpe 2 TC 89, 94 ; Werle v Colquhoun 2 TC
402 .
68 Currimbhoy v CIT 2 ITR 148, 153 (PC) ; Hotz v CIT 5 ITC 8 ; Reid v IR 14 TC 512, 521 .
69 7 TC 387, 411 (HL).
70 Archer-Shee v Baker 11 TC 749, 770 (HL) ; Re. Probynabad 4 ITR 114, 126.
71 Dubash v CIT 19 ITR 182, 189 (SC) ; Hotz v CIT 5 ITC 8, 16 ; Re, Probynabad 4 ITR 114; Official Trustee v CIT 67
ITR 218, 238-39, on appeal 93 ITR 348 (SC).
72 2 ITR 148.
73 5 ITC 8, 16, followed in Saldhana v CIT 6 ITC 114 (FB) .
74 For the meaning of ‘association of persons’, see under s 2(31) .
75 Williams v Singer 7 TC 387, 417 (HL) ; Fry v Shiels 6 TC 583 . See also under ‘Measure of representative
assessee’s liability’, p 1949, n 20.
76 Re, Probynabad 4 ITR 114.
77 CIT v Moktar 162 ITR 402 .

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78 Rex v Newmarket Comrs., 7 TC 49, 54 (CA); Shridhar v CIT 45 ITR 577 .
79 Mullick v CIT 6 ITR 206, 209 (PC) . Cf. Shankar v CIT 13 ITR 500, 509-10 .
80 Drummond v Collins 6 TC 525 (HL) .
81 CIT v Nagore Durgah 57 ITR 321 (SC) ; Rajamanner v CIT 51 ITR 339 ; CWT v Kripashankar 81 ITR 763 (SC);
Chanadulal v CWT 55 ITR 441 ; Chintamani v CWT 80 ITR 331 ; Sheth v CIT 107 ITR 45 .
82 Administrator-General v CIT 56 ITR 34 (SC) : Administrator-general does not receive income on behalf of residuary
legatees so long as administration is incomplete.
83 CIT v Ethiraj 120 ITR 271 .
84 Cf. CIT v TAV Trust 166 ITR 848 (invalid trust), affirmed in TAV Trust v CIT 236 ITR 788 (SC) .
85 Mohammed v CIT 42 ITR 115 (SC) ; CIT v Nagore Durgah 57 ITR 321 (SC) ; Shanmugham v CIT 81 ITR 310 (SC) ;
Arunachala v CIT 41 ITR 432 ; Warde v CIT 43 ITR 219 ; IR v Thompson 20 TC 422 . Cf. Keshardeo v CIT 7 ITR 394
(PC) .
86 Jainulabdeen v CIT 12 ITR 285 .
87 Asitkumar v CagIT 22 ITR 177 ; Court Receiver v CIT 54 ITR 189 ; Premnarain v ITO 61 ITR 57 ; Gaurishanker v
State of Uttar Pradesh 77 ITR 827 ; John v ITO 139 ITR 972, 983 .
88 Re, Official Assignee 5 ITR 233 [question whether case fell within s 41 (as it then stood) of 1922 Act was left open];
Re, McMeekin 48 TC 725; CIT v Narayana 228 ITR 99 . Cf. Hibbert v Fysh 40 TC 305 (CA) .
89 See s 2(35), under ‘Principal officer’, and ss 222-23, under ‘…Liquidation of company and insolvency’.
90 CIT v Off Liq Agra Spg. 2 ITR 79, 84 .
91 CIT v Dutt 10 ITR 477 .
92 Navnit Lal v CIT 193 ITR 16 (SC) .
93 Patel v CIT 239 ITR 738 (SC) ; Dubash v CIT 16 ITR 90, affirmed on another point in 19 ITR 182 (SC); Raghavalu
v CIT 18 ITR 787 ; Asitkumar v CAGIT 22 ITR 177 ; Chockalingam v CIT 40 ITR 429 ; Warde v CIT 43 ITR 219 ;
Suhashini v WTO 46 ITR 953 ; Thirumani v CWT 96 ITR 152 ; Mullick v CIT 6 ITR 206, 209 (PC) ; Administrator-
General v CIT 56 ITR 34 (SC) ; Narayanan v CIT 98 ITR 130 ; CIT v Ghosh 159 ITR 124 . Cf. CIT v Ethiraj 120 ITR
271 (official trustee, appointed both as executor and trustee, assumes the role of trustee from the date he obtains
probate); CIT v Balakrishna 143 ITR 651 .
Page 13 of 16
94 CIT v Ramaswami 46 ITR 666 ; Court Receiver v CIT 54 ITR 189 ; Carlish v IR 38 TC 37, 63-64 (CA); Narayanan v
CIT 98 ITR 130, 141 ; CWT v Prakasam 125 ITR 772 ; Navnit Lal v CIT 193 ITR 16 (SC) .
95 Dubash v CIT 16 ITR 90 ; Raghavalu v CIT 18 ITR 787 .
96 Dubash v CIT 16 ITR 90, 98 .
97 Asitkumar v CagIT 22 ITR 177 ; Forbes v Sec of State 1 ITC 8 ; Chockalingam v CIT 40 ITR 429 ; Mullick v CIT 6
ITR 206 (PC) .
98 Sridhar Jiew v ITO 63 ITR 192 ; Jogendra v CIT 74 ITR 33 (SC) ; Official Trustee v CIT 67 ITR 218, on appeal 93
ITR 348 (SC). Cf. CIT v Pulin 63 ITR 179 .
99 Habibur v CIT 13 ITR 189 ; CIT v Jamal 9 ITR 375 .
100 CIT v Puthiya 44 ITR 172 (SC) ; CWT v Puthiya 63 ITR 787 .
101 Joint Committee of Action v CIT 48 ITR 427 . Pre-1941 s 41 of 1922 Act did not apply to testamentary trusts: ITT v
Radha 14 ITR 470 ; CIT v Venkatachalam 12 ITR 261 .
102 Re, Probynabad Stud Farm 4 ITR 114.
103 Kunti Trust v CIT 95 Taxman 550 .
104 CIT v Vijaya 215 ITR 939 .
105 See under ‘Assessment on representative assessee where several persons are beneficially entitled to income: Joint
representative assessees’.
106 Shankar v CIT 13 ITR 500 .
107 Currimbhoy v CIT 2 ITR 148 (PC) ; CIT v Balwantrai 34 ITR 187 ; Birendra v CIT 42 ITR 661 .
108 Mohammed Noorullah v CIT 42 ITR 115 (SC) ; Razzak v CIT 48 ITR 276 ; CIT v Balwantrai 34 ITR 187 ; Harendra v
CIT 12 ITR 68 ; Habibur v CIT 13 ITR 189 ; ITT v Radha 14 ITR 470 ; Ramaswamy v CIT 40 ITR 377 . Cf Hotz v CIT
5 ITC 8 .
109 Seth Jivatlal v CIT 204 ITR 574 .
110 108 ITR 555, 595, followed in Abdul Sathar v CIT 169 ITR 84 .
Page 14 of 16
111 See under ‘Assessment on representative assessee where several persons are beneficially entitled to income: Joint
representative assessees’.
112 Amy v CIT 237 ITR 82 .
113 CIT v Venu Suresh 221 ITR 649 ; DIT v Shardaben 247 ITR 1 ; CIT v Sowmini 232 ITR 25 ; CIT v Ramesh Mahesh
231 ITR 752 ; CIT v Anand Sarabhai 231 ITR 529 ; CIT v Saurin 257 ITR 160 ; CIT v Trustees T. Stanes 200 ITR 396
.
114 Williams v Singer 7 TC 387, 411-12 (HL); CIT v Krishna Warrier 75 ITR 154 (SC) ; Annamalai v CIT 73 ITR 809 ;
CWT v Official Trustee 136 ITR 162 . Cf. Abdul Hameed v CIT 156 ITR 230 (SC) .
115 CIT v Veenaben 197 ITR 156 .
116 IR v Dewar 16 TC 84, 93 (HL) .
117 Vakil v CIT 33 ITR 517 .
118 Cf. Archer-Shee v Baker 11 TC 749 (HL) ; Nelson v Adamson 24 TC 36, 40 .
119 ITO v Eastern Scales 115 ITR 323 .
120 Reid v IR 14 TC 512, 525 ; Kelly v Rogers 19 TC 692, 713 (CA) . In CIT v Workshop Trust 142 ITR 26 income of the
trust was exempt on this view, but point was not urged before court.
121 Williams v Singer 7 TC 387 (HL) .
122 Archer-Shee v Baker 11 TC 749 (HL) .
123 Ibid; Nelson v Adamson 24 TC 36 .
124 Drummond v Collins 6 TC 525 (HL) .
125 Arundhati v CIT 177 ITR 275 (SC) (assessment on beneficiary); IR v Dewar 16 TC 84, 94 (HL) ; Reid v IR 14 TC
512, 523 ; Aikin v Macdonald 3 TC 306 ; Hotz v CIT 5 ITC 8, 16 . See also under ‘ Section 160 and 161 are machinery
sections and are not exhaustive’.
126 IR v Dewar 16 TC 84 (HL) .
127 IR v Blackwell 10 TC 235 .

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128 81 ITR 310, followed in Gopal v ITO 109 ITR 820 ; CIT v Karelal 148 ITR 412 ; George v CIT 171 ITR 386 (business
of dissolved firm carried on by receiver, income assessable as of association of persons).
129 Contrast s 168(1)(b) which expressly enacts that co-executors should be assessed as if they constituted an
association of persons, and see CIT v Seth 133 ITR 192 for the effect of this provision.
130 CIT v Balwantrai 34 ITR 187 ; Birendra v CIT 42 ITR 661 ; CWT v Nizam’s Trust 108 ITR 555 (SC) . Cf. Hobbs v
CagIT 49 ITR 811 .
131 224 ITR 635; Deccan Wine v CIT 106 ITR 111 ; Saldhana v CIT 6 ITC 114 (FB) . Cf. n 30 below and s 161(1A) .
132 Mohammed Noorullah v CIT 42 ITR 115 (SC), overruling on this point Mazumdar v CIT 15 ITR 484 ; Shanmugham
v CIT 81 ITR 310 (SC) . Cf. Mohammed Rowther v CIT 49 ITR 39 (executor carrying on business); Gopala v ITO 109
ITR 820 .
133 CIT v Court Receiver 31 ITR 885 ; Gopala v AgITO 75 ITR 120 ; CIT v Menon 168 ITR 125 .
134 Habibur v CIT 13 ITR 189 .
135 CIT v Shyamaraju 189 ITR 392 ; CIT v Marsons 188 ITR 224 .
136 CIT v Nandlal 59 ITR 758 (SC) .
137 Arunachala v CIT 41 ITR 432 ; Pratap v ITO 100 ITR 551 .
138 Warde v CIT 43 ITR 219 .
139 CIT v Dutt 10 ITR 477 .
140 CIT v Manilal 44 ITR 876 (SC) ; CIT v Jayalakshmi 53 ITR 525 ; CIT v Shanti 90 ITR 385, 395 .
141 CIT v Nizam’s Trust 162 ITR 286 (SC) ; CIT v Nizam’s Trust 154 ITR 573 .
142 124 ITR 501, affirmed in CIT v Doctor 230 ITR 744 (SC) ; CIT v Mathew 233 ITR 770 .
143 CIT v Shyamaraju 189 ITR 392 .
144 CIT v Ambalal Sarabhai D Trust 231 ITR 528 ; CIT v Prem Family Private (Specific) Trust 217 ITR 546 ; CIT v
Mathew (KT) 199 ITR 439; Moti Trust v CIT 185 ITR 358 .
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145 CIT v US Navlekar 252 ITR 465 ; CIT v Shyamaraju (K) (Trustee) 189 ITR 392 ; CIT v Marsons Beneficiary Trust
188 ITR 224 ; CIT v Mathur (BN) 184 ITR 402 .
146 ACIT v Ajay Vijay Traders 254 ITR 642 .
147 CIT v Ajay Vijay Traders 248 ITR 100 (SC) .
End of Document
S. 162. Right of representative assessee to recover tax paid
(1) Every representative assessee who, as such, pays any sum under this Act, shall be entitled to recover the sum so
paid from the person on whose behalf it is paid, or to retain out of any moneys that may be in his possession or
may come to him in his representative capacity, an amount equal to the sum so paid.
(2) Any representative assessee, or any person who apprehends that he may be assessed as a representative
assessee, may retain out of any money payable by him to the person on whose behalf he is liable to pay tax
(hereinafter in this section referred to as the principal), a sum equal to his estimated liability under this Chapter,
and in the event of any disagreement between the principal and such representative assessee or person as to the
amount to be so retained, such representative assessee or person may secure from the148[Assessing Officer] a
certificate stating the amount to be so retained pending final settlement of the liability, and the certificate so
obtained shall be his warrant for retaining that amount.
(3) The amount recoverable from such representative assessee or person at the time of final settlement shall not
exceed the amount specified in such certificate, except to the extent to which such representative assessee or
person may at such time have in his hands additional assets of the principal.
Section 162 [Second and Third Provisos to Section 42(1) of 1922 Act]: Representative Assessee’ Right to
Recover Tax or other Sum.—This section extends to every representative assessee the right to retain, out of money
in his possession in his representative capacity, an amount equal to any sum paid or payable by him under this Act, or
to recover the amount paid from the person beneficially entitled to the income. Such a right of retention and recovery
was expressly provided for in the 1922 Act only in the case of agents of non-residents. The agent who apprehends
that he may be assessed as a representative assessee, has the right to retain such sum, irrespective of the fact that
the non-resident may turn out to be not assessable at all when the assessment is ultimately made upon him.149 But,
this right does not extend to recover penalty paid by the guardian for the default committed by heirs.150
A similar right of retention and recovery is conferred upon legal representatives [ s 159(5) ] and on executors,
administrators and other persons administering the estate of a deceased person (s 169 ).
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149 Aggarwal Chamber of Commerce v Ganpatrai 33 ITR 245 (SC) .
150 CIT v R. Srinivasan 228 ITR 214 ; CIT v Sunil Kalro 292 ITR 86 .
End of Document
S. 163. Who may be regarded as agent
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > C. —
Representative assessees—Special cases
C. —Representative assessees—Special cases
(1) For the purposes of this Act, “agent”, in relation to a non-resident, includes any person in India—
(a) who is employed by or on behalf of the non-resident; or
(b) who has any business connection with the non-resident; or
(c) from or through whom the non-resident is in receipt of any income, whether directly or indirectly; or
(d) who is the trustee of the non-resident,
and includes also any other person who, whether a resident or non-resident, has acquired by means of a
transfer, a capital asset in India:
and includes also any other person who, whether a resident or non-resident, has acquired
by means of a transfer, a capital asset in India:
Provided that a broker in India who, in respect of any transactions, does not deal directly with or on
behalf of a non-resident principal but deals with or through a non-resident broker shall not be deemed to
be an agent under this section in respect of such transactions, if the following conditions are fulfilled,
namely:—
(i) the transactions are carried on in the ordinary course of business through the first-mentioned broker; and
(ii) the non-resident broker is carrying on such transactions in the ordinary course of his business and not as
a principal.
151[Explanation.—For the purposes of this sub-section, the expression “business connection” shall
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have the meaning assigned to it in Explanation 2 to clause (i) of sub-section (1) of section 9 of this
Act.]
[Explanation.—For the purposes of this sub-section, the expression “business connection”

shall have the meaning assigned to it in Explanation 2 to clause (i) of sub-section (1) of section
9 of this Act.]
(2) No person shall be treated as the agent of a non-resident unless he had had an opportunity of being heard by
the152[Assessing Officer] as to his liability to be treated as such.
1. Section 163 [ Section 43 of 1922 Act]: Statutory Agents of Non-residents.—Under s 161 the agent of a non-
resident is personally liable to assessment in respect of the non-resident’s income. Section 163 deals with the
appointment of a statutory agent on whom an assessment may be made in respect of income covered by s 160(1)(i) .
The purpose of these sections is to secure payment from the non-resident of the tax chargeable on him, though the
person directly affected is the statutory agent.153
In Abdul Azeez v CIT ,154 the Madras High Court held that the provisions imposing tax liability on the non-resident, and
vicarious liability on the agent as the representative assessee, in respect of income arising from business connection
in India did not offend the Fundamental Rights embodied in Arts 14 and 19(1)(g) of the Constitution .
A person who is an agent of a non-resident under the general law may be assessed as an agent. Even if a person is
not an agent under the general law, he may still be assessed as an agent if:
(i) he is employed by or on behalf of the non-resident,
(ii) he has any business connection155 with the non-resident,156
(iii) from or through him the non-resident is in receipt of any income, whether directly or indirectly,157
(iv) he is the trustee of the non-resident, or
(v) he has acquired, by means of a transfer from the non-resident, a capital asset in India.
In the first four cases it is further necessary that the person sought to be assessed as an agent should be ‘in India’;
whereas this condition is not necessary in the fifth case. The fifth case is also wide enough to include even simple
transfers of shares. The transferee (or purchaser) of the capital asset is deemed to be the agent of the non-resident.
The transferee may be a resident or non-resident and tax can be realized from him on a joint reading of ss (1)(i) and
163(i).158 The expression ‘in India’ is far too vague, both as to its meaning and as to the point of time to which it
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relates.
Person ‘employed by or on behalf of’ a non-resident would include authorised agents in fact and in law.159 The second
category of statutory agents comprises those who have a business connection with the non-resident.160 For the
concept and import of business connection, see s 9(1), under ‘Business connection’. The Finance Act, 2003 has
inserted an explanation to sub-s (1) of this section, as a result of which the definition of the term ‘business connection’
in s 9 is made applicable for this sub-section. Statutory agents of the third category are those from or through whom
the non-resident is in receipt of any income,161 e.g. an agent for sale.162 Where a solicitor on behalf of his resident
client makes an income payment to a non-resident, the solicitor, being the person through whom the non-resident
receives the payment, may be treated as the statutory agent of the non-resident.163 Similarly, when a resident engages
a non-resident service provider, such as a firm of solicitors, it is deemed to be its representative agent by virtue of s
163(1)(b) and (c) .164
Under this section, a non-resident may be treated as the agent of another non-resident.165 An agent of a non-resident
may be appointed under this section even if at the date of such appointment the non-resident is not alive.166
An agent appointed under this section is deemed to be the agent ‘for the purposes of the Act’.167 The Supreme Court
has held that a person may be appointed the agent of a non-resident before the commencement of the relevant
assessment year and as such, made liable for advance payment of tax under s 210 in respect of the non-resident’s
income.168 [See further ss 207-212, ‘Advance Tax Payable by non-resident’s agent’.]
The proviso enacts that when transactions are carried on in the ordinary course of business through a broker in India
and the broker does not deal directly with or on behalf of a non-resident principal but deals with or through a non-
resident broker, the broker in India cannot be treated as an agent under this section in respect of such transactions.
Thus, where bona fide ‘hedging and straddling’ operations take place through a broker in India and a foreign broker
acting for an undisclosed principal,169 the Indian broker cannot be deemed to be the agent of the foreign principal.
Sub-section (2) lays down that a person cannot be treated as the agent of a non-resident unless and until he has had
an opportunity of being heard by the AO as to his liability. Since an order under this section is appealable, a written
order is essential.170
2. Principles Regulating Appointment and Liability of Agents.—The following principles govern the appointment
and liability of agents:
(a) Agent is Chargeable as Representative Assessee only in Respect of Income Specified in Section 9(1)
.— Every representative assessee is defined by s 160 in relation to certain income; it is only ‘in respect of the
income’ specified in s 160 that any person may be held to be a representative assessee. Section 161, which
is the only section in the Act imposing a substantive liability on the representative assessee, expressly
confines the liability to ‘the income in respect of which he is a representative assessee’. An agent is defined
by s 160(1)(i) as a representative assessee only in respect of the income of a non-resident specified in s
9(1), and it is only in respect of such income specified in s 9(1) that a substantive vicarious liability is
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imposed on the agent by s 161 . In respect of any income falling outside s 9(1), no person can be regarded
as a representative assessee or assessed as such.171
There may be no agent in India in whose hands the income specified in s 9(1) may be assessed, and to
get over that difficulty s 163 provides for the appointment by the AO of a statutory agent. Thus, s 163
really provides only the machinery for giving effect to ss 160 and 161, and the mere appointment for an
agent under s 163 would be of no consequence unless there is income in respect of which the agent can
be held to be a representative assessee under s 160 and can be assessed as such under s 161 .172 In
other words, any person appointed an agent under s 163 is not necessarily assessable as a
representative assessee in respect of non-resident’s income; it is only in relation to the income covered
by s 160 that the status of representative assessee emerges and the liability to be assessed under s 161
arises. For instance, though there may be a business connection between a resident and a non-resident
company, where there is no evidence to show that any profits accrued to the non-resident company
through the business connection, no assessment can be made on the resident company as the agent of
the non-resident company and the mere appointment of the resident company as such agent under this
section would be of no avail.173
A person ‘from or through whom the non-resident is in receipt of any income’ may be regarded as an
agent under s 16(1)(c), but unless such income falls within s 9(1) the agent would not be a
representative assessee in respect of such income under s 160(1)(i) and would not be assessable under
s 161 . The position was different under the 1922 Act. Under s 40(2) of that Act, the agent was liable to
be assessed in respect of any taxable income which was receivable or received by him on behalf of a
non-resident, even if such income did not fall within the old s 42(1) which corresponded to the present s
9(1)(i) .174
Section 9(1) deems the income specified therein to accrue in India. However, if the income of a non-
resident is of the nature specified in that section, the agent can be assessed to tax in respect of it, even
if the income actually accrues in India or is received in India and therefore, the question of deeming it to
accrue in India (to make it chargeable) does not arise. But in a case falling under cl. (i) of s 9(1), only
that part of the income which is reasonably attributable to the operations carried out in India would be
covered by that clause,1 and the balance of the income attributable to the operations carried out abroad
would not be taxable in the hands of the agent even though the entire income may be received in India
by the agent.2 An assessment at the hands of the representative assessee is not an independent
assessment. It is the assessment of the income of the non-resident and of the income of the
representative assessee and there is no question of double assessment.3
(b) Agent is Chargeable in Like Manner and to the same Extent as the Non-resident. — [See s 161(1), under
‘Measure of representative assessee’s liability: ‘In like manner and to the same extent’].
(c) Agent is Assessable in Respect of Income of Non-resident only.— This section and s 160 make it clear
that the appointment and vicarious liability of an agent are in respect of the income of non-residents only and
not in respect of residents.
(d) Statutory Agent may not be Agent in Fact. —The person deemed to be an agent under this section may not
be an agent at all in fact and in law.4 Any person who comes within the terms of s 163 is put by that section
artificially into the position of agent.5 Thus, where the non-resident managing agents of a non-resident limited
company, in accordance with the powers conferred on them, open in India, a branch of the company, and the
managing agents supply goods to the branch for sale in India and receive a commission on the sales so
effected, there is a business connection between the managing agents and the branch of the company in
India, and the company may be fictionally deemed to be, and assessed as the agent of the managing
agents, though the position is the reverse in fact.6
(e) Agent Need not be in Receipt of Income on Behalf of Non-resident.—A person in India who has not
received any income on behalf of a non-resident but has actually paid the non-resident the sums sought to
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be taxed (e.g. by way of interest on a loan advanced by the non-resident, or by way of dividend) may be
treated as an agent under this section and assessed as a representative assessee.7
(f) Agent’s Liability is Personal.—The liability of the statutory agent appointed under this section and assessed
under s 161 is personal and not conditional upon his having any funds of the non-resident.8 The Supreme
Court has held that if he is unable to recover from the non-resident, the amount of tax, he cannot claim it as a
bad debt or as a business loss on ordinary principles of commercial accounting.9 But whereas the agent
would become personally liable to tax in respect of the non-resident’s income if he is assessed as the
representative assessee, there is no provision for recovering the tax from his personal assets where the
assessment is made direct on the non-resident, though the department would be entitled to go against the
non-resident’s property in the agent’s possession (s 167 ).
(g) Agent must have some Connection or Concern with Income Sought to be Assessed.—The statutory
agent must have some connection or concern with the income sought to be assessed.10 Transfer of shares in
pyramid like structure between two non-residents which eventually had a fully owned subsidiary company in
India, the Indian subsidiary was held not an agent qua deemed capital gains purportedly earned by the non-
resident as there was no live connection between the income earned abroad in India.11 Thus, a borrower in
India may be assessable as the agent of the non-resident lender in respect of the interest payable to the
non-resident lender, but the borrower cannot be assessed as the agent in respect of the income arising to
the lender from immovable property in India with which the borrower has no concern.12 A separate
assessment may be made on the agent managing the property on behalf of the non-resident.13 Where a non-
resident has business connection in India with several agents, each agent can be assessed in respect of the
profits accruing through the dealings with him only and not with the other agents, and the department should
make separate assessments on the different agents.14 Further, each agent should be taxed at the rate
applicable to the income assessed in his hands, and not at the rate applicable to the total income of the non-
resident.15 But where an agent receives overriding commission even in respect of orders placed directly by
customers with the non-resident and carries out certain obligations with regard to such orders, the agent may
be held assessable in respect of profits arising to the non-resident from such orders.16
A mere fact that bank statements of a non-resident Indian found in the premises of the resident assessee, will not
justify in treating the assessee as an agent of his non-resident brother. The assessing officer could not establish any
business connection between the assessee and his non-resident brother. There was also no evidence that there was
any kind of accrual of income to the non-resident brother in India. Accordingly, it was held that the provisions of ss
163(1)(c) or 163(1)(d) was not attracted.17
The department has the option to assess either the non-resident or his agent as the representative assessee. [See
under ‘ sections 160 and 161 are enabling sections—Department’s option to assess representative assessee or
person beneficially entitled to income’.]
3. Sub-section (2): ‘Opportunity of Being Heard’.— Section 43 of the 1922 Act expressly required a notice to be
served on the person proposed to be treated as an agent and further required that he should be given an opportunity
of being heard as to his liability. This sub-section does not refer to service of a notice but only provides for an
opportunity of being heard. However, it seems that a proper opportunity of being heard in a matter of this importance
would, generally speaking, involve the service of a notice, though such notice need not be in any particular form. If in
the notice given in due course under s 142(1)(i) calling for a return of income the relevant assessment year is
specified, the assessee can have no grievance in point of procedure merely because the year for which he is
proposed to be treated as an agent is not mentioned in the notice under this section.18
Under the 1922 Act, the Privy Council19 held that if a reasonable opportunity of being heard was given, it was not
further necessary to the validity of a notice calling for a return of income where it was served on a person as agent of a
Page 6 of 10
non-resident that it should be preceded by an order declaring him to be the agent of the non-resident; it was open to
the AO to postpone any final determination of the question of agency until the time came to make an assessment. But,
as the Punjab,20 Bombay21 and Madras22 High Courts have held, the above principle does not apply where a notice is
to be issued under s 148 of the present Act, and an order treating a person as an agent of a non-resident must be
made under s 163 before he is served with such notice.
The Punjab & Haryana High Court has held that even though the return was filed by the assessee as agent for his
non--resident brother, a notice should have been given under s 163(2) and an opportunity of being heard should be
given. It is submitted that this amounts to stretching of procedural requirements too far. If a person voluntarily files
return as agent of a non-resident person, it will be meaningless to once again give him an opportunity of being heard.23
Unless an express order is passed to treat a person as an agent of a non-resident, penalty for delay in filing a return
cannot be imposed on him.24
The assessment for each year is self-contained and therefore, a determination under this section should be made
afresh in respect of each assessment year. The mere fact that the assessee was found to be an agent in one
assessment year does not lead to the necessary inference that he is also an agent in the next assessment year.25 But
if the assessee by his conduct admits the position and status of an agent of a non-resident for the purposes of this Act
and makes a return or pays the tax on that footing, failure to serve a notice under this section would not invalidate the
assessment.26 Where a person has been validly assessed as an agent for a particular financial year and subsequently,
reassessment proceeding are taken under s 147 in respect of that year, no fresh determination need be made under
this section, for the facts necessary to determine the question of agency would be the same as in the original
assessment.27
4. Limitation.—An assessment on the principal or agent under s 143 read with this section should be made within the
period of limitation prescribed by s 153 . If the income of the non-resident principal has escaped assessment or has
been under-assessed, action under s 147 can be taken against the agent, but the notice must be issued within two
years from the end of the relevant assessment year [ s 149(3) ].
5. Appeal.—[See s 246 under ‘Appeal against order under s 163 …’.]
6. Reference to Court.—Whether on the facts of a given case a person is liable to be treated as an agent of a non-
resident under this section is a question of law.28
In the context of s 163, the undernoted cases held that referable questions of law arose29 or did not arise30 under s
256 .
7. ‘Protective’ Assessment.—[See ss 222-23, under ‘Recovery under “protective assessment”’.]

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151 Ins. by the Finance Act, 2003 (32 of 2003), s 68 (w.e.f. 1-4-2004). See Circular No. 7 of 2003, September 5, 2003; 263
ITR (St.) 62.
153 Cf. Trinidad v CIT 13 ITR Suppl 14, 17 (PC); Firestone v Lewellin 37 TC 111 (HL) : 33 ITR 741.
154 33 ITR 154.
155 See Explanation to s 163, inserted by the Finance Act 2003.
156 Cf. Premnath v CIT 159 ITR 575 .
157 CIT v Cochin Co., 104 ITR 655 . Under s 43 of 1922 Act, only the person through whom, and not also the person from
whom, a non-resident was in receipt of income could be treated as agent, and therefore, it did not cover a lessee
paying rent to a non-resident: CIT v Blackwood 76 ITR 107 ; Air India Ltd. v Caribjet Inc. 271 ITR 370 —prima facie
view that s 163(1)(iii) applies to leasing agreements
158 Triniti Corporation, In Re: 295 ITR 258, 267 (AAR).
159 Cf. Muller v Lethem 13 TC 126 (HL) ; Belfour v Mace 13 TC 539 (CA) .
160 Raghava v CIT 44 ITR 720 (SC) ; CIT v Navabharat Ferro 244 ITR 261 (not if it is an isolated sale transaction).
161 CIT v Visalakshi 5 ITR 448, 454 ; CIT v Currimbhoy, 1 ITR 341, affirmed in 3 ITR 395 (PC).
162 Turner Morrison v CIT 23 ITR 152 (SC) .
163 Ray v IR 19 TC 164 (HL) . Cf. Howells v IR 22 TC 501 .
164 CESC Ltd. v DCIT 263 ITR 402 .
165 Damodara v CIT 26 ITR 650 .
166 Abdullabhai v CIT 22 ITR 241 .
167 Turner Morrison v CIT 23 ITR 152, 162-63 (SC).
168 Premier Automonbiles v Shrivastava, 76 ITR 1 ; Premier Automobiles v ITO 59 ITR 656 .
Page 8 of 10
169 Cf. CIT v Govindram, 6 ITR 584 .
170 CIT v Express Newspapers 111 ITR 347 .
171 Turner Morrison v CIT 19 ITR 451 affirmed in 23 ITR 152 (SC); CIT v TI & M Sales, 166 ITR 93 (SC); Caltex v CIT
21 ITR 278, 290 .
172 CIT v Metro , 7 ITR, 184; Caltex v CIT 21 ITR 278, 290 ; Abdullabhai v CIT 22 ITR 241 ; Subramania v CIT 46 ITR
724 ; CIT v Remington, 5 ITC 177, 180 (PC).
173 CIT v Bombay Trust Corpn. 4 ITR 323 (PC) .
174 Turner Morrison v CIT 23 ITR 152 (SC) ; Raghava v CIT 44 ITR 720 (SC) .
1 See cl. (a) of the Explanation to s 9(1)(i), and thereunder ‘Apportionment of profits’.
2 As stated above, the position was different under 1922 Act of which s 40(2) made agent liable to tax in respect of
income received by him in India on behalf of non-resident: Turner Morrison v CIT 23 ITR 152 (SC) .
3 CESC Ltd. v CIT 263 ITR 402
4 Re, Nandlal 7 ITR 452, 462.
5 CIT v Remington 5 ITC 177, 180 (PC), per Lord Russell.
6 Re, Nandlal 7 ITR 452. Cf, Sarupchand v CIT 5 ITC 108 .
7 CIT v Bombay Trust Corpn. 4 ITC 312 (PC) ; CIT v Remington 5 ITC 177 (PC) ; Bank of Chettinad v CIT 8 ITR 522
(PC) ; Caltex v CIT 21 ITR 278 .
8 Plunkett v Narayan 1 ITC 1 .
9 CIT v Abdullabhai 41 ITR 545 . See comment on this case under s 29, ‘Losses incidental to trade’.
10 Ramnarayan v CIT 24 ITR 442 ; Soho v CIT 31 ITR 727 ; Subramania v CIT 46 ITR 724 . Cf. IR v Countess of
Longford 13 TC 573, 594 (HL) .
11 Vodafone International Holdings B.V. v UOI 341 ITR 1 (SC) ; General Electric Co. v DCIT 347 ITR 60 .
12 CIT v Currimbhoy 3 ITR 395, 402 (PC) .

Page 9 of 10
13 Cf. Ibid.
14 Ramnarayan v CIT 24 ITR 442 ; Subramania v CIT 46 ITR 724 ; CIT v Fertilizers & Chemicals 166 ITR 823 . Cf. CIT
v Gargiben 130 ITR 479 .
15 ITO v Eastern Scales 115 ITR 323 approvingly cited in CIT v Fertilizers & Chemicals 166 ITR 823, 832-33 .
16 Soho v CIT 31 ITR 727 .
17 CIT v Madhawan Bashyam 312 ITR 90 (on fact, it was also held that a notice under Section 148 was time barred).
18 CIT v Nawalkishore 6 ITR 61 (PC) . See also s 292B .
19 Ibid. Cf Blue Star v CIT 73 ITR 283 .
20 CIT v Kanhayalal 87 ITR 476 .
21 CIT v Belapur Sugar 141 ITR 404 .
22 CIT v Sambandam 242 ITR 708 .
23 CIT v Prem Kumar Bhagat 311 ITR 266 .
24 CIT v Express Newspapers Ltd. 111 ITR 347 (assessment and penalty proceeding are different.)
25 Sud v TELCO 71 ITR 457 (SC) ; Re, Govindram 11 ITR 104, 122, 126-27; Harakchand v CIT 16 ITR 119 .
26 Re, Govindram 11 ITR 104; Harakchand v CIT 16 ITR 119 ; Jadavji v CIT 31 ITR 1 ; Habib v CIT 49 ITR 792 ;
Nawalkishore v CIT 4 ITC 451 .
27 Re, Govindram 11 ITR 104.
28 See the questions formulated and answered in CIT v Bombay Trust Corpn. 4 ITC 312 (PC), CIT v Remington 5 ITC
177 (PC), CIT v Currimbhoy 3 ITR 395 (PC), Bank of Chettinad v CIT 8 ITR 522, 528 (PC) and CIT v Metro 7 ITR 176
.
29 National Industrial Development Corporation Ltd v CIT 185 ITR 528 .
30 National Industrial Development Corporation Ltd v CIT 253 ITR 489 ; CIT v Schreiner Airways BV 182 ITR 429 .
Page 10 of 10
End of Document
S. 164. Charge of tax where share of beneficiaries unknown
(1) 31[Subject to the provisions of sub-sections (2) and (3), where any income in respect of which the persons
mentioned in clauses (iii) and (iv) of sub-section (1) of section 160 are liable as representative assessees or any
part thereof is not specifically receivable on behalf or for the benefit of any one person or where the individual
shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are
indeterminate or unknown (such income, such part of the income and such persons being hereafter in this section
referred to as “relevant income”, “part of relevant income” and “beneficiaries”, respectively),32[tax shall be charged
on the relevant income or part of relevant income at the maximum marginal rate:]
Provided that in a case where—
(i) 33[noneof the beneficiaries has any other income chargeable under this Act exceeding the maximum amount
not chargeable to tax in the case of an association of persons or is a beneficiary under any other trust; or]
(ii) the relevant income or part of relevant income is receivable34[under a trust declared by any person by will and
such trust is the only trust so declared by him]; or
(iii) the relevant income or part of relevant income is receivable under a trust created before the 1st day of March,
1970, by a non-testamentary instrument and the35[Assessing Officer] is satisfied, having regard to all the
circumstances existing at the relevant time, that the trust was created bona fide exclusively for the benefit of
the relatives of the settlor, or where the settlor is a Hindu undivided family, exclusively for the benefit of the
members of such family, in circumstances where such relatives or members were mainly dependent on the
settlor for their support and maintenance; or
(iv) the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity
fund, pension fund or any other fund created bona fide by a person carrying on a business or profession
exclusively for the benefit of persons employed in such business or profession,
tax shall be charged36[on the relevant income or part of relevant income as if it] were the total income of
an association of persons:
37[Provided further that where any income in respect of which the person mentioned in clause (iv) of
sub-section (1) of section 160 is liable as representative assessee consists of, or includes, profits and
gains of business, the preceding proviso shall apply only if such profits and gains are receivable under a
Page 2 of 11
trust declared by any person by will exclusively for the benefit of any relative dependent on him for
support and maintenance and such trust is the only trust so declared by him.]
(2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious
purposes,38[or which is of the nature referred to in sub-clause (iia) of clause (24) of section 2,39[or which is of the
nature referred to in sub-section (4A) of section 11,] tax shall be charged on so much of the relevant income as is
not exempt under section 11 or section 12 ], as if the relevant income not so exempt were the income of an
association of persons:
40[Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12
by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the
relevant income or part of relevant income at the maximum marginal rate.]
(3) 41[In a case where the relevant income is derived from property held under trust in part only for charitable or
religious purposes or is of the nature referred to in sub-clause (iia) of clause (24) of section 2 ]42[or is of the nature
referred to in sub-section (4A) of section 11,] and either the relevant income applicable to purposes other than
charitable or religious purposes (or any part thereof)43[is not specifically receivable on behalf or for the benefit of
any one person or the individual shares of the beneficiaries in the income so applicable are indeterminate or
unknown, the tax chargeable on the relevant income shall be the aggregate of—
(a) the tax which would be chargeable on that part of the relevant income which is applicable to charitable or
religious purposes (as reduced by the income, if any, which is exempt under section 11 ) as if such part (or
such part as so reduced) were the total income of an association of persons; and
(b) the tax on that part of the relevant income which is applicable to purposes other than charitable or religious
purposes, and which is either not specifically receivable on behalf or for the benefit of any one person or in
respect of which the shares of the beneficiaries are indeterminate or unknown, at the maximum marginal
rate:]
Provided that in a case where—
(i) 44[none of the beneficiaries in respect of the part of the relevant income which is not applicable to
charitable or religious purposes has any other income chargeable under this Act exceeding the
maximum amount not chargeable to tax in the case of an association of persons or is a beneficiary under
any other trust; or]
(ii) the relevant income is receivable45[under a trust declared by any person by will and such trust is the only
trust so declared by him]; or
(iii) the relevant income is receivable under a trust created before the 1st day of March, 1970, by a non-
testamentary instrument and the46[Assessing Officer] is satisfied, having regard to all the circumstances
existing at the relevant time, that the trust, to the extent it is not for charitable or religious purposes, was
created bona fide exclusively for the benefit of the relatives of the settlor, or where the settlor is a Hindu
undivided family, exclusively for the benefit of the members of such family, in circumstances where such
relatives or members were mainly dependent on the settlor for their support and maintenance,
Page 3 of 11
tax shall be charged47[on the relevant income as if the relevant income] (as reduced by the income,
if any, which is exempt under section 11 ) were the total income of an association of persons:]
48[Provided further that where the relevant income consists of, or includes, profits and gains of
business, the preceding proviso shall apply only if the income is receivable under a trust declared by
any person by will exclusively for the benefit of any relative dependent on him for support and
maintenance, and such trust is the only trust so declared by him:
Provided also that in a case where the whole or any part of the relevant income is not exempt under
section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-
section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at
the maximum marginal rate.]
49[Explanation 1.— For the purposes of this section,—
(i) any income in respect of which the persons mentioned in clause (iii) and clause (iv) of sub-section (1)
of section 160 are liable as representative assessee or any part thereof shall be deemed as being
not specifically receivable on behalf or for the benefit of any one person unless the person on whose
behalf or for whose benefit such income or such part thereof is receivable during the previous year
is expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may
be, and is identifiable as such on the date of such order, instrument or deed;
(ii) the individual shares of the persons on whose behalf or for whose benefit such income or such part
thereof is received shall be deemed to be indeterminate or unknown unless the individual shares of
the persons on whose behalf or for whose benefit such income or such part thereof is receivable,
are expressly stated in the order of the court or the instrument of trust or wakf deed, as the case
may be, and are ascertainable as such on the date of such order, instrument or deed.
50[* * * * ]]
1. Section 164 Applicable after Computation of Income.— Section 164 of the Act would come into play only after
the income has been computed in accordance with the other provisions of the Act. Since the determination of the
status of an assessee is a part of the process of computation of income, it is necessary to look into the general
principles for determining whether the status of the trustees can be taken to be “association of persons” or “individual”.
Section 164(1) only lays down the rate of tax applicable to discretionary trust. It is not concerned with the manner of
computation of the total income. This section, therefore, is required to be taken into consideration only after the
income has been computed in accordance with various other provisions contained in the Act.51
2. Section 164 [First Proviso to Section 41(1) of 1922 Act]: Indeterminate or Unknown Shares of
Page 4 of 11
Beneficiaries.—As noted above, the basis of assessment on the representative assessee is that laid down in s
161(1), viz. that the tax should be levied upon the representative in like manner52 and to the same extent as it would
be leviable upon the beneficiary. This section mentions two exceptional cases where the above basis of assessment
does not prevail. In cases in which:
(i) any income is not specifically receivable on behalf or for the benefit of any one person,53 or
(ii) the individual shares of the beneficiaries are indeterminate or unknown,54
The tax is to be charged at the maximum marginal rate55 [ s 2(29C) ]. However that rate does not apply and the
income is chargeable as if it were the total income of an association of persons, where:
(i) none of the beneficiaries has any other income chargeable under this Act, and none of them is a beneficiary
under any other trust,56 or
(ii) the trust is declared by will,57 and it is the only trust so declared by the testator, or
(iii) the trust is a non-testamentary trust created bona fide 58 before March 1, 19701 March 1970 for the exclusive
benefit of the settlor’s relatives59 mainly dependent on him for their support and maintenance60 or, where the
settlor is a Hindu undivided family, for the exclusive benefit of its members so dependent on it (for this
purpose, the situation that was obtaining on the day the trust was created is relevant and not the situation in
the year for which the assessment is being made),61 or
(iv) the trust is a provided or other fund created by a person carrying on a business or profession, exclusively for
the benefit of his employees, or
(v) the income is derived from property held under the trust wholly for charitable or religious purposes or is
business income of the nature referred to in s 11(4A) or voluntary contributions are received by certain trusts
and institutions, and such income or contributions are not exempt under s 11 or 12 . But in the cases stated
in the proviso to sub-s (2) the income of the trust is taxable at the maximum marginal rate from the
assessment year 1985-86.62 [The case where the trust is partly for charitable or religious purposes and partly
for other purposes is dealt with by sub-s (3)].63
Where the income of a trust declared by a duly executed instrument in writing consists wholly or partly of business
income, relief from the maximum marginal rate is available, from the assessment year 1985-86, only if the trust is
declared by a person by will exclusively for the benefit of his relative [ s 2(41) ] dependent on him for support and
maintenance and such trust is the only one so declared by him. [See further s 161(1A), under ‘Where trustee carries
on business’.]
The Supreme Court in CIT v Kamalini Khatau 64 observed that the liability of a trustee of a discretionary trust to be
assessed to tax in respect of the income of the trust and to the recovery of tax is created by s 161, while s 164 sets out
how such tax shall be charged; therefore, s 164 cannot be read as being a code in itself applicable to the taxation of
discretionary trusts. Consequently, it held that the income of a discretionary trust, which is distributed to and received
by the beneficiary within the accounting year, would squarely fall within the broad sweep of total income under s 5 ;
Page 5 of 11
and the beneficiary would be liable to assessment and recovery of tax thereon under s 4 .
A trust was initially assessed at the normal rates but subsequently, tax at the maximum marginal rates by an order
passed under s 154 . In a connected wealth tax case, it was held by the tribunal that the trust was valid and that the
shares were known in determination. The fact that a reference petition was pending against this tribunal order would
not justify the Department from taking action for rectification under s 154 .65 There was no justification in taking
recourse to the provisionTribunal of s 164 .
Prior to the assessment year 1971-72, in cases covered by this section, the department had to assess the trustees at
the appropriate rate or at the rate applicable to the total income of the beneficiary who actually received the trust
income, whichever course resulted in a benefit to the revenue. If a part of the trust income was assessed directly in the
hands of a beneficiary, the balance of income, not given to the beneficiary, was taxable in the hands of the trustees at
the rate of tax applicable to such balance.66 Under the corresponding provision of the 1922 Act the assessment was
made at the maximum rate of income-tax and the appropriate rate of super-tax.67 For the assessment year 1971-72 to
1979-80 the tax was to be charged as if the income were the total income of an association of persons, or at the rate
of 65 per cent, whichever course was more beneficial to revenue.
Where a part of the income is specifically receivable on behalf of any one person or on behalf of beneficiaries whose
individual shares are determinate and known, and the other part of the income is not so receivable, it is only the latter
part of the income which is liable to tax on the basis laid down in this section and not the former part.68
If the trust deed does not define the individual shares of the beneficiaries, the provisions of this section would be
attracted. For instance, if it is in the discretion of the trustee to distribute among the beneficiaries the income of the
trust in such proportion as he pleases69 or so much of the income as he pleases,70 or if it is in the discretion of the
trustees or shebait to alter the shares of the deities in the income from the dedicated properties,71 or if the right to
receive income is contingent in nature,72 the shares of the beneficiaries would be indeterminate. Where the trust is to
accumulate the income for a class of beneficiaries who have not yet been ascertained or who are not even
ascertainable in a given year, the income would not be specifically receivable on behalf of any one person.73 Similarly,
if the objects of a trust are inter alia a dharamshala or a sadavant 74 or the political advancement of India,75 the
beneficiaries would be wholly indeterminate and unknown, and the income would not be specifically receivable on
behalf of any one person.
When the trust deed does not fix the shares of the beneficiaries, a resolution of the trustees to pay the net income to
one of the beneficiaries will not alter the character of the trust as discretionary. The main question as to whether the
character of a discretionary trust can be altered by the trustees was, unfortunately, not clearly answered by the High
Court.76 But the trust deed gives the power to the trustees to determine the shares of the beneficiaries and they do so,
the trust will not be a discretionary trust.77
A trust deed, executed in 1982, did not specify the shares of the beneficiaries. This lacuna was remedied by a deed of
rectification made in 1988. The trust was held to be discretionary for the assessment years prior to 1988.78 If the
shares are fixed/determinate, wrong distribution of income by the trustees would make the trust discretionary.79
Page 6 of 11
When there is only one beneficiary in a trust s 164(1) will not apply because the testator had created four trusts.80
But where a trust or endowment was created vesting properties in several deities whose shares were not defined in
the deed, it was held that their shares were equal in law in the absence of any express provision on the point in the
deed, and since the shares were determinate in law the trustee was assessable at the rate applicable to the individual
income of each of the deities.81 This principle may be applied, on a reasonable construction, even to a deed of trust
created for private individuals.82
In another case where a trust was created for the benefit of the settlor’s ‘family, children and descendants’ who were
to take the income ‘simultaneously and in equal shares’, and the tribunal found as a fact that the beneficiaries
numbered 24 in all, it was held that the shares were known and determinate.83 If the beneficiaries and their shares are
known and determinate in the relevant year, the section would not apply84 merely because the class of beneficiaries
may vary in different years85 or a dispute regarding the title to income is pending in the court.86 Further, if one of the
beneficiaries whose share is specified dies, and interest devolves on the deceased’s heir or heirs, the trust would not
become a trust in which the shares of the beneficiaries were indeterminate.87 The trustees of an employees’ provident
fund or gratuity fund are not assessable under this section, since the income received by them is to be apportioned
and credited to the separate account of each employee.88
The above case law has to be read subject to Expln. 1 introduced in this section by the Finance (No. 2) Act 1980 with
effect from the assessment year 1980-81 under which:
(i) income is deemed as being not specifically receivable on behalf or for the benefit or any one person unless
such person is expressly mentioned in the order of the court or the trust deed and is identifiable as such on
the date of such order or deed; and
(ii) the individual shares of the beneficiaries are deemed to be indeterminate or unknown unless their shares are
expressly stated in the order of the court or the trust deed and are ascertainable as such on the date of such
order or deed.
The representative assessee in the case of a discretionary trust must be regarded as an individual and thus would be
entitled to the benefit of deductions under ss 80K,89 80L90 (now omitted) and 80C91 of the Act.92
256 .
31 Subs., by the Finance Act, 1970 (19 of 1970), s 21 (w.e.f. 1-4-1971), See Circular No. 45, September 2, 1970; 79 ITR
(St.) 33, for the following:—
Page 7 of 11
‘ S. 164 . Charge of tax where share of beneficiaries unknown.—Where any income in respect of which the persons
mentioned in clauses (iii) and (iv) of sub-section (1) of section 160 are liable as representative assessees or any part thereof, is
not specifically receivable on behalf or for the benefit of any one person, or where the individual shares of the persons on whose
behalf or for whose benefit such income or such part thereof is receivable (which persons are hereinafter in this section referred
to as the beneficiaries) are indeterminate or unknown, tax shall be charged as if such income or such part thereof were the total
income of an association of persons, or, where such income or such part thereof is actually received by a beneficiary, then at the
rate or rates applicable to the total income [* * * *] of the beneficiary if such course would result in a benefit to the revenue.’.
In the above, the words “or total world income” were, earlier, omitted by the Finance Act, 1965 (10 of 1965), s 40, with effect
from 1st April, 1965.
32 Subs., by the Finance (No. 2) Act, 1980 (44 of 1980), s 27(a)(i) (w.e.f. 1-4-1980), See Circular No. 281, September 22,
1980; 131 ITR (St.) 4, for the following:—
“tax shall be charged—
(i) as if the relevant income or part of relevant income were the total income of an association of persons, or
(ii) at the rate of sixty-five per cent.
whichever course would be more beneficial to the revenue:”.
33 Subs., by the Finance (No. 2) Act, 1980 (44 of 1980), s 27(a)(ii)(1) (w.e.f. 1-4-1980), for the following:—
“(i) none of the beneficiaries has any other income chargeable under this Act; or”.
34 Subs., for “under a trust declared by will”, by the Finance (No. 2) Act, 1980 (44 of 1980), s 27(a)(ii) (2) (w.e.f. 1-4-
1980).
36 Subs., for ‘as if the relevant income or part of relevant income”, by the Finance (No. 2) Act, 1980 (44 of 1980), s
27(a)(ii)(3) (w.e.f. 1-4-1980).
37 Ins. by the Finance Act, 1984 (21 of 1984), s 21(a) (w.e.f. 1-4-1985). See Circular No. 387, July 6, 1984; 152 ITR (St.)
1.
38 Subs., by the Finance Act, 1972 (16 of 1972), s 27 for “tax shall be charged on so much of the relevant income as is
not exempt under section 11 ” (w.e.f. 1-4-1973). See Circular No. 108, March 20, 1973.
39 Ins. by the Finance Act, 1983 (11 of 1983), s 37(a) (w.e.f. 1-4-1984). See Circular No. 372, December 8, 1983; 146
ITR (St.) 9.
40 Added by the Finance Act, 1984 (21 of 1984), s 21(b) (w.e.f. 1-4-1985).
41 Subs., by the Finance Act, 1972 (16 of 1972), s 27 for “In a case where the relevant income is derived from property
held under trust in part only for charitable or religious purposes” (w.e.f. 1-4-1973). See Circular No. 108, March 20,
1973.
42 Ins. by the Finance Act, 1983 (11 of 1983), s 37(b) (w.e.f. 1-4-1984).
Page 8 of 11
43 Subs. by the Finance (No. 2) Act, 1980 (44 of 1980), s 27(b)(i) (w.e.f. 1-4-1980), for the following:—
“is not specifically receivable on behalf of any one person or the individual shares of the beneficiaries in the income so
applicable are indeterminate or unknown, the tax chargeable on the relevant income shall be either—
(a) the tax which would be chargeable if the whole of the relevant income (as reduced by the income, if any, which is exempt
under section 11 ) were the total income of an association of persons; or
(b) the aggregate of—
(i) the tax which would be chargeable on that part of the relevant income which is applicable to charitable or religious purposes
(as reduced by the income, if any, which is exempt under section 11 ) as if such part (or such part as so reduced) were the total
income of an association of persons; and
(ii) the tax on that part of the relevant income which is applicable to purposes other than charitable or religious purposes, and in
respect of which the shares of the beneficiaries are indeterminate or unknown, at the rate of sixty-five per cent.
whichever course would be more beneficial to the revenue:”.
44 Subs., by the Finance (No. 2) Act, 1980 (44 of 1980), s 27(b)(ii)(1) (w.e.f. 1-4-1980), for the following:—
“(i) none of the beneficiaries in respect of the part of the relevant income which is not applicable to charitable or religious
purposes has any other income chargeable under this Act; or”.
45 Subs., for “under a trust declared by will”, by the Finance (No. 2) Act, 1980 (44 of 1980), s 27(b)(ii)(2) (w.e.f. 1-4-1980).
47 Subs., for “as if the relevant income”, by the Finance (No. 2) Act, 1980 (44 of 1980), s 27(b)(ii)(3) (w.e.f. 1-4-1980).
48 Ins. by the Finance Act, 1984 (21 of 1984), s 21(c) (w.e.f. 1-4-1985). See Circular No. 387, July 6, 1984; 152 ITR (St.)
1
49 Ins. by the Finance (No. 2) Act, 1980 (44 of 1980), s 27(c) (w.e.f. 1-4-1980).
50 Explanation 2 [as inserted by the Finance (No. 2) Act, 1980 (44 of 1980), s 27(c) (w.e.f. 1-4-1980) alongwith
Explanation 1] has been omitted by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), s 64(b) (w.e.f. 1-4-1989).
Prior to its omission, Explanation 2 stood as under:—
‘Explanation 2.—In this section, “maximum marginal rate” means the rate of income-tax (including surcharge on income-tax, if
any) applicable in relation to the highest slab of income in the case of an association of persons as specified in the Finance Act
of the relevant year.’.
51 CIT v SAE Head Office, MPEW Trust 271 ITR 159 .
52 CIT v Shri Krishna Bandar Trust 201 ITR 989 [fiction of status of association of persons does not apply to s 164(1) ];
CIT v Marsons 188 ITR 224 ; Lalchand v Kuriyan 188 ITR 253 ; Niti Trust v CIT 221 ITR 435 ; CIT v Deepak Family
211 ITR 575 ; Meera and Co v CIT 224 ITR 635 (SC) .
53 Sahebzadas v CIT 44 ITR 332 ; Pallavi v CIT 127 ITR 701 ; CIT v Hemant 135 ITR 768 (amount actually paid to a
beneficiary cannot be charged in his hands). Cf. CIT v Tarunkumar 94 ITR 361 .
54 CIT v Puthiya 44 ITR 172 (SC) ; Sahebzadas v CIT 44 ITR 332 ; Shamsuddin v CIT 33 ITR 733 ; Mahalaxmiwala v
CIT 26 ITR 177 dissenting from Yakub v CIT 14 ITR 548 ; Official Trustee v CIT 26 ITR 410 ; Rajamannar v CIT 51
Page 9 of 11
ITR 339 ; CIT v Ratanbai 67 ITR 504 ; Santimoyee v CIT 74 ITR 133 ; Nirmala v CIT 74 ITR 268 ; CIT v Indu 101 ITR
561 ; Savitabai v CIT 113 ITR 240 ; Piarelal v CIT 136 ITR 583 ; Pramod v CIT 148 ITR 573 ; Syed Shah v CIT 150
ITR 174 ; CIT v Dharampal 226 ITR 357 ; CIT v Tanvi 209 ITR 947 .
55 Basic exemption not available: Surendranath v CIT 142 ITR 149 ; ACIT v Ajay Vijay 254 ITR 642 ; CIT v C.V.
Divakaran 254 ITR 222 .
56 CIT v Maharaja Daljitsinhji 204 ITR 135 ; CIT v Sanghrajka 181 ITR 484 ; CIT v Pushpaben 207 ITR 587 .
57 Cf. Chintamani v CIT 222 ITR 578 .
58 Keshrichand v CIT 138 ITR 351 .
59 Cf. Chintamani v CIT 222 ITR 578 .
60 Actual financial dependence at time of creation of the trust, and not settlor’s legal obligation to support and maintain is
the test: CIT v Gunvantlal 133 ITR 162 (SLP rejected 140 ITR St 5).
61 CIT v Chunilal 189 ITR 631 ; VMR Trust v CIT 253 ITR 491 .
62 Cf. DIT v Sheth Mafatlal 249 ITR 533 .
63 CIT v Shri Krishna Trust 213 ITR 777 .
64 209 ITR 101 (SC), followed in Moti Trust v CIT 236 ITR 37 (SC) ; CIT v Anand Sarabhai 231 ITR 529 .
65 CIT v Pushpa Mohan 301 ITR 421 .
66 Panna v CIT 74 ITR 396 ; CIT v Gargiben 130 ITR 479 . Cf. ss 160-61, under ‘ Sections 160 and 161 are enabling
sections’, p. 1941, n. 52.
67 Vakil v CIT 14 ITR 298, 304 ; Arur v CIT 13 ITR 465, 480 ; Official Trustee v CIT 26 ITR 410 ; Shamsuddin v CIT 33
ITR 733 .
68 Official Trustee v CIT 26 ITR 410 ; Sahebzadas v CIT 44 ITR 332 .
69 Anasuya v CIT 232 ITR 561 ; CIT v Gosar 189 ITR 18 affirmed in Gosar v CIT 215 ITR 55 (SC) .
70 Harendra v CIT 12 ITR 68 ; Arur v CIT 13 ITR 465 ; Mahalaxmiwala v CIT 26 ITR 177 ; CIT v Ratanbai 67 ITR 504 ;
CIT v Arvind 73 ITR 490 ; Gartside v IR 70 ITR 663 (HL) . Contrast Khimiji v CIT 113 ITR 751 .
Page 10 of 11
71 CIT v Ambalal (No 5), 231 ITR 540 (change by resolution not valid); Panchanandas v CIT 20 ITR 57 .
72 Anklesharia v CIT 207 ITR 1068 .
73 Yakub v CIT 14 ITR 548 ; Charanjilal v CIT 191 ITR 384 ; CIT v Atreya Trust 193 ITR 716 ; CIT v Keshav Mohta
232 ITR 875 . Cf. Kelly v Rogers 19 TC 692, 713 (CA) . CIT v M.K. Kannan 240 ITR 785 is wrongly decided.
74 ITT v Radha 14 ITR 470, 476 .
75 Re, Lokamanya Tilak 10 ITR 26.
76 CIT v Ambalal Sarabhai Trust (No.5) 231 ITR 540 ; CIT v Ambalal Sarabhai Trust 269 ITR 119 - the High Court
should have considered the submission that the beneficiary had already been taxed on the same income as did by the
Madras High Court in Ranga Rao Lottery Agencies v CIT 287 ITR 542 .
77 CIT v Devshi Trust 279 ITR 519 .
78 Ranga Rao, ibid.
79 CIT v Gurmail Kaur Trust 268 ITR 124 .
80 CIT v Poonam Trust 282 ITR 129 .
81 Jyotishwari v CIT 14 ITR 703 ; CIT v Pulin 20 ITR 314 ; CIT v Ashalate 20 ITR 326 ; Visheshwara v CIT 19 ITR 522
; CIT v Bhimchandra 30 ITR 46 ; Jogeswar v Ramchund 23 IA 37 ; CIT v Official Trustee 139 ITR 1 . Contrast CIT v
Kokiladevi 77 ITR 350 (SC) (one deity was the sole beneficiary).
82 CWT v Chetty 120 ITR 329 .
83 Habibur v CIT 13 ITR 189 ; CIT v Balakrishna 143 ITR 651 ; Khimji v CIT 113 ITR 751 ; CIT v Nizam’s Trust 160
ITR 270 .
84 CIT v Saroja 238 ITR 34 ; CIT v Suneeti Raje 240 ITR 12 .
85 CWT v Nizam’s Trust 108 ITR 555 (SC)followed in CWT v Nizam’s Trust 129 ITR 796 ; Pandit v CIT 83 ITR 136 ;
Suhashini v WTO 46 ITR 953, 963-65 ; Padmavati v CWT 61 ITR 66 ; Putlibai v CWT 66 ITR 653 ; CWT v Hansabi
69 ITR 527 ; CIT v Khaimchand 113 ITR 185 ; CWT v Somaiya 109 ITR 789 ; CWT v Chetty 120 ITR 329 .
86 Mahamaya v CIT 126 ITR 748 .
87 CIT v Gulabchand 254 ITR 336 .

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88 CIT v Kerala SRTC 161 ITR 681 ; CIT v Staff Gratuity Fund 162 ITR 471 .
89 CIT v Anand Sarabhai 231 ITR 529 ; CIT v Bharatidevi 231 ITR 537 .
90 CIT v Deepak Family 211 ITR 575 ; CIT v Venu Suresh 221 ITR 649 . See also p. 1947, n 1.
91 CIT v Saurin 257 ITR 160 .
92 Niti Trust v CIT 221 ITR 435 .
93 CIT v Ambalal Sarabhai D Trust 231 ITR 528 ; CIT v Pooranchand 192 ITR 107 .
94 CIT v Sanchay Angana Trust 234 ITR 772 ; Prem Family Pvt (Specific) Trust v CIT 226 ITR 694 .
End of Document
S. 164A. Charge of tax in case of oral trust
S. 164A. Charge of tax in case of oral trust
95[Where a trustee receives or is entitled to receive any income on behalf or for the benefit of any person under an oral
trust, then, notwithstanding anything contained in any other provision of this Act, tax shall be charged on such income at the
maximum marginal rate.
Explanation.—For the purposes of this section,—
(i) 96[* ***]
“oral trust” shall have the meaning assigned to it in Explanation 2 below sub-section (1) of section 160 .]
Section 164A : Charge of Tax in Case of Oral Trust.—[See under ss 160-161, ‘Oral trust’.]
95 Ins. by the Finance Act, 1981 (16 of 1981), s 15 (w.e.f. 1-4-1981). See Circular No. 308, June 29, 1981, 131 ITR (St.)
119.
96 Clause (i) has been omitted by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), s 65 (w.e.f. 1-4-1989). See
Circular No. 549, October 31, 1989; 182 ITR (St.) 1. Prior to its omission, clause (i) stood as under:—
‘(i) “maximum marginal rate” shall have the meaning assigned to it in Explanation 2 below sub-section (3) of section 164 ;’.
End of Document
S. 165. Case where part of trust income is chargeable
S. 165. Case where part of trust income is chargeable
Where part only of the income of a trust is chargeable under this Act, that proportion only of the income receivable by a
beneficiary from the trust which the part so chargeable bears to the whole income of the trust shall be deemed to have
been derived from that part.
Section 165 [Second Proviso to Section 41(1) of 1922 Act]: Non-taxable Portion of Trust Income.—This
section enacts that where part only of the trust income is chargeable under this Act, the beneficiary’s share of the
income should be taken to be derived proportionately from the chargeable and non-chargeable portions of the trust
income, and should be assessed accordingly in the hands of the trustee.97
97 CIT v Anand Sarabhai 231 ITR 529 .
End of Document
S. 166. Direct assessment or recovery not barred
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > D.—
Representative assessees—Miscellaneous provisions
D.—Representative assessees—Miscellaneous provisions
S. 166. Direct assessment or recovery not barred
Nothing in the foregoing sections in this Chapter shall prevent either the direct assessment of the person on whose behalf
or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect
of such income.
End of Document
S. 167. Remedies against property in cases of representative assessees
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > D.—
Representative assessees—Miscellaneous provisions
D.—Representative assessees—Miscellaneous provisions
The98[Assessing Officer] shall have the same remedies against all property of any kind vested in or under the control or
management of any representative assessee as he would have against the property of any person liable to pay any tax,
and in as full and ample a manner, whether the demand is raised against the representative assessee or against the
beneficiary direct.
1. Sections 166 and 167 [ Sections 41(2) and 42(1) of 1922 Act]: Direct Assessment on Person Beneficially
Entitled to Income.—The provisions of these sections have been considered in ss 160-161 under the head ‘ Sections
160 and 161 are enabling sections: Department’s option to assess representative assessee or person beneficially
entitled to income’.
As regards arrears of tax in respect of a non-resident’s income specified in s 9(1)(i), there is a special provision made
in s 173 . Such arrears may be recovered from any assets of the non-resident which are, or may at any time come,
within India, irrespective of the question whether the assessment is made on the non-resident or on his agent as a
representative assessee.
The provisions of s 167 are made applicable also to the legal representatives of a deceased person [ s 159(5) ].
The set of provisions dealing with the liability of a representative assessee cannot be interpreted to mean that the
Revenue must necessarily assess the agent of the non-resident.99 Section 166 gives the Revenue a choice to assess
either the non-resident or his agent.100 There is no bar under the Act to have simultaneous proceedings making direct
assessment in the hands of the non-resident and an assessment in the hands of the representative assessee.101
Page 2 of 2
However, it is submitted that the same income cannot be taxed both in the hands of the non-resident and the agent.
2. Resulting Trust.—If a trust fails as a charitable trust and there is resulting trust in favour of the settlor, the income
would be received by the trustees on behalf of the settlor as the beneficiary and the taxing authorities would be
justified in including that income in the total income of the settlor.102
3. Accretion to Corpus but Taxable as Income.—Where an amount received by trustees forms part of the corpus of
the trust according to the provisions of the deed but is taxable as income under the Act, e.g. where a capital receipt is
deemed to be dividend under s 2(22)(c) or the gains made on frequent variations of investments are held taxable as
business profits, such amount may be assessed as the income of the trustees but cannot be assessed in the hands of
the beneficiary who as the life-tenant is entitled only to the trust income.103
99 Arundhati Balkrishna v CIT 177 ITR 275 ; Panna Sanjay Trust v CIT 74 ITR 396 .
100 Deputy Director of Income Tax v R. Lines Ltd. 298 ITR 150 (obiter) ; also see Premier Automobiles v ITO 59 ITR 656
.
101 Aditya Birla Nuvo Ltd. v DDIT 342 ITR 308 .
102 Dwarkadas v CIT 16 ITR 160 .
103 CIT v Wadia 48 ITR 135 ; Pallavi v CIT 127 ITR 701 ; CIT v Nizam’s Trusts 154 ITR 573 . Cf. CIT v Arvind 73 ITR
490 .
End of Document
S. 167A. Charge of tax in the case of a firm
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > DD.—
Firms, association of persons and body of individuals
DD.—Firms, association of persons and body of individuals
S. 167A. Charge of tax in the case of a firm
104[In the case of a firm which is assessable as a firm, tax shall be charged on its total income at the105[rate as specified in
the Finance Act of the relevant year].]
Section 167A : Charge of Tax in the Case of a Firm.—In the case of a firm which is assessable as a firm, tax shall
be charged on its total income at the rate specified in the Finance Act of the relevant year.
As a part of the changes in the law of taxation of firms, this section was introduced by the Finance Act, 1992 with
effect from April 1, 19931 April 1993 to provide that in case of a firm, tax shall be charged at the maximum marginal
rate, and with effect from April 1, 19981 April 1998 at the rate as specified in the Finance Act of the relevant year.
104 Subs., by the Finance Act, 1992 (18 of 1992), s 64 (w.e.f. 1-4-1993), see Circular No. 636, August 31,1992, 198 ITR
(St.) 1, for the sub-heading “DD.—Association of persons and body of individuals”, which was earlier substituted, for
“DD.—Associations of persons—special cases”, by the Direct Tax Laws (Amendment) Act, 1989 (3 of 1989), s 26
(w.e.f. 1-4-1989) and which was, originally, inserted by the Finance Act, 1981 (15 of 1981), s 16 (w.e.f. 1-4-1981). See
Circular No. 308, June 29, 1981, 131 ITR (St.) 119.
105 Subs., for “maximum marginal rate”, by the Finance Act, 1997 (26 of 1997), s 44 (w.e.f. 1-4-1998). See Circular No.
763, February 18, 1998, 230 ITR (St.) 54.
End of Document
S. 167B. Charge of tax where shares of members in association of persons
or body of individuals unknown, etc.
S. 167B. Charge of tax where shares of members in association of persons or body of individuals unknown, etc.
(1) 106[Where the individual shares of the members of an association of persons or body of individuals (other than a
company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860),
or under any law corresponding to that Act in force in any part of India) in the whole or any part of the income of
such association or body are indeterminate or unknown, tax shall be charged on the total income of the
association or body at the maximum marginal rate:
Provided that, where the total income of any member of such association or body is chargeable to tax at a rate which is
higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such higher
rate.
(2) Where, in the case of an association of persons or body of individuals as aforesaid [not being a case falling under
sub-section (1)],—
(i) the total income of any member thereof for the previous year (excluding his share from such association or
body) exceeds the maximum amount which is not chargeable to tax in the case of that member under the
Finance Act of the relevant year, tax shall be charged on the total income of the association or body at the
maximum marginal rate;
(ii) any member or members thereof is or are chargeable to tax at a rate or rates which is or are higher than the
maximum marginal rate, tax shall be charged on that portion or portions of the total income of the association
or body which is or are relatable to the share or shares of such member or members at such higher rate or
rates, as the case may be, and the balance of the total income of the association or body shall be taxed at
the maximum marginal rate.
Explanation.—For the purposes of this section, the individual shares of the members of an association
of persons or body of individuals in the whole or any part of the income of such association or body shall
be deemed to be indeterminate or unknown if such shares (in relation to the whole or any part of such
income) are indeterminate or unknown on the date of formation of such association or body or at any
Page 2 of 3
S. 167B. Charge of tax where shares of members in association of persons or body of individuals unknown,
etc.
time thereafter.]
1. Section 167B, Sub-section (1): Charge of Tax where Shares of Members Unknown.—This topic was dealt with
by s 167A for the assessment years 1981-82 to 1988-89. The Direct Tax Laws (Amendment) Act, 1989 replaced that
section by the present s 167B with effect from the assessment year 1989-90.
This sub-section provides for taxing the income of an association of persons at the maximum marginal rate [ s 2(29C) ]
where the shares of its members are indeterminate or unknown.107 It is analogous to s 164 which contains a similar
provision in respect of the income of a trust where the shares of the beneficiaries are indeterminate or unknown. [See
under s 164 .]
The explanation to the section provides that the shares of the members should be deemed to be indeterminate or
unknown—‘if such shares…are indeterminate or unknown or the date of formation of such association…or at any time
thereafter’. In the context, the vague words ‘at any time thereafter’ should be read in a restricted sense to mean ‘in any
subsequent accounting year the income of which falls to be assessed’.
2. Sub-section (2): Charge of Tax where Shares of Members are Determinate and Known.—There was no
corresponding provision in the deleted s 167A .
This sub-section deals with the case of an association of persons the shares of whose members are determinate and
known. In such a case each member would be assessable on his share of the association’s profits at the rate
applicable to him. But cl. (i) of this sub-section provides that if any member has any other taxable income, the total
income of the association would become assessable at the maximum marginal rate, and not be assessed in the hands
of the members at the appropriate rate. This provision is truly tyrannical and shows how little thought has gone into
making of fiscal laws in the recent past. The pattern of taxation is clear: each member has his determinate and known
share included in his total income and is assessable at the appropriate rate. What can be the rational justification for
discarding this pattern and levying the punitive maximum marginal rate of tax on the total income of the association,
merely because a member has some other taxable income of his own ? Is it a crime in India to form an association of
persons for carrying on business? This irrational provision is a relic of the thoughtless Direct Tax Laws (Amendment)
Act 1987 which incidentally made all partnership assessable at the maximum marginal rate on their total income.
Provisions of this section will not be applicable when the assessee is not acting as association of persons.108
Clause (ii) of the sub-section contains an equally whimsical provision. If a member, eg a limited company, of an
association is taxable at a rate higher than the maximum marginal rate applicable to individuals, the portion of the total
income of the association, distributable among the other members, would be assessable at the maximum marginal
Page 3 of 3
S. 167B. Charge of tax where shares of members in association of persons or body of individuals unknown,
etc.
rate.
106 Section 167B has been inserted by the Direct Tax Laws (Amendment) Act, 1989 (3 of 1989), s 28 (w.e.f. 1-4-1989).
See Circular No. 550, January 1, 1990; 182 ITR (St.) 114.
107 JKS Employees’ v ITO 199 ITR 765 [this issue cannot be decided in s 143(1)(a) proceedings].
108 Sudhir Nagpal v ITO 349 ITR 636 .
End of Document
S. 167C. Liability of partners of limited liability partnership in liquidation
S. 167C. Liability of partners of limited liability partnership in liquidation
109[Notwithstanding anything contained in the Limited Liability Partnership Act, 2008 (6 of 2009), where any tax due from a
limited liability partnership in respect of any income of any previous year or from any other person in respect of any income
of any previous year during which such other person was a limited liability partnership cannot be recovered, in such case,
every person who was a partner of the limited liability partnership at any time during the relevant previous year, shall be
jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any
gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the limited liability partnership.]
110[Explanation.—For the purposes of this section, the expression “tax due” includes penalty, interest or any other sum
payable under the Act.]
109 Ins. by the Finance (No. 2) Act, 2009 (33 of 2009), s 59 (w.e.f. 1-4-2010). See Circular No. 5 of 2010, June 3, 2010,
324 ITR (St.) 293.
110 Ins. by the Finance Act, 2013 (17 of 2013), s 44 (w.e.f. 1-6-2013). See Memorandum explaining the provisions in
Finance Bill, 2013; 351 ITR (St.) 102.
End of Document
S. 168. Executors
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > E.—
Executors
E.—Executors
S. 168. Executors
(1) Subject as hereinafter provided, the income of the estate of a deceased person shall be chargeable to tax in the
hands of the executor,—
(a) if there is only one executor, then, as if the executor were an individual; or
(b) if there are more executors than one, then, as if the executors were an association of persons,
and for the purposes of this Act, the executor shall be deemed to be resident or non-resident according
as the deceased person was a resident or non-resident during the previous year in which his death took
place.
(2) The assessment of an executor under this section shall be made separately from any assessment that may be
made on him in respect of his own income.
(3) Separate assessments shall be made under this section on the total income of each completed previous year or
part thereof as is included in the period from the date of the death to the date of complete distribution to the
beneficiaries of the estate according to their several interests.
(4) In computing the total income of any previous year under this section, any income of the estate of that previous
year distributed to, or applied to the benefit of, any specific legatee of the estate during that previous year shall be
excluded; but the income so excluded shall be included in the total income of the previous year of such specific
legatee.
Explanation.—In this section, “executor” includes an administrator or other person administering the estate of a deceased
person.
Page 2 of 6
S. 168. Executors
1. Section 168 : Income of Estate of Deceased Person—Executor Carrying on Business.—This section applies
to executors as well as to administrators or other person administering the estate of a deceased person
(explanation),111 but not to administrators pendente lite;112 it is also inapplicable to the income of estates of persons
who have died intestate.113 There was no express provision in the 1922 Act corresponding to this section. But the
income of the estate was held liable to tax, under the general charging provisions of that Act, in the hands of the
executors or administrators in whom the estate vested.
Under this section, a single assessment is to be made in respect of the income of the entire estate of the deceased,
even if he has made separate wills appointing different executors in respect of different properties.114 An assessment
made jointly on the executors and other persons who cannot claim to be legal representatives was held by the
Calcutta High Court to be invalid.115 If an application for probate was rejected on technical grounds, the will executed
does not cease; the assessment must be made under s 168 .116
Section 159 is meant to enable the revenue to make an assessment on the legal representative in respect of the
income which accrued to or was received by the deceased. Section 168 enjoins an assessment on the legal
representative in respect of the income which accrues to him after the death, the estate being vested in him.117 This
section is mandatory.118
Where the admission of a minor to the benefits of a partnership was held to be independent of the contribution of
capital in the firm received by the minor under the will, the share of profits of the firm received by the minor could not
be taxed under this section in the hands of the executor.119
If the executors make capital gains, they are entitled to set off against such gains the capital loss which the deceased
had incurred in the same accounting year; the fact that the deceased was assessed as an individual and the executors
are assessed as an association of person is immaterial.120
The executor will continue to be assessed until the estate is distributed among the beneficiaries.121 If the estate is not
fully administered the legal heir cannot be charged to tax.122
After the estate is fully administered and the executors act as trustees for the beneficiaries, they may be assessed as
trustees under s 161, but not till then. However, they may, in some cases, cease to be executors and become trustees
even while some debts remain undischarged.123 [See ss 160-161, under ‘Executors and trustees’.]
Where a trader dies, his executors may carry on the business for some time in the course of winding-up the estate,
and in that even they would be assessable under s 28 in respect of the profits made by them in carrying on such
business.124 On the other hand, the executors may not continue the business but may merely realise the estate to the
best advantage, in which event the realisations may not be assessable as income in their hands125 on general
principles underlying s 28 . On the same general principles, royalties received by the executors of a writer of books or
director of films, under contracts for professional services rendered by the deceased in his lifetime, are not assessable
in the hands of the executors if they are received in a year subsequent to the year of death.126 But the realisations in
the former case and the royalties in the latter may now be chargeable under ss 176(3A) and 176(4) respectively. Even
where the business is not carried on by the executors, if any income is earned by the capital employed in the business
Page 3 of 6
S. 168. Executors
it would be assessable as their income. Thus, where after the death of a money-lender, the administrator collected the
interest which fell due after the death, the administrator was held chargeable in respect of such interest though he had
not at any time carried on the business.127 [See further under s 28, ‘Business carried on in course of administration, or
winding-up or liquidating a concern’.]
Fees earned by a professional person which are collected after his death by his executor are part of the estate and not
‘the income of the estate’ within this section. Therefore, such fees cannot be taxed in the hands of the executor under
this section, but he may be separately taxed in respect of such fees as the ‘recipient’ thereof within s 176(4) .128
The executor who is assessed under this section has the right of retention and reimbursement in respect of tax paid or
payable by him under this Act (s 169 read with s 162 ).
2. Costs, Expenses and Payments to Beneficiaries.—Where executors apply a portion of the income received by
them from the estate, in a particular way pursuant to the directions of the testator or other legal obligation, it is merely
a case of application of income and would not entitle the executors to claim any deduction in respect of the income so
applied. Thus payment of the addya sradh expenses, costs of probate, death duties and other debts due to the
state,129 or periodic payment to beneficiaries (other than specific legatees130) out of the income of the estate131 in
compliance with the obligatory directions of the testator, cannot be excluded in computing the executors’ chargeable
income from the estate. [See further s 4, under ‘Application of income and its diversion by overriding title’.
3. Sub-section (2): Separate Assessments.—The assessment of an executor under this section should be made
separately from his personal assessment, even if the executor is the sole beneficiary and has applied a part of the
estate to his benefit.132
4. Sub-section (3): Assessments during Execution of Estate.—This sub-section contemplates a single

assessment on the executor for each accounting year or part thereof and not separate assessments according to the
several interests of the beneficiaries.133
5. Sub-section (4): Specific and Residuary Legacies.—Under the general law, when the executor gives his assent
to a specific legacy, the title of the legatee relates back to the date of the death and the income arising after the death
and before the assent belongs to the legatee and is taxable as his income and not as the income of the executor.134
Thus, where shares are specifically bequeathed, the dividends received by the executors after the death and prior to
their delayed assent to the legacy, form part of the legatees’ total income for the years in which the dividends were
distributed.135 Similarly, where the life interest in the property mentioned in the codicil devolved on the legatee and the
executors assented to the title of the legatee, the notional income from the property was assessable in the hands of
the legatee.136 However, this principle of general law must now be read subject to the express provision of sub-s (4)
that it is only the income distributed to, or applied for the benefit of, any specific legatee during the previous year,
which should be excluded from the executor’s total income, implying that if the income is not so distributed or applied
in the previous year, it would be taxable as part of the executor’s total income.
On the other hand, though there may be a residuary legatee, the income from the residue is the income of the
executor and taxable in his hands so long as the estate has not been completely administered; it is only after the
estate is fully administered and the net residue is ascertained that the residuary legatee gets a title to the residue and
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S. 168. Executors
the income therefrom can be said to accrue to him and can be taxed in his hands.137 This principle would apply
irrespective of whether the residue is settled in trust for a life-tenant or is bequeathed absolutely,138 and it would apply
even if a part of the income of the estate has been actually paid on account to the residuary legatee pending the
administration of the estate.139 However, the administration may be regarded as completed, the executor’s assent to
the residuary legacy as valid and the residuary legatee’s title as established, although some liabilities due by the
estate may remain undischarged.140
If the executor is also the sole beneficiary, it does not necessarily follow that he receives the income in the latter
capacity.141
[See further ss 160-161, under ‘Executors and trustees’.]
111 CIT v Navnit Lal 125 ITR 67, on appeal Navnit Lal v CIT 193 ITR 16 (SC) ; CIT v Usha 127 ITR 850 ; Jagadamba v
CIT 143 ITR 527 .
112 Mahamaya v CIT 126 ITR 748 .
113 CIT v Manonmani 245 ITR 48 (FB), approving CIT v Dhanalakshmi 215 ITR 662 .
114 Vijayakunverba v CIT 136 ITR 18 .
115 Thapar v CIT 116 ITR 797 . But see CIT v Sumantbhai 128 ITR 142, 171 .
116 CIT v A.M.L Price 295 ITR 45 .
117 Dubash v CIT 19 ITR 182, 190 (SC) ; James Anderson v CIT 39 ITR 123, 126 (SC) ; Chockalingam v CIT 40 ITR
429 ; Asitkumar v CagIT 122 ITR 177 ; Re, Mullick 8 ITR 236; Mullick v CIT 6 ITR 206 (PC) ; CIT v James Anderson
51 ITR 345 (SC) .
118 CIT v Usha 127 ITR 850 .
119 CIT v Savudappan 244 ITR 620 .
120 CIT v Seth 133 ITR 192 .
121 Navnit Lal v CIT 193 ITR 16 (SC) ; Patel v CIT 239 ITR 738 (SC) . See also p. 1946, n. 89.
122 CIT v Mrunalinidevi Puar of Dhar 305 ITR 263 .

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S. 168. Executors
123 See ss 160-61, under ‘Executors and trustees’, p. 1946, n. 88. The words ‘complete distribution’ in sub-s. (3) does not
militate against the proposition set out in the text.
124 Dubash v CIT 19 ITR 182, 190 (SC) ; Philip v IR 17 TC 696 ; Newbarns Hay 22 TC 461 (CA).
125 Marshall v Joly 20 TC 256 ; Cohan v IR 12 TC 602 (CA) .
126 Carson v Cheyney 38 TC 240 (HL), 38 ITR 115 ; Purchase v Stainer 32 TC 367 (HL) . Cf. CIT v Amarchand 36 ITR
124, affirmed on another ground in 48 ITR (SC) 59; CIT v Miller 57 ITR 478 . See further s 28, under ‘Business
should have been “carried on” in accounting year’.
127 Bennett v Ogston 15 TC 374 .
128 CIT v Viswanatha 121 ITR 270 .
129 Mullick v CIT 61 206 (PC); Inverclyde v Millar 9 TC 14 (HL) ; Ramaswamy v CIT 11 ITR 597 (held not deductible as
business expenses).
130 See under sub-s. (4).
131 Re, Mullick 8 ITR 236; Raghavalu v CIT 18 ITR 787 .
132 CIT v Bakshi 133 ITR 650, 655 .
133 Rejkuerba v CIT 135 ITR 393 .
134 IR v Hawley 13 TC 327 .
135 Ibid.
136 Estate of Ambalal v CIT 245 ITR 445 .
137 Administrator-General v CIT 56 ITR 34, 39 (SC) ; Rex v Special Comrs 7 TC 646 (HL) ; Corbett v IR 21 TC 449 (CA)
; Asitkumar v CagIT 22 ITR 177 . See also ss 160-61, under ‘Executors and trustees’, n 89.
138 Corbett v IR 21 TC 449, 458, 460 (CA).
139 Corbett v IR 21 TC 449 (CA) ; Marie v IR 11 TC 226 ; CIT v Ghosh 159 ITR 124 .
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S. 168. Executors
140 See ss 160-61, under ‘Executors and trustees’, p. 1946, n 88.
141 IR v Wahl 17 TC 744 (HL) ; CIT v Bakshi 133 ITR 650, 655 .
End of Document
S. 169. Right of executor to recover tax paid
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > E.—
Executors
E.—Executors
S. 169. Right of executor to recover tax paid
The provisions of section 162 shall, so far as may be, apply in the case of an executor in respect of tax paid or payable by
him as they apply in the case of a representative assessee.
End of Document
S. 170. Succession to business otherwise than on death
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > F.—
Succession to business or profession
F.—Succession to business or profession
(1) Where a person carrying on any business or profession (such person hereinafter in this section being referred to
as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the
successor) who continues to carry on that business or profession,—
(a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took
place up to the date of succession;
(b) the successor shall be assessed in respect of the income of the previous year after the date of succession.
(2) Notwithstanding anything contained in sub-section (1), when the predecessor cannot be found, the assessment of
the income of the previous year in which the succession took place up to the date of succession and of the
previous year preceding that year shall be made on the successor in like manner and to the same extent as it
would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply
accordingly.
(3) When any sum payable under this section in respect of the income of such business or profession for the previous
year in which the succession took place up to the date of succession or for the previous year preceding that year,
assessed on the predecessor, cannot be recovered from him, the142[Assessing Officer] shall record a finding to
that effect and the sum payable by the predecessor shall thereafter be payable by and recoverable from the
successor, and the successor shall be entitled to recover from the predecessor any sum so paid.
(4) Where any business or profession carried on by a Hindu undivided family is succeeded to, and simultaneously
with the succession or after the succession there has been a partition of the joint family property between the
members or groups of members, the tax due in respect of the income of the business or profession succeeded to,
up to the date of succession, shall be assessed and recovered in the manner provided in section 171, but without
prejudice to the provisions of this section.
Explanation.—For the purposes of this section, “income” includes any gain accruing from the transfer, in any manner
whatsoever, of the business or profession as a result of the succession.
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1. Section 170 [ Sections 25A(2) and 26(2) of 1922 Act], Sub-section(1): Succession to Business otherwise
than on Death.—This section applies to cases of succession to a business, profession or vocation [ s 2(36) ] and not
of succession to any other income-producing source. The corresponding provision in s 26(2) of the 1922 Act was held
to apply to cases of succession inter vivos as well as succession on death.143 But, as the marginal note indicates, this
section does not apply to succession on death. There is nothing in the section itself to indicate that cases of
succession on death fall outside its ambit; but the section should be construed as excluding cases of succession on
death, because such cases fall within the more specific provisions of ss 159 and 168. The legal representative is
assessable under s 159 in respect of the income up to the date of death, and the person administering the estate is
assessable under s 168 in respect of the income from the date of death. In the 1922 Act there was no provision
corresponding to s 168 .
The effect of this section is that the predecessor in business is assessable in respect of the income of the year of
succession up to the date of succession, while the successor is assessable in respect of the income of that year after
the date of succession.144 Thus, the income of the year in which the succession occurs is to be apportioned between
the predecessor and the successor according to their respective shares. The predecessor and the successor would
each be liable to tax at the rate applicable to each.145 The income of the predecessor and the successor must be
computed separately, and each must be granted the deductions and allowances appropriate to his case.146 The
assessment on each must be separate and distinct.147
In Sassoon & Co. Ltd. v CIT 148 where on the transfer of a managing agency in the course of the accounting year no
share in the managing agency commission for the broken period accrued to the assignor, the Supreme Court held that
s 26(2) of the 1922 Act did not apply and the assignor was not chargeable in respect of any part of the managing
agency commission for the year of succession. The old s 26(2) referred to the ‘actual share’ of the predecessor and of
the successor in the income of the year of succession. Despite the change in the statutory wording, the decision of the
Supreme Court would apply under this section, because even this section makes the predecessor assessable only in
respect of the income accruing to or received by him up to the date of succession. The section would apply even if the
succession takes place at the very end of an accounting year.149
The fact that the predecessor has been wrongly assessed in respect of profits which are chargeable in the hands of
the successor under this section does not entitle the successor to immunity from tax in respect of such profits.150
2. Sub-sections (2) and (3): Where Predecessor cannot be Found or Tax cannot be Recovered from him.—
These sub-sections lay down two exceptions to the general principle that the successor is not liable to tax in respect of
the income of the period prior to the date of succession. If the predecessor cannot be found the assessment can be
made on the successor,151 and if the tax assessed on the predecessor cannot be recovered from him,152 recovery of
the tax can be made from the successor, in respect of the income of the year in which the succession took place up to
the date of succession and of the year preceding that year. It is only in these two cases and only in respect of the
income of the year of succession and the preceding year, that the successor can be held liable for the tax which is
primarily chargeable on the predecessor. Further, the successor is assessable only in respect of the income of the
predecessor from the business in which the succession has taken place and any gain accruing from the transfer of the
business, e.g. capital gains arising to the predecessor upon sale of the business assets (Explanation). Under the 1922
Act, the successor was not liable to be assessed in respect of such capital gains made by the predecessor.153 The
amount of sales tax refund received by the assessee-firm cannot be said to be gain accruing from the transfer and
hence it is not liable to be taxed by virtue of s 170(1)(b) read with the Explanation.154 In respect of the tax for which the
predecessor is primarily liable, even reassessment proceedings under s 147 may be taken against the successor
within the limits laid down by sub-s (2).155 In a Calcutta case where reassessment proceedings were taken against the
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successor after 1939 but they related to income which should have been charged in an assessment year prior to 1939,
s 26(2) of the 1922 Act as it stood before its amendment in 1939 was held to govern the liability of the successor in
those proceedings.156 The correctness of this decision has been doubted by the Bombay High Court.157 Any tax paid
by the successor in discharge of his vicarious liability under sub-s (3) may be recovered by him from his predecessor
in interest.
Sub-section (2) authorises an assessment on the successor in respect of the income of the predecessor only when the
predecessor ‘cannot be found’. An assessment cannot be made on the successor under that sub-section when the
predecessor is alive and his whereabouts are known or can be ascertained.158 It would be incorrect to say that a firm
which has been dissolved ‘cannot be found’ when its partners are alive and their whereabouts are known.159 But a
company which has ceased to exist and is struck off the register of companies is one which ‘cannot be found’.160
Unlike the old s 26(2), sub-s (3) requires the AO to record a finding that the tax assessed on the predecessor cannot
be recovered from him, before seeking to recover such tax from the successor.161 Where the old s 26(2) referred to
‘the tax’, sub-s (3) refers to ‘any sum’. However, having regard to the collocation of the words ‘any sum payable under
this section in respect of the income...assessed on the predecessor’, it seems that only tax and not penalty, fine or
interest levied on the predecessor would be payable by the successor.
The successor against whom an order of assessment or recovery is made under sub-ss (2) or (3) respectively, has a
right of appeal (s 246 ).
[See also Expln. 1 to s 43(6) .]
3. Carry-forward of Predecessor’s Losses and Unabsorbed Depreciation.—The successor cannot claim to carry
forward and set off the losses incurred by his predecessor.162 He has no right to carry forward the unabsorbed
depreciation allowance of the years prior to his succession to the business.163 Nor can the predecessor carry forward
his loss, because the right of carry-forward is conditional upon the continuance (by the assessee who incurred the
loss) of the business in which the loss was incurred [ s 72(1) ]. Section 78 expressly deals with the question of carry-
forward and set-off of losses in cases of change in the constitution of a firm or succession to a business (See under s
78 ). The exceptional case where that section allows the successor to carry forward the losses incurred by his
predecessor is where the succession is by inheritance. The second exception to the above principle is contained in s
72A . Where one company merges into another, s 72A permits, on fulfilment of certain conditions, the latter company
to set off and carry forward the unabsorbed loss and depreciation allowance of the former.
4. Sub-section (4): Succession to and Partition of Joint Family Business.—Where a partition of joint family
property takes place simultaneously with or after succession to the joint family business, the provisions of this section
and of s 171 which deals with partition, equally apply. [See under s 171 .] Cases involving both partition and
succession are noted under ‘Succession’.
There is no inconsistency or conflict between any of the provisions of ss 170, 171 and 176 (discontinuance). [See s
171, under ‘Discontinuance of or succession to family business’.]
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Succession
It will be convenient to note here, in one place, the cases dealing with succession including succession on death,
although, as stated above, this section should be construed as being inapplicable to cases of succession on death.164
In the words of Madhavan Nair, Officiating CJ, in Jupudi Kesava Rao v CIT ,165 ‘the word “succession” connotes a
transfer of ownership and the person who succeeds another must have by such succession become the owner of the
business which his predecessor was carrying on and which he after the succession carries on in ‘such capacity’, that
is, the capacity as owner’. Succession may be by transfer inter vivos, or by inheritance or devolution on the death of
the owner,166 or by acquisition where the whole property and undertaking of the trader vests in the government.167 The
simplest case of succession is the transfer by one trader to another of the business along with the goodwill, i.e. the
right to that benefit which arises from connection and reputation.168 However, a transferee to whom the government
has transferred a sick undertaking after compulsory acquisition under s.pecial special enactment is not a successor
under this section.169
The person succeeding need not be a beneficial owner. As the Supreme Court laid down in Dubash’s Executors v CIT
,170 succession takes place where an executor succeeds to the estate of the testator and carries on the business in his
capacity as the representative of the estate, or where a trustee acquires and carries on business on behalf of
beneficiaries.
It is well established that where there is a change of ownership, e.g. where the business devolves on an heir171 or is
transferred to a purchaser, it is a case of succession and not discontinuance. Thus, in cases where:
(i) the heirs carry on in partnership, the proprietary business of the deceased which devolved on them,172
(ii) an individual owning a business transfers it to a company,173 or a partnership is converted into a limited
company,174
(iii) a company acquires the business of another company175 or a parent company absorbs its subsidiary
company,176 or a company goes into voluntary liquidation and the liquidators transfer the entire business and
undertaking of the company to another company which continues the business,177
(iv) an individual admits partners to a business or professional practice hitherto carried on solely by himself,178
(v) a partnership is dissolved and one partner or a new firm takes over and continues the business of the
partnership,179
(vi) a Hindu undivided family disrupts and the members or some of them continue the family business in
partnership,180 or the family business is allotted on partition to a member of the family who continues the
business,181 or where without effecting a complete partition the members form themselves into a limited
company and the company carries on one of the separate and distinct businesses of the family,182 or where
the business of a partnership between two kartas representing their joint families is taken over and continued
after partition of both the families by a partnership of the separated members of the two families,183
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There is no discontinuance of the business, generally speaking, but there is succession. However, it would not be a
case of succession where the business of a joint family devolves on a coparcener by survivorship under Hindu law
while the family remains joint.184 Simlarly, where assessee takes over the business of its erstwhile firm, the same will
not be regarded as succession by inheritance.185
5. Date of Succession.—As a general rule, succession takes place at the time when the property in the business
passes to the person succeeding.186 However, de facto succession may take place on an earlier date, although the
contract of sale may be executed and other legal formalities may be completed later on.187 In Dubash’s Executors v
CIT ,188 where executors carried on the business of the deceased for a certain period in accordance with the directions
contained in the will and thereafter sold the business, it was held that succession to the deceased took place on the
date of the death.
6. Requisites of Succession.—The requisites of succession, as the Supreme Court laid down in CIT v Chambers
,189 are as follows:
(i) there should be a change of ownership.
(ii) the integrity of the business should remain—the whole business should devolve upon the successor; or
(iii) the identity and continuity of the business should be substantially preserved—the same business should be
carried on by the person succeeding.
(a) Change of Ownership.—There should be a change of ownership, e.g. by a transfer inter vivos or by inheritance.
Cases of change of ownership, of transfer and inheritance, have been dealt with under ‘Succession’. In a case where
there is no transfer of ownership, eg where a receiver is appointed, there is no succession.190 If there is only an
agreement to transfer, it would not be regarded as involving a succession.191 A sham or fictitious transfer may be
disregarded and the transferee may not be recognised as the person succeeding within the meaning of the Act.192
The old s 26(2) contained the words ‘a person carrying on any business, profession or vocation has been succeeded
in such capacity by another person’. The expression ‘in such capacity’ apparently meant ‘in the capacity of a person
carrying on the business as the owner’.193 According to Patanjali Sastri J., Patanjali Sastri J.,194 the expression meant
‘nothing more than the capacity of a person who carries on the business as the predecessor was carrying it on, that is,
with a liability to be taxed on its profits and gains’. This section does not use the words ‘in such capacity’, but instead
refers to the successor ‘who continues to carry on that business’. The change of wording has made no material
difference. That the successor should carry on the business is implicit and necessarily involved in the concept of
succession. See under ‘Identity and continuity of business—Same business should be carried on by succession’.
(b) Integrity of Business: Succession to Whole Business: Separate Businesses.—Succession necessarily

implies devolution of the business as a whole: there can be no succession unless the business retains its integrity
despite the change of ownership.195 Page CJ said in CIT v NN Firm 196 ‘In order that a person should be held to have
‘succeeded’ to another person in carrying on a business, profession or vocation, it is necessary that the person
succeeding should have succeeded his predecessor in carrying on the business as a whole. Where a business is split
up and thereafter another person carries on part of the business… he does not succeed his predecessor in carrying on
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the business.’
However, the fact that the person succeeded retains some of the assets or liabilities of the business,197 or that the
person succeeding does not take over the vendor’s selling organisation and book debts198 or one of the branches of
the business,199 or that new capital is brought in by the person succeeding,200 would not necessarily destroy or impair
the integrity or identity of the business so as to negative the idea of a succession. Ramaswami, J. Ramaswami, J.
said:
…it is not essential in every case that the successor firm should have mathematically the same extent of
business as the predecessor firm or that it should have taken over the same extent of trade or the same line or
set of customers, as belonging to the predecessor firm, nor does it mean that the successor firm should have
taken over all the assets and liabilities of the predecessor firm. In my opinion it is sufficient if there is substantial
identity and similarity in the nature and extent of the activities carried on between the two firms, and if the major
portion of the liabilities and assets have been taken over by the new firm from the old partnership.201
In determining whether there has been succession to the whole business, it is necessary to consider all the concerns
or shops or branches belonging to the original owner. If the businesses carried on by the same owner constitute
separate and distinct businesses, the person acquiring one of them succeeds to the business within the meaning of
this section, for he takes over the whole separate business.202 If on the other hand the original owner was carrying on
in different places a number of branches of one and the same business, the person acquiring one of the branches
would not succeed to the business, for he does not take over the whole of the single business.203 The case law on the
question whether various concerns constitute one and the same business or separate and distinct businesses has
been discussed under s 72, under ‘Continuance of business in which loss was incurred’.
(c) Identity and Continuity of Business: Same Business should be Carried on by Successor.— Succession
occurs only where the same business is carried on by a different person. There is no succession where a business
terminates and a different, though similar, business is carried on by another person or by a newly constituted firm.204
Succession presupposes the preservation in substance of the identity and continuity of the business. If goodwill is sold
along with other assets, that would be an important factor in determining whether the case is one of succession.205
Illustration
A joint family and a firm were both independently doing the business of supplying coolies to the port Trust under
contracts for certain periods. When the port trust called for tenders for a five year contract, the family and the firm
agreed to make a joint tender, and to share the profits and loss in certain proportions. Their tender was accepted,
and they formed themselves into a new firm and supplied coolies under the contract with the port trust. No assets
or liabilities of the joint family or the old firm passed to the new firm. Held, the businesses of the family and the old
firm were discontinued and there was no ‘succession’ by the new firm.206
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Where the purchaser does not acquire the business but only some of the assets of the business, there would be no
succession,207 even if the purchaser employs the servants of the previous owner of the business and proceeds to
carry on a business similar to that of the previous owner on the same premises.208 If a person merely gives up an
agency and that is given to another, there would be no succession to the business;209 but if an agency business is sold
as a going concern, there would be continuity and identity and the purchaser would be regarded as the successor in
business.210
Where a parent company, which carried on a business in retail sales and used to buy its requirements from two
subsidiary manufacturing companies which sold their products wholesale exclusively to the parent company, acquired
the assets and goodwill of the subsidiary companies (which were wound-up) and carried on the manufacturing
operations, it was held that there was no succession, for the subsidiary companies’ business of selling wholesale their
products ceased and became completely merged in the business of the parent company.211 But where the works of
subsidiary companies were taken over by the parent company without any change in the manner of ultimate sale, the
department’s decision that there had been a succession was upheld.212 The fact that the successor to a business
makes changes in the set-up, organisation or operations of the business after the succession has been
accomplished,213 or discontinues one or two activities,214 or does not carry on the business on the same scale215 or in
the same trade name,216 or that after succession the business is, to a greater or lesser extent, merged in another
business which the successor was carrying on prior to the succession,217 will not necessarily negative a ‘succession’
within the meaning of the Act.
‘Where there is no continuity in carrying on the business and when one business has come to an end and after a time
another business is started, it may be with the same assets and under the same conditions and in the same premises
as the old business, the persons carrying on the new business do not ‘succeed’ those who had carried on the old
business…’.218 But this is not an invariable principle of universal application. The delay or gap is a question of degree,
and in some cases, it may only mean a cesser of profit-making operations and not a real cessation of the business at
all; the real test is whether the identity of the business has been maintained or not.219
Illustration
The building in which a company carried on the business of a waxworks exhibition was burnt down in March,
1925. The company sold the site in July, 1926, and a new company entered into possession, rebuilt the premises
and opened them to the public in April, 1928. It was held that the department could rightly arrive, as it did, at the
conclusion that the new company had succeeded to the business of the old company.220
The fact that upon the dissolution of a firm, a new firm comprising all or some of the partner of the dissolved firm
carries on a similar business on the same premises, would not mean that the new firm has succeeded to the dissolved
firm, if the continuity and identity of the business is not preserved.221
7. Change in Constitution of Firm Distinguished from Succession.— Sections 187 and 188 expressly deal with
change in the constitution of a firm, and succession to one firm by another firm, respectively. They provide that in order
to constitute a change in the constitution, at least one of the partners should continue in the firm. If all the old partners
Page 8 of 13
go out and a set of all new partners comes in, or if the partnership is dissolved and some of the partners take over and
carry on the same business, it would be a case of succession to the old firm by a new firm and not merely of a change
in the constitution of the firm, and separate assessments would have to be made under this section on the
predecessor firm and the successor firm. [See under ss 187 and 188.]
8. Discontinuance Distinguished from Succession.—Discontinuance and succession are mutually exclusive

concepts. Section 176 deals with the topic of discontinuance of business. [See under s 176 .]
9. Appeal.—An appeal lies under s 246(1)(e) against an order passed under sub-ss (2) or (3) of this section.
10. Reference to Court.—It is a question of law whether on the facts found there was a succession within the
meaning of the Act; the correct legal inference to be drawn from the facts found involves a question of law.222
11. Writ, Direction or Order.—The court will quash the proceeding initiated against a party under sub-s (3) if there is
no prima facie evidence of his being the successor.223
143 Dubash v CIT 19 ITR 182 (SC) ; Maharaja of Darbhanga v CIT 2 ITR 345 (PC) ; CIT v Ramaswamy 11 ITR 610 . Cf.
Abdul Rahim v ITO 59 ITR 273 .
144 CIT v Indian Overseas 182 ITR 439 .
145 CIT v Western India Turf Club 2 ITC 490 (PC) . Cf. Iyanar v CIT 78 ITR 775 .
146 Indian Iron v CIT 11 ITR 328, 337 (PC) .
147 CIT v Nachal 1 ITR 277 and Ram Rakhamal v CIT 5 ITR 137 have been superseded by statutory change.
148 26 ITR 27.
149 Ramniwas v Venkataraman 43 ITR 152 . If succession has taken place on the last day of relevant year of account,
income of the whole of that year would be assessable in hands of the predecessor.
150 Karuppiah v CIT 9 ITR 1 .

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151 CIT v Tecalemit 64 Taxman 149 .
152 RKV Motors v CIT 68 ITR 794 .
153 CIT v Express Newspapers 53 ITR 250 (SC) ; CIT v Chugandas 55 ITR 17, 27-28 (SC).
154 CIT v Saurashtra Packaging 259 ITR 520 .
155 CIT v Express Newspapers 40 ITR 38, on appeal 53 ITR 250 (SC). Cf. Maneklal v CIT 24 ITR 375 ; CIT v Nachal 1
ITR 277 ; Ram Rakhamal v CIT 5 ITR 137 ; Iyanar v CIT 78 ITR 775 .
156 Krishna Press v CIT 11 ITR 504 .
157 Maneklal v CIT 24 ITR 375, 385-86 .
158 CIT v National Cycle 9 ITR 502 ; Deo Sharma v ITO 84 ITR 633 .
159 Ibid.
160 CIT v Express Newspapers 40 ITR 38, 59, on appeal 53 ITR 250 (SC).
161 CIT v Ettumanoor 165 ITR 751 (successor need not be heard).
162 See s 78, under ‘Carry forward and set off of losses…on succession’.
163 See s 32(2), under ‘…Set off and carry forward of depreciation allowance’.
164 See under ‘Sub-section (1): Succession to business otherwise than on death’.
165 3 ITR 339, 343. The words ‘in such capacity’ occurred in s 26(2) of 1922 Act.
166 Dubash v CIT 19 ITR 182 (SC) ; Saroj v CIT 156 ITR 497 (SC) (succession by inheritance); Maharaja of Darbhanga
v CIT 2 ITR 345 (PC) (son succeeding as heir to his father); CIT v Ramaswamy 11 ITR 610 ; Re, Lachhman 23 ITR
250 (succession under an award).
167 Bramford v Evans 35 TC 145 .
168 Thomson v Le Page 8 TC 541, 548 .

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169 Pondicherry Textile v Union of India 239 ITR 457 ; CIT v National Textile 243 ITR 487 .
170 19 ITR 182, 186-87.
171 See n. 68 above.
172 CIT v Madhukant 132 ITR 159, affirmed in 247 ITR 805 (SC).
173 Bartlett v IR 7 TC 229 ; CIT v Naraindas 7 ITR 305 (firm transferring its business to company).
174 CIT v Figgies 24 ITR 405 (SC) ; Ryhope v Foyer 1 TC 343 ; Krishna Press v CIT 11 ITR 504 ; Motor Sales v CIT
230 ITR 44 ; CIT v Koder 233 ITR 620 .
175 Bell v National Prov Bank 5 TC 1 (CA) ; James v Morris 14 TC 413 ; Wild v Madame Tussaud ’ s 17 TC 127;
Malayalam v Clark 19 TC 314 ; Best v CIT 6 ITC 92 .
176 Briton v Barry 23 TC 414 (CA) : 9 ITR Suppl 122; IR v Spira 29 TC 187 . Cf. Laycock v Freeman 22 TC 288 (CA) : 7
ITR 237.
177 CIT v Sanjana 2 ITC 110 .
178 Hassan v CIT 16 ITR 19 ; Subbaraya v CIT 44 ITR 801 .
179 CIT v Pigot 135 ITR 620 (SC) ; United Coir v CIT 195 ITR 463 ; CIT v Mansookhlal 5 ITR 664 (FB) ; Sharma v CIT
57 ITR 372 ; Koteswara v CIT 46 ITR 882 ; Satyanarayan v ITO 46 ITR 920 ; Jittanram v CIT 23 ITR 288 ; Kaniram v
CIT 23 ITR 314 ; Karuppiah v CIT 9 ITR 1 ; CIT v Muthukaruppan 7 ITR 29 ; Michael v Carter 11 TC 565 ; CIT v
Karuppaswami 2 ITR 284 ; CIT v National Cycle 9 ITR 502 . See further s .187, under ‘Meaning of change in
constitution of firm’.
180 Meyyappa v CIT 11 ITR 247, approved in CIT v Polson 13 ITR 384 (PC) ; Kotha v CIT 12 ITR 97 (FB), overruling
Thontepu v CIT 5 ITR 132 ; Mettur v CIT 47 ITR 781 ; Re Jugalkishore 6 ITR 495; Ganeshada v CIT 16 ITR 12 ;
Bishandchand v CIT 22 ITR 520 ; Re, Bijadhar 23 ITR 343; Appavoo v CIT 41 ITR 636 . Cf. Shanmugavel v CIT 16
ITR 355 ; CIT v NN Firm 2 ITR 85 .
181 CIT v Saran Singh 14 ITR 152 ; Kalumal v CIT 3 ITC 341 .
182 Ram Rakhamal v CIT 5 ITR 137 .
183 Kshetra v CEPT 24 ITR 488 (SC) .
184 Jupudi v CIT 3 ITR 339, explained in Kotha v CIT 12 ITR 97 .

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185 Pramod Mittal v CIT 356 ITR 456 .
186 Ranchi Elec v CIT 16 ITR 134 . Cf. Bonner v Frood 18 TC 488 ; Waddington v O’ Callaghan 16 TC 187 .
187 Marshall v ITO 223 ITR 809 (SC) (‘effective date’ in case of amalgamation approved by the court); Angel v
Hollingworth 37 TC 714 ; Todd v Jones 15 TC 396, 411 .
188 19 ITR 182 (SC).
189 ITR 674, followed in Premji v ITO 118 ITR 216 ; Oriental Fire v CIT 244 ITR 631 .
190 IR v Thompson 20 TC 422 .
191 Bhagavndas v CIT 6 ITR 176 ; Oriental Fire v CIT 244 ITR 631 ; Ranchi Elec v CIT 16 ITR 134 .
192 Bhagavandas v CIT 6 ITR 176 .
193 The meaning of ‘in such capacity’ was considered in Maharaja of Darbhanga v CIT 2 ITR 345, 347 (PC), Jupudi v CIT
3 ITR 339, 343, Re, Lachhman 23 ITR 250, and Sind Rly v CIT 6 ITC 271 .
194 Dubash v CIT 19 ITR 182, 189 (SC) .
195 Nagjee v CIT 51 ITR 849 (SC) .
196 2 ITR 85, 87-88.
197 CIT v Chambers 55 ITR 674 (SC) ; Hassan v CIT 16 ITR 19 ; Kaniram v CIT 23 ITR 314 ; Krishna Press v CIT 11
ITR 504 ; CIT v Naraindas 7 ITR 305 ; Reynolds v Ogston 15 TC 501, 524 ; CIT v Basu 76 ITR 291 .
198 Malayalam v Clark 19 TC 314 .
199 Jittanram v CIT 23 ITR 288 .
200 Hassan v CIT 16 ITR 19 .
201 Kaniram v CIT 23 ITR 314, 322 ; Jittanram v CIT 23 ITR 288, 296 ; Ramdas v CIT 97 ITR 361 .
202 Best v CIT 6 ITC 92 ; Ram Rakhamal v CIT 5 ITR 137 (succession by limited company to one of separate business
of joint family which had not completely disrupted); Sind Rly v CIT 6 ITC 271 ; CIT v N.N. Firm 2 ITR 85, 87 .
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203 CIT v ALVRP Firm 8 ITR 531, 542 .
204 Industrial Dev & Inc. v CEPT 31 ITR 688 .
205 Ibid.
206 Kannappa Naicker v CIT 5 ITR 49 .
207 Reynold v Ogston 15 TC 501 (CA) ; Watson v Lothian 4 TC 441 ; Tolaram v CIT 5 ITR 680, distinguished in CIT v
Naraindas 7 ITR 305 .
208 Wilson v Chibbett 14 TC 407 ; Fullwood v IR 9 TC 101 ; Laycock v Freedom 22 TC 288 (CA) . Cf. Re, Motichand 14
ITR 534 and Kannappa v CIT 5 ITR 49, where old business was held to be discontinued and similar business started
on same premises was held to be a different business. Cf also Mills from Emelie v IR 12 TC 73 .
209 Tolaram v CIT 5 ITR 680 .
210 CIT v Naraindas 7 ITR 305 .
211 Laycock v Freeman 22 TC 288 (CA) : 7 ITR 237.
212 Briton v Barry 23 TC 414 (CA) ; IR v Spirax 29 TC 187 .
213 Laycock v Freeman 22 TC 288, 297-98 (CA) : 7 ITR 237.
214 Sassoon v CIT 86 ITR 757 (SC) .
215 CIT v Mansookhlal 5 ITR 664 ; James v Morris 14 TC 413, 421 ; Re, Gregory 5 ITR 12, 33.
216 CIT v Chambers 55 ITR 674 (SC) .
217 Briton v Barry 23 TC 414, 429 (CA) .
218 CIT v N.N. Firm 2 ITR 85, 88, per Page CJ.
219 CIT v Mansookhlal 5 ITR 664 ; Reynold v Ogston 15 TC 501, 528 ; CIT v Naraindas 7 ITR 305 ; CIT v Madhukant
132 ITR 159, affirmed in 247 ITR 805 (SC). See further s 28, under ‘Business may be passive or dormant: Periods of
lull and inactivity’.
220 Wild v Madame Tussaud’s Ltd., 17 TC 27 .

Page 13 of 13
221 Hariram v CIT 12 ITR 367 . Cf Re, Motichand 14 ITR 534, where however the question was whether business of old
firm had been discontinued.
222 CIT v Chambers 55 ITR 674 (SC) ; CIT v Mansookhlal 5 ITR 664 (FB) ; Industrial Dev & Inv v CEPT 31 ITR 688 ;
Kaniram v CIT 23 ITR 314, 324-25 ; CIT v ALVRP Firm 8 ITR 531 ; Hariram v CIT 12 ITR 367 ; CIT v N.N. Firm 2
ITR 85 ; Naraindas v CIT 5 ITR 116 ; Bell v National Prov Bank 5 TC 1 (CA) ; Thomson v Le Page 8 TC 541, 550 ;
Kirk v Dunn 8 TC 663 .
223 Premji v ITO 118 ITR 216 . See further s 293, under ‘Writs, directions and orders under Constitution’.
End of Document
S. 171 Assessment after partition of a Hindu undivided family
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > G.—
Partition
G.—Partition
(1) A Hindu family hitherto assessed as undivided shall be deemed for the purposes of this Act to continue to be a
Hindu undivided family, except where and in so far as a finding of partition has been given under this section in
respect of the Hindu undivided family.
(2) Where, at the time of making an assessment under section 143 or section 144, it is claimed by or on behalf of any
member of a Hindu family assessed as undivided that a partition, whether total or partial, has taken place among
the members of such family, the224[Assessing Officer] shall make an inquiry thereinto after giving notice of the
inquiry to all the members of the family.
(3) On the completion of the inquiry, the224 [Assessing Officer] shall record a finding as to whether there has been a
total or partial partition of the joint family property, and, if there has been such a partition, the date on which it has
taken place.
(4) Where a finding of total or partial partition has been recorded by the224 [Assessing Officer] under this section, and
the partition took place during the previous year,—
(a) the total income of the joint family in respect of the period up to the date of partition shall be assessed as if no
partition had taken place; and
(b) each member or group of members shall, in addition to any tax for which he or it may be separately liable and
notwithstanding anything contained in clause (2) of section 10, be jointly and severally liable for the tax on the
income so assessed.
(5) Where a finding of total or partial partition has been recorded by the224 [Assessing Officer] under this section, and
the partition took place after the expiry of the previous year, the total income of the previous year of the joint
family shall be assessed as if no partition had taken place; and the provisions of clause (b) of sub-section (4)
shall, so far as may be, apply to the case.
(6) Notwithstanding anything contained in this section, if the224 [Assessing Officer] finds after completion of the
assessment of a Hindu undivided family that the family has already effected a partition, whether total or partial,
the225[Assessing Officer] shall proceed to recover the tax from every person who was a member of the family
before the partition, and every such person shall be jointly and severally liable for the tax on the income so
assessed.
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(7) For the purposes of this section, the several liability of any member or group of members thereunder shall be
computed according to the portion of the joint family property allotted to him or it at the partition, whether total or
partial.
(8) The provisions of this section shall, so far as may be, apply in relation to the levy and collection of any penalty,
interest, fine or other sum in respect of any period up to the date of the partition, whether total or partial, of a
Hindu undivided family as they apply in relation to the levy and collection of tax in respect of any such period.
(9) 226[Notwithstanding anything contained in the foregoing provisions of this section, where a partial partition has
taken place after the 31st day of December, 1978, among the members of a Hindu undivided family hitherto
assessed as undivided,—
(a) no claim that such partial partition has taken place shall be inquired into under sub-section (2) and no finding
shall be recorded under sub-section (3) that such partial partition had taken place and any finding recorded
under sub-section (3) to that effect whether before or after the 18th day of June, 1980, being the date of
introduction of the Finance (No. 2) Bill, 1980, shall be null and void;
(b) such family shall continue to be liable to be assessed under this Act as if no such partial partition had taken
place;
(c) each member or group of members of such family immediately before such partial partition and the family shall
be jointly and severally liable for any tax, penalty, interest, fine or other sum payable under this Act by the
family in respect of any period, whether before or after such partial partition;
(d) the several liability of any member or group of members aforesaid shall be computed according to the portion
of the joint family property allotted to him or it at such partial partition,
and the provisions of this Act shall apply accordingly.]
Explanation.—In this section,—
(a) “partition” means—
“partition” means—
(i) where the property admits of a physical division, a physical division of the property, but a physical
division of the income without a physical division of the property producing the income shall not be
deemed to be a partition; or
(ii) where the property does not admit of a physical division, then such division as the property admits of,
but a mere severance of status shall not be deemed to be a partition;
(b) “partial partition” means a partition which is partial as regards the persons constituting the Hindu
undivided family, or the properties belonging to the Hindu undivided family, or both.
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“partial partition” means a partition which is partial as regards the persons constituting the
Hindu undivided family, or the properties belonging to the Hindu undivided family, or both.
1. Section 171 [ Section 25A of 1922 Act]: Scope and Scheme of Section.—This section is a machinery section
and not a charging section.227 The corresponding provision in s 25A of the 1922 Act was enacted to meet the difficulty
of levying and collecting the tax in cases where a Hindu undivided family had received income in the year of account
but was no longer in existence as such at the time of assessment.228 The difficulty was more acute by reason of the
provision contained in the old s 14(1) [present s 10(2) ] which exempted from tax any sum received by an assessee as
a member of Hindu undivided family. Whereas the old s 25A applied only to cases where there was a total partial
partition of the joint family, this section applies also to cases of partial partition effected before January 1, 19791st
January, 1979, i.e. partial either as regards the persons constituting the joint family or as regards the properties
belonging to the joint family or both. The section provides that the total income of the joint family in respect of the
period up to the date of partition should be assessed as if no partition had taken place and the members should be
held jointly and severally liable for the tax assessed on the family, the several liability of any member or group of
members being computed according to the portion of the joint family property allotted to him or it, at the partition.
This section is constitutional.229 Its scheme has been examined by the Supreme Court in UOI v Valliappan ,230
Govinddas v ITO 231 and Kalloomal Prasad v CIT 232 and by the Andhra Pradesh High Court in Karri Ramakrishna
Reddy v TRO .233 The provisions of the corresponding section of the 1922 Act were analysed by the Privy Council in
Sundar Singh Majithia v CIT ,234 by the Supreme Court in Kalwa Devadattam v Union of India ,235 ITO v Thimmayya
236 and Udayan Chinubhai v CIT ,237 and by various High Courts in the undermentioned cases.238
The Madras,239 Gujarat,240 Punjab and Haryana,241 and Karnataka242 High Courts have held that there cannot be a
partition of joint family property where the family has only one male member, the other members being females.
2. Joint Family and Joint Family Property.—For the meaning of the expression ‘Hindu undivided family’, and
assessment on the Hindu undivided family as a unit and on individual member thereof, see under ss 2(31)(ii) and
10(2).
3. Sub-section (1): Disrupted Hindu Family Deemed to be Undivided—Partial Partition.—This section deals with
two distinct and different situations:
(i) the case where a Hindu undivided family undergoes total partition and ceases to exist as an undivided family,
and
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(ii) the case where a Hindu undivided family continues to exist as an undivided family, but only some property is
divided prior to 1979 by way of partial partition among the members or some member separates from the
undivided family.
Section 25A of the 1922 Act applied to the first case only243 and provided for a fiction of law by which a Hindu family
after total partition was deemed to continue to exist as an undivided family unless an order was passed under that
section. Sub-section (1) of this section reproduces that fiction and deems the family ‘to continue to be a Hindu
undivided family’ in the absence of a finding under this section to the contrary. But the words in the sub-section are not
adequate to deal with the second case where the family continues to exist as a Hindu undivided family in reality and
there is only a pre-1979 partial partition as regards some member or some family property or both. In such a case no
purpose would be served by invoking the fiction in sub-s (1) that the family is ‘deemed…to continue to be a Hindu
undivided family’, for in fact it would so continue. To deal with such a case what is needed are words to indicate that
the partial partition should be deemed not to have taken place—ie, the property or source of income should be
deemed to continue to belong to the Hindu undivided family or the member should be deemed not to have separated,
in the absence of a finding of partial partition under this section. However, in Kallomal Tapeswari Prasad v CIT 244 the
Supreme Court sought to effectuate such intention of the legislature by construing the words of sub-s (1) to mean that
the family is deemed to continue to be a Hindu undivided family in relation to the partitioned property or source in
income unless a finding of partial partition is given under this section. Sub-section (9) makes the section totally
inapplicable to partial partitions effected after
December 31, 1978. 31st December, 1978.
As regards cases of complete partition, the position is clear; once a Hindu undivided family is assessed as such, it
would continue to be so assessed even after it has disrupted and has ceased to exist unless a finding is given under
this section recording the total partition. But no finding of partition can be given unless there has been a physical
division of the property or where the property does not admit of a physical division, such division as the property
admits of and not a mere severance of status (Explanation). Therefore, where a joint family has come to an end in law,
if a physical division of the family property, though possible, has not been effected, and consequently, no finding is
given under this section, the family would be deemed, for the purposes of this Act, to continue to be a joint family and
would continue to be charged as a unit of assessment.245 A claim of partition was made on the basis of an alleged
family arrangement. However, in the lease deed, subsequent to the date of family arrangement, the family was
described as a Hindu Joint Family. On facts, the view taken by the Tribunal that the partition has not taken place could
not be interfered with particularly because the said lease deed did not even say a word about the family
arrangement.246
Even where there has been a total partition and a physical division of the family properties, if no claim of partition is
made by any of the members at the time of making the assessment or, though a claim is made, no finding is given
recording the partition, the family should be deemed, for the purposes of this Act, to continue to be a Hindu undivided
family.247 The underlying idea of s 171(1) is that unless an inquiry is undertaken and existence of total or partial
partition is found as a fact and recorded, in the eye of the income-tax law, the Hindu undivided family continues to be
assessable to tax notwithstanding the effect of the provisions of the Hindu Succession Act, 1956.248 But this section
which deems a Hindu undivided family to continue to exist cannot apply where, by reason of death, the former family is
reduced to a single individual.249
4. Sub-sections (2) and (3): Order Recording Partition.—The AO’s jurisdiction to make an order under this section
recording a partition depends upon the concurrence of the following conditions:
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(i) At the time of making an assessment under s 143 or s 144, a claim should be made by or on behalf of any
member of a Hindu family that a partition has taken place among the members.
(ii) The family should hitherto have been assessed as undivided.
(iii) The AO should make inquiry into the matter and he is further bound to give notice of the inquiry to all the
members of the family.
(iv) The AO should be satisfied that the joint family property has been partitioned among the various members or
groups of members by physical division or otherwise as provided in the Explanation.
Unlike the 1922 Act, this Act enjoins the AO to record the date on which the partition has taken place.
If in assessment proceedings, a claim is made by any member of the family that a partition has taken place, the AO is
bound to hold an inquiry and pass an order accepting or rejecting the claim for partition.250 If the joint family is
assessed without such an inquiry and an order under this section, the assessment should be set aside in appeal, with
a direction to the AO, in appropriate cases, to make a fresh assessment according to law.251
Once a total partition is effected and an order is passed under this section, a joint family constituted by some of the
members of the disrupted joint family would be a different assessable entity.252
5. Order Enures for all Subsequent Years.—An order under this section has to be passed only once, and all
subsequent assessments have to be in conformity with that order. The Supreme Court held in Udayan Chinubhai v
CIT 253 that an order under s 171 recording partition remains effective for, and should be followed by the AO in, the
relevant year for which the order is passed as well as all subsequent years; and no assessment or reassessment
proceedings can be taken against the family ignoring the order under s 171 on the ground that it was obtained by
misrepresentation or that it was otherwise erroneous or that it was non est.254
6. ‘At the Time of Making an Assessment’.—‘At the time of making an assessment under s 143 or s 144 ’255 means
in the course of the process of assessment under that section. The expression is not restricted to the time of making
the final order determining the tax payable.256 The plea of partition must be raised before the AO at the time of the
assessment proceeding; it cannot be raised for the first time on an appeal against the assessment.257 It is not
necessary that a partition should have been effected during the relevant accounting year. At the time of making an
assessment, a member of a family hitherto assessed as undivided may put forward a claim in respect of a partition
effected prior to,258 or after the close of,259 the relevant accounting year, and the AO would be bound to inquire into
such a partition and make an order in accordance with the provisions of this section. [See also s 187, under ‘At the
time of making an assessment’.]
7. ‘Family Hitherto Assessed as Undivided’.—This section has no application to the case of a Hindu family which
has never been assessed before as a joint family, i.e. as a unit of assessment.260 But a joint family which had been
assessed as such in the past would be ‘hitherto assessed as undivided’ though for some years thereafter it may not be
assessed at all. The section does not require the continuous assessment of the family without any break till the time a
Page 6 of 18
claim for partition is made.261 Once an order is made under this section recording a total partition, the family would
thereafter cease to answer the description of ‘a Hindu family hitherto assessed as undivided’, and therefore, this
section cannot be invoked again (apart from cases of reunion) in a subsequent year after an order has been made
under this section.262 Thus, the section exhausts itself in the first assessment after the claim of partition is made and
upheld. However, if the AO is not satisfied regarding the factum of the alleged partition and refuses to record a finding
of partition under this section, that would not preclude a member from repeating in a subsequent year his claim that
there has been a partition.263 The words “hitherto assessed as undivided” must not be given a literal meaning to mean
only a completed assessment. The word “assessed” in s 171(9) should be read as “as assessable”. Consequently, it is
not necessary that an actual assessment order should be passed before the date of partial partition. Section 171(9)
would apply even if the assessments were completed after the date of partial partition.264
8. Assessee Wrongly Assessed in Past as Joint Family or Property Wrongly Assessed as Joint Family
Property.—The doctrine of res judicata or estoppel does not apply to income-tax proceedings and therefore, it is open
to the assessee to contend that certain properties and the income therefrom, which were treated in past years as
belonging to the joint family, belong in fact to an individual member, and therefore, the income should be assessed in
the hands of the individual member.265
Where an assessee has been wrongly assessed in the past in the status of a Hindu undivided family, he is entitled to
claim in a subsequent year that he should be assessed as an individual, but in such a case an application under this
section for recording a ‘partition’ would be misconceived.266 The Allahabad High Court held in Baijnath v CIT 267 that
this section does not apply to a case where an assessee claims that he has never been a member of a joint family,
and therefore, there is no question of any partition, or that he has become the sole survivor of a Hindu undivided family
and the property which had once belonged to the joint family has become his exclusive property.
9. Physical Division of Family Properties: Validity of Partition.—Where a state law puts an end to the joint family
status and deems the property to be held by the members as tenants-in-common, this section would have no
application and the members should be assessed separately even if the property is not physical divided.268
Under Hindu law partition may be either notional269 or reflected in the physical division of the family properties. But in
order to secure a finding under this Act it is not enough that the joint family has come to an end; it is necessary to
prove a partition by metes and bounds, or a physical division of the joint family properties, wherever possible.270 There
is no ipso facto partition on the death of a coparcener, The fiction created by Explanation 1 to s 6 of the Hindu
Succession Act, 1956 has nothing to do with the actual disruption of the status of a family. It is only the quantity of
shares of certain heirs on the death of a coparcener. To claim a partition, there are additional requirements that must
be met under the Income Tax Act, 1961.271 The principle also applied under s 25A of the 1922 Act which required the
partition of family properties to be ‘in definite portions’. The explanation to this section puts the matter beyond the pale
of controversy.
A mere division in interest or a mere change of the coparcenary to a tenancy-in-common by a severance of the joint
status is not enough.1 According to the Dayabhaga law, unlike the Mitakshara law, the members of a joint family
always have definite and ascertained shares in the family property. This section is as applicable to Hindu families
under the Dayabhaga system as to those under the Mitakshara system. Partition of the family property is defined to
mean physical division and not mere division in interest, because division in interest always exists, even before
partition, in the case of families governed by the Dayabhaga law and this section would have no effect at all on
families under the Dayabhaga system unless it requires a physical division of the property into definite portions.2 Thus,
where the members of a joint family put an end to their joint status by an express declaration of their intention to
separate but the immovable properties belonging to the family are not divided by metes and bounds,3 or where there is
Page 7 of 18
merely a reference to arbitration with a view to procuring a partition of the family property,4 or where an arbitrator gives
his award which is to be followed later by a registered partition deed affecting immovable properties,5 or where only a
preliminary decree is passed in a partition suit appointing commissioners or receivers to effect an actual partition by
metes and bounds,6 the family property cannot be regarded as partitioned within the meaning of this section. But, as
the Supreme Court held in Udayan Chinubhai v CIT ,7 a physical division of the family properties in definite portions
among all the members is not necessary; it is enough if on the physical division, groups of members are allotted
different properties, and a group may then hold its property as a smaller joint family or as tenants-in-common.
However, the expression ‘partition’ must be construed with regard to the nature of the property concerned.8 A business
cannot be physically divided into parts in the same manner as a piece of land; division may be possible only in the
books of the business, i.e. by making appropriate entries in the books of account, and in such special cases, having
regard to the nature of the property, a partition may be recognised under this section even if there is not, and cannot
be, a physical division of the property.9 The explanation makes it clear that whereas in the case of property which
admits of a physical division, a physical division of merely the income is not enough, where the property does not
admit of a physical division, partition means such division as the property admits of, and in such a case even a
physical division of the income may be enough. For instance, a share in a firm in which the karta is a partner
representing the family may be effectively partitioned by dividing the income and making appropriate entries in the
books of account.10 If the shares of a company belong to a joint family, but stand in different lots in the individual name
of each of the members of the family, and if on partition of the family each member takes the shares standing in his
own name, needless to say, the shares are ‘partitioned’ within the meaning of this section.11
If the property has been physically divided in definite portions, the AO cannot refuse to recognise the partition merely
because the shares allotted to the various members are not in accordance with the parties’ legal rights12 or the
interests of minor coparceners are prejudiced by inequality in the division of property13 or a share is allotted to a
member who is not entitled to it14 or the mother and son took the amounts jointly amongst themselves15 or the interest
in a firm was allotted to groups consisting of members of the family16 or HUF divided itself into groupwise among
members17 or the assessee who impressed his individual property with the character of joint family property was not
given any share in the subsequent partition18 or the manner in which the property allotted to the minor would be
managed was not clear.19
Even in a case where the property is not divided by metes and bounds, if a separated member alienates his share in
such property, the joint family cannot be assessed on the income from the alienated share in the property, although an
order under this section may not have been passed.20
10. Total Partition means Complete Partition of Entire Family Property.—Total partition under this section means
completed partition of the entire family property, even of the properties which are not the source of any assessable
income.21 If some assets are divided while other substantial assets are left for division at a future date, it would be a
case of partial partition.22 But the Orissa High Court held that ‘where the entire joint family has, in fact, become
disrupted in status and where the properties of the family have been partitioned between the members thereof in
definite portions, the assessee would be entitled to an order under s 25A(1) [of the 1922 Act, recording total partition],
notwithstanding that some items of the family property which are comparatively small in proportion to the entire family
assets and which produce only a substantially small income in relation to the total income of the family properties, are
kept undivided for solid and substantial reasons whether of practicability, convenience or reasonable sentiment not
affecting the general bona fide intention of becoming completely separated units for all purpose’.23 In such a case
where assets producing some income are not physically divided for any reason although a physical division is
possible, it may be held to be a case of partial partition and not total partition.
Page 8 of 18
11. Property Divided among Members by Way of Partial Partition before 1979.—The following commentary
should read as confined to partial partitions effected up to 31 December 1978, since sub-s (9) makes the provision of
the section inapplicable to partial partition effected after that date.
Although an order under s 25A of the 1922 Act could be passed only upon total partition, by physical division wherever
possible, of the entire family property, it was held under that Act that income from properties which were actually
divided among the members by way of partial partition could not be taxed as the income of the family. This section
simplifies the position by providing for the making of an order recording a partial partition in cases where some of the
family properties are divided among the member. Even a part of an asset belonging to a joint family, e.g. cash or credit
balance in a firm, may be divided among the members by way of partial partition.24
There can be a partial partition as regards persons or as regards property or as regards both.25 A father can effect
partial partition even without the consent of the sons whether they are majors or minors.26 Such a partition would be
valid even if there is an unequal division among the co-sharers.27
Where a joint family has disrupted but only some properties have been partitioned by physical division and the other
not, it is only the income arising from the undivided properties that is assessable as the income of the joint family.28
Likewise, where the members of a joint family, while remaining joint, partition some of the properties among
themselves, this section would apply, and the income from such properties would be regarded as the income of the
individual members to whom the properties are allotted.29 The Supreme Court laid down in Charandas Haridas v CIT
30 that where a share in a firm in which the karta was a partner representing the family, is partitioned, the joint family
cannot thereafter be assessed in respect of the share of income from the firm. The Privy Council held in Sundar Singh
Majithia v CIT 31 that there was nothing in the old s 25A to prohibit the members of a Hindu undivided family, while
remaining joint, from entering into a partnership in respect of a business, being a portion of the joint property, which
they had partitioned among themselves; in such a case the income from the business would be assessable as the
income of the partnership and would not form part of the joint family income.32 The joint family ‘need not have the
same assets or the same income in each year and it can part with an item of its property to its individual members if it
takes the proper steps’.33 The joint family may settle its business or other property upon trust under which the
members of the family may be beneficiaries, and in that event the trust income may be assessed under s 161 in the
hands of the trustees.34 Similarly, if the members of a joint family, after the severance of the joint status, divide some
of the family properties among themselves while the physical partition of the entire family estate remains to be
completed, for example, if they divide the family businesses among themselves pending the final division of the
immovable properties and the businesses are carried on by the members separately for their own benefit, the income
from such businesses as from the date of the division would be the individual income of the members and cannot be
included in the total income of the family, whereas the income from the other properties which are not partitioned
would continue to remain the income of the family.35 In such a case the family must be treated and assessed as a joint
family till all the assets are finally partitioned and an order recording a total partition is made under this section.36 But in
view of the Supreme Court’s decision in Kalloomal Tapeswari Prasad v CIT ,37 in all the above cases a finding of
partial partition must be recorded by the AO if, needless to add, the partition took place before 1st January, 1979. [See
further s 184, under ‘Joint family business converted into partnership business’.]
12. Oral Partition: Evidence of Partition.—Since a partition does not involve any transfer, a partition of even
immovable properties of a joint Hindu family can be effected by an oral agreement irrespective of the value of the
property; and therefore, a memorandum recording the fact of a partition which has already taken place is admissible in
law, even if it is not registered under the Indian Registration Act.38
Page 9 of 18
The AO should be satisfied that the family property has been partitioned among the members within the meaning of
the Explanation. He is not bound to accept as correct the recitals in a deed of partition or partnership and may call
upon the executants to prove the facts recited therein; he may disbelieve the oral or documentary evidence produced
and hold that the alleged partition is a sham or that in any event there has been no partition within the meaning of the
Act.39 The burden of proving partition is on the assessee.40 The fact that the partition was effected with the open and
avowed object of securing benefit in tax would be immaterial in deciding the factum of partition or the assessee’s right
to an order under this section.41 The case for partition is not negatived by the members of the family living together.42
13. Assessment or Reassessment Proceedings after Disruption of Joint Family but for Pre-partition Period.—
If after a joint Hindu family has come to an end any portion of its income earned before partition is found to have
escaped assessment, a reassessment may be made on the family under s 147 read with this section.43 Such action
under s 147 may be taken against the family even after an order has already been made under this section in
assessment proceeding of another year, accepting the claim of partition.44 The Supreme Court held in Lakshminarain
Bhadani v CIT 45 that in such a case where proceedings are initiated under s 147 after an order has been passed
under this section recording total partition, but the proceedings are in respect of escaped income which had accrued to
the joint family before partition, it is not necessary that the notice under s 148 should be served on every member of
the family individually; it is sufficient if the notice under that section is issued in the name of the joint family and served
on the quondam karta. This principle is given statutory recognition by s 283(1) which provides that after a finding of
total partition has been recorded under this section, notices under this Act in respect of the income of the Hindu family
should be served on the person who was the last manager of the family, or if such person is dead, then on all adults
who were members of the family, immediately before the partition. The same principle would apply where normal
assessment proceedings are taken against the joint family under ss 143 or 144 after partition to assess income which
had accrued to the family prior to partition.46 But after making the assessment on the joint family, i.e. after computing
the total income of the family and determining the amount of tax payable by the family, the amount of tax should be
apportioned among the members of the family according to the portion of the joint family property allotted to each of
them and a notice of demand should be issued against each member for the amount apportioned as payable by him.47
The Calcutta High Court has held that if a joint Hindu family has never been assessed as such, this section would
have no application and proceedings under s 147 cannot be taken against the joint family after its disruption to assess
the income of the pre-partition period.48
14. Sub-sections (4) to (7): Members’ Liability for Tax Assessed on Family.—In every case where an order has
been made recording the partition of joint family property among the members or groups of members, the assessment
of the total income received by or on behalf of the joint family as such must be made in accordance with the procedure
laid down in sub-ss (4) and (5), which is the same as that under the 1922 Act although the relevant provisions of this
Act are differently cast. The procedure is to compute the total income of the joint family up to the date of partition and
also determine the tax payable by the joint family as such, as if no partition had taken place and as if the joint family
was still in existence,49 and then to hold each member or group of members liable for a share of the tax determined as
payable by the joint family.50 The tax assessed as payable by the joint family should be apportioned among the
members or groups of members ‘according to the portion of the joint family property allotted to’ each of them;51 but
fresh assessments under s 143 have not to be made on them in respect of the income of the joint family.52 Further, the
section makes all the members and groups of members jointly and severally liable for the whole amount of the tax
assessed on the total income of the joint family; and it would not be correct to say that it is only on the failure or default
of payment by one of the members that the revenue can recover his portion of the tax from the other members.53 The
joint and several liability of the members under this section is personal and is not restricted to the property received on
partition54 and would arise under sub-s (6) even where a partition is found to have taken place after the assessment on
the joint family.55 Sub-section (6) imposes on the members of the joint family a personal substantive liability even in
cases of partial partition, whereas no such liability existed under the 1922 Act in such cases. Therefore, as the
Supreme Court held in Govinddas v ITO ,56 sub-s (6) cannot be invoked in cases of partial partition for assessment
Page 10 of 18
years covered by the 1922 Act.
The provisions of this section override s 10(2) which exempts from tax, a member of an undivided family in respect of
any sum received by him as such member out of the income of the family.57
Apart from the provisions of this section, the department can invoke the principle of Hindu law that if a partition has
taken place after the family had incurred a debt but no provision is made at the time of partition for payment of the
debt, the creditor can proceed to recover it from every one of the members to the extent of the family property in his
hands.58
15. Discontinuance of or Succession to Family Business.—If the business of the joint family is discontinued, an
assessment may be made on the joint family under s 176(1) on the profits of the year of discontinuance. If there is a
succession to the joint family business, eg where the members of the family continue the business in partnership,59 the
joint family would be liable under s 170 in respect only of its share of the profits of the year in which the succession
occurs, and each member would be liable under this section for a share of the tax so assessed on the family,60 and the
other provisions of s 170 would also apply [ s 170(4) ]. It is thus, clear that there is no repugnancy, inconsistency or
conflict between the provisions of ss 170, 171 and 176, for each section deals with a different set of circumstances.61
16. Sub-section (8): Penalty, Fine or Interest on Joint Family after Disruption.—This sub-section expressly
enacts that the provisions of the section apply in relation to the levy and collection of any penalty, interest, fine or other
sum in respect of any period up to the date of partition, as they apply in relation to the levy and collection of tax.62 In
some earlier cases it was held that the provisions of s 25A of the 1922 Act did not apply to penalty proceedings.63 But
the Supreme Court ruled in Gaurishankar v CIT 64 that even under that section, a Hindu family once assessed as
undivided was deemed to continue to be a Hindu undivided family for all the purposes of the Act till an order accepting
the partition was passed under that section, and therefore, a penalty could be imposed on a disrupted family even
while its application for recognising the partition was pending.65 Similarly, the levy of penalty on the Hindu undivided
family for the period prior to the date of partition was held to be valid.66
17. Sub-section (9): Partial Partition Ineffective for Tax Purposes.—The effect of this sub-section, which applies
only from the assessment year 1980-81,67 is that once a Hindu family is assessed as undivided, s 171 would not apply
to the case of any partial partition among its members effected after December 31, 197831st December, 1978. Such a
partition cannot be claimed, recorded or recognised under this section; the family would continue to be assessed as if
no such partial partition had taken place; and the family and its members would be jointly and severally liable for any
tax or other sum payable by it under the Act for any period before or after such partition. The partial partition effected
after December 31, 197831st December, 1978 is of no legal effect even if it is recognised by the AO under sub-s (3).68
Under the 1922 Act, although an order under the corresponding s 25A could be passed only upon total partition of the
entire family property, it was well settled that income from properties which were actually divided among the members
by way of partial partition could not be taxed as the income of the family. The present sub-section not only restores the
position that prevailed under the 1922 Act regarding the recording of only total partitions, but further abrogates the
general rule which has always prevailed under the income-tax law that the joint family cannot be assessed in respect
of income arising from property which has been the subject of a valid partial partition. The inequitous result is that
where the members of a joint family divide a business by way of partial partition and carry it on in partnership, the firm
cannot be recognised, registered and assessed as such.69 The Supreme Court70 has held that this sub-section is
constitutional.
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18. Appeal and Revision.—[See s 246, under ‘Appeal against order under s 171 as regards partition’; and s 263,
under ‘Revision of order prejudicial to revenue’.]
19. Reference to Court.—Whether there has been a physical division of the joint family property is a question of fact
left to the satisfaction of the AO.71 But the court can interfere if there is no evidence to support the finding as regards
the genuineness of partition, or if the finding is directly contrary to the evidence in the case72 or is arbitrary or fanciful.73
In the context of ss 171 and 171(9), the undernoted cases held that referable questions of law arose73a or did not
arise73b under s 256 .
226 Ins. by the Finance (No. 2) Act, 1980 (44 of 1980), s 28 (w.e.f. 1-4-1980). See Circular No. 281, September 22, 1980,
131 ITR (St.) 4.
227 Waman v CIT 14 ITR 116, 125, 128; CIT v Gopichand 125 ITR 611 ; CIT v Gyan Chand & Sons 303 ITR 267
(explaining the scheme of the section).
228 Sundar Singh v CIT 10 ITR 457, 464 (PC) ; Lakhmichand v CIT 35 ITR 416, 422 (SC) ; Govinddas v ITO 103 ITR
123, 128-19 (SC); Waman v CIT 14 ITR 116 ; Rangalal v CIT 18 ITR 383, 391 ; Kailash v CIT 46 ITR 928, 938, 946;
Arunachalam v CIT 3 ITC 441, 449-50 .
229 Ugarmal v ITO 163 ITR 630 .
230 238 ITR 1027.
231 103 ITR 123.

Page 12 of 18
232 133 ITR 690.
233 87 ITR 86, on appeal TRO v Karri 145 ITR 739 (SC) .
234 10 ITR 457.
235 49 ITR (SC)165.
236 55 ITR 666.
237 63 ITR 416.
238 Gordhandas v CIT 11 ITR 183 ; Waman v CIT 14 ITR 116 ; Ranagalal v CIT 18 ITR 383 ; Meyyappa v CIT 18 ITR
587 ; Sulakhe v CIT 39 ITR 394 ; Kannan v CIT 50 ITR 601 .
239 Natarajan v CIT 111 ITR 539 ; Raman v CIT 140 ITR 876 .
240 CIT v Shantikumar 105 ITR 795 (joint family consisting of widow and her minor son).
241 Sat Pal v CIT 162 ITR 582 (FB) . Contrary view in Ramnarain v CIT 162 ITR 539 must be deemed overruled.
242 Ravindranath Punja v CIT 179 ITR 243 .
243 Sundar Singh v CIT 10 ITR 457, 464-65 (PC); Biradhmal v CIT 2 ITR 164 .
244 133 ITR 690. In view of this ruling, decision of Andhra Pradesh High Court in CIT v Dara 129 ITR 339 will have to be
taken as no longer law. See also CIT v Srinivasa 146 ITR 526 .
245 Sundar Singh v CIT 10 ITR 457, 465 (PC) ; Arunachlal v CIT 41 ITR 4232 ; Gordhandas v CIT 11 ITR 183, 201 ;
Beharilal v Comr. 62 ITR 555, 564 .
246 Bengali Singh v CIT 308 ITR 393 .
247 Kalwa v Union of India 49 ITR 165 (SC), 173; Indra Singh v CIT 11 ITR 16, 37 ; Omprakash v Union of India 144 ITR
247 .
248 ITO v Sarada 187 ITR 696 (SC) ; Tunki Sah v CIT 212 ITR 632 (SC) ; CIT v Maharani Raj 224 ITR 582 (SC) .
249 Seethammal v CIT 130 ITR 597 .

Page 13 of 18
250 Avtar Krishan v CIT 214 ITR 352 ; Ramchandra v CIT 217 ITR 647 ; Ramaswamy v CWT 220 ITR 205 .
251 Kapurchand v CIT 131 ITR 451 (SC) . Cf. Karri v TRO 87 ITR 86, on appeal TRO v Karri 145 ITR 739 (SC) (under
Art. 226 of Constitution); Omprakash v Union of India 144 ITR 247 (suit) .
252 Arunachalal v CEPT 32 ITR 222, affirmed in 44 ITR 352 (SC).
253 63 ITR 416; Gokul v ITO 211 ITR 738 ; CIT v Wazir 226 ITR 820 ; CIT v Jegadeesan 237 ITR 371 ; CIT v Selvaraj
243 ITR 32 . This point was not considered by the Supreme Court in ITO v Bachulal 60 ITR 74 .
254 CIT v Ganeshilal 61 ITR 408 ; CIT v Jagdishlal 157 ITR 620 ; CIT v Maganlal 199 ITR 772 ; CIT v Basappa 251 ITR
673 .
255 The same words occur also in s 187(1) .
256 Maharaja of Darbhanga v CIT 2 ITR 345, 349 (PC) ; CIT v Maharaja of Darbhanga 12 ITR 116 ; Rajmal v CIT 18
ITR 1 ; Maneklal v CIT 24 ITR 375 . As for different meanings of the word ‘assessment’, See s 143, under ‘Scope of
the section’.
257 Biradhmal v CIT 2 ITR 164 ; Karamchand v CIT 5 ITC 313 .
258 Ganeshdas v CIT 16 ITR 12 .
259 Rajmal v CIT 18 ITR 1 ; Esthuri v CIT 62 ITR 816 .
260 CIT v Durgamma 166 ITR 776 ; CIT v Kantilal ,192 ITR 376; Roshan v CIT 68 ITR 177 (SC) ; Rameswar v ITO 88
ITR 374 . Cf. IAC of AgIT v Poomulli 83 ITR 108 (SC) and CAgIT v Narayanan 83 ITR 453 (SC) (Ker AgIT Act);
Goswami v CWT 79 ITR 373, approved in Tatavarthi v CWT 225 ITR 561 (SC) ; Tirlochan Singh v CIT 316 ITR 39 .
261 Ambika v CIT 168 ITR 444 ; Gaurikanta Barkataky v CIT 313 ITR 34 .
262 Re, Bisesardas 4 ITR 66, 70.
263 Biradhmal v CIT 2 ITR 164 . Cf. Mathuradas v CIT 44 ITR 517 (SC) ; Tarachand v CIT 4 ITR 312 . See further s 143,
under ‘Res judicata: Estoppel’.
264 CIT v Gyan Chand & Sons 303 ITR 367 .
265 Baijnath v CIT 26 ITR 324 ; Hanumanthappa v CIT 22 ITR 364 ; Murugappa v CIT 21 ITR 311 ; Jitumal v CIT 12
ITR 296 ; Indra Singh v CIT 11 ITR 16 ; Premsukhdas v CIT 46 ITR 376 ; Satinder v CIT 106 ITR 64 ; Venkatamma v
CIT 119 ITR 298 ; CIT v Unmed Singh 126 ITR 518 (HUF formerly assessed as individual ). Cf Re, Kishanchand 12
Page 14 of 18
ITR 289: CIT v Harish 132 ITR 799 . Contra Chhedilal v CIT 10 ITR 60 . See further s 143, under ‘Res judicata:
Estoppel’.
266 Contrary view in Re, Kishanchand 12 ITR 289 is incorrect.
267 26 ITR 324.
268 Shantilal v CIT 169 ITR 805 and Sreepadam v CWT 155 ITR 318, following WTO v Madhavan 169 ITR 810 ;
Narayanaswamy v CIT 169 ITR 813 .
269 Partition may be oral: Padmalochan v State of Orissa 84 ITR 88 . Disruption of joint family takes place as soon as suit
for partition is filed: Bijoykumar v ITO 84 ITR 71 . But see Kaniram v CWT 96 ITR 661 .
270 ITO v Sarada 187 ITR 696 (SC) ; Tatavarthi v CWT 225 ITR 561 (SC) ; CIT v Venugopal 239 ITR 514 (SC) ;
Ramaswamy v CWT 220 ITR 205 ; Satish v CIT 216 ITR 717 .
271 CIT v Dharam Pal Singh HuF 280 ITR 629 ; CIT v Meera Prem Sundar 280 ITR 360 ; CIT v Charan Dass 280 ITR
637 .
1 Kalloomal v CIT 133 ITR 690 (SC) ; Gordhandas v CIT 11 ITR 183 ; Saligram v CIT 2 ITR 448 ; Lachiram v CIT 4
ITR 279 ; Medam Setty v CIT 12 ITR 176 ; Bansidhar v CIT 12 ITR 126 ; Ranglal v CIT 18 ITR 393, 389 ; Meyyappa v
CIT 18 ITR 586 ; Jyoti v CIT 18 ITR 777 ; Baijanath v CIT 26 ITR 324 ; Veerappa v CIT 35 ITR 322, 330 ; Arunachala
v CIT 41 ITR 432 .
2 Gordhandas v CIT 11 ITR 183, 194-95, 200; Bansidhar v CIT 12 ITR 126, 147-48 ; Rangalal v CIT 18 ITR 383, 389 ;
Sundar Singh v CIT 10 ITR 457, 465 (PC) .
3 Gordhandas v CIT 11 ITR 183 ; Veerappa v CIT 35 ITR 322, 330 ; Pilliah v CIT 45 ITR 136 .
4 Rajmal v CIT 18 ITR 1 .
5 CIT v Ghanshyamdas 95 ITR 438 .
6 Jyoti v CIT 18 ITR 777 ; Arunachala v CIT 41 ITR 432 . Cf. Ramaswamy v CWT 220 ITR 205 (final decree of court).
7 63 ITR 416.
8 CIT v Govindlal 138 ITR 711 .
9 Gordhandas v CIT 11 ITR 183, 196-97, approved in Udayan v CIT 63 ITR 416, 421 (SC) ; Jakka v CIT 22 ITR 264,
overruled on another point in CIT v Dwarkadas 41 ITR 528 (SC) ; Meyyappa v CIT 18 ITR 586 ; Re, Gulab Singh 14
ITR 239; Sher Singh v CIT 2 ITR 479, 483 ; Re, Bisesardas 4 ITR 66,70; Bansidhar v CIT 12 ITR 126, 142 ;
Page 15 of 18
Jagannathram v CIT 19 ITR 353 ; Bhimraj v CIT 26 ITR 185 ; Ghewarchand v CIT 111 ITR 391 ; CIT v Shivlingappa
135 ITR 375 . All these cases except the first were cases involving partition of business.
10 Charandas v CIT 39 ITR 202 (SC) ; CIT v Ramakrishnier 49 ITR 608 ; Kuppiah v CIT 63 ITR 522 ; CIT v Chandulal
107 ITR 91 ; Shiv Narain v CIT 139 ITR 999, 1004-05 ; CIT v Pabbati 145 ITR 702 ; Sushil v ITO 234 ITR 98 .
11 Veerappa v CIT 35 ITR 322 .
12 Sulakhe v CIT 39 ITR 394 ; Kannan v CIT 50 ITR 601, 614 ; Hotchand v CIT 96 ITR 586 ; Sundar Singh v CIT 10
ITR 457, 463 (PC) ; Parduman v State of Uttar Pradesh 50 ITR 394 .
13 Meyyappa v CIT 18 ITR 586 .
14 CIT v Govind 101 ITR 602 .
15 Ram Nath v CIT 217 ITR 661 .
16 CIT v Shrawan 232 ITR 123 ; CIT v Brahma Swarup 253 ITR 604 .
17 CIT v Amrit Lal 295 ITR 505 .
18 CIT v Balakrishnan 238 ITR 801 .
19 CIT v Rajeev 246 ITR 24 .
20 Kannan v CIT 50 ITR 601, 614-15 .
21 Meyyappa v CIT 18 ITR 586 .
22 Medam v CIT 12 ITR 176 ; Biradhmal v CIT 2 ITR 164 ; Pilliah v CIT 45 ITR 136 .
23 Rangalal v CIT 18 ITR 383, 395 . Cf Pilliah v CIT 45 ITR 136, 151 .
24 Brij Mohanlal v CIT 82 ITR 173 ; Motial v CIT 84 ITR 186 ; CIT v Manickam 127 ITR 498 ; CIT v Hoshiarilal 128 ITR
515 .
25 Apoorva v CIT 141 ITR 558, 571 (SC) ; CIT v Vajulal 120 ITR 21 ; CIT v Babulal 141 ITR 156 ; Tulsidas v CIT 163
ITR 810 .
26 Apoorva v CIT 141 ITR 558 (SC) ; Gopaldas v CIT 141 ITR 577 (SC) ; CIT v Hoshiarilal 128 ITR 515 .
Page 16 of 18
27 Apoorva v CIT 141 ITR 558 (SC) ; Muniswamy v CIT 202 ITR 399 .
28 Meyyappa v CIT 18 ITR 586 ; Rangalal v CIT 18 ITR 383, 393 .
29 CIT v Purushottamdas 61 ITR 86 ; CIT v Dara 129 ITR 339 .
30 39 ITR 202. See also CIT v Ramakrishnier 49 ITR 608 .
31 10 ITR 457, 464.
32 Followed in Chiranjilal v CIT 56 ITR 715, South Indian Lucifer v CIT 43 ITR 319, Bhimraj v CIT 26 ITR 185 ;
Jagannathram v CIT 19 ITR 353 and Ghewarchand v CIT 111 ITR 391 .
33 Sundar Singh v CIT 10 ITR 457, 465 (PC) .
34 Harendra v CIT 12 ITR 68 . Cf. Kannan v CIT 50 ITR 601 .
35 Waman v CIT 14 ITR 116 ; Bansidhar v CIT 12 ITR 126 ; Meyyappa v CIT 18 ITR 586 ; Jakka v CIT 22 ITR 264,
overruled on another point in CIT v Dwarkadas 41 ITR 528 (SC) . Cf. Ram Rakhamal v CIT 5 ITR 137 .
36 Waman v CIT 14 ITR 116 ; Bansidhar v CIT 12 ITR 126 ; Meyyappa v CIT 18 ITR 586 .
37 133 ITR 690; ITO v Sarada 187 ITR 696 (SC) ; Tunki Sah v CIT 212 ITR 632 (SC) ; CIT v Maharani Raj 224 ITR 582
(SC) .
38 Popatlal v CIT 77 ITR 1013 ; See also s 64(2), under ‘Conversion of separate property into joint family property, and
subsequent partition’. For case of reunion see Paramanand v CIT 135 ITR 673 .
39 Kalwa v Union of India 49 ITR 165, 180 (SC); Chockalingam v CIT 91 ITR 492 ; Re, Gulab Singh 14 ITR 239; Re,
Mullick 6 ITR 99; Lachiram v CIT 4 ITR 279, 285 ; Sher Singh v CIT 2 ITR 479, 482 ; Piyarelal v CIT 1 ITR 215 . Cf.
Dayashanker v CIT 124 ITR 691 .
40 Nihorilal v CIT 19 ITR 240, 244 ; Ramparshad v CIT 21 ITR 555 ; Hirachand v CIT 5 8 ITR 533, 545 .
41 Aruna Group of Estates v State of Madras 55 ITR 642 ; Kathirvelu v CAgIT 68 ITR 786 ; Sulakhe v CIT 39 ITR 394 .
42 Kathirvelu v CagIT 68 ITR 786 ; Hari v State of Uttar Pradesh 77 ITR 853 ; Ramnath v CagIT 84 ITR 206 ;
Dayashanker v CIT 124 ITR 691 .
43 Lakshminarain v CIT 20 ITR 594 (SC) ; CIT v Swaminathan 15 ITR 430 . Cf. Ramaswamy v CIT 12 ITR 29 .
Page 17 of 18
44 Lakshminarain v CIT 20 ITR 594 (SC) .
45 20 ITR 594; Balchand v CIT 144 ITR 791 .
46 Gulabrai v CIT 23 ITR 333 .
47 Lakshminarain v CIT 20 ITR 594, 596-97 (SC); Gulabrai v CIT 23 ITR 333 ; Ranganatham v ITO 39 ITR 730 .
48 Rameswar v ITO 88 ITR 374 ; Shyam Sundar v ITO 89 ITR 317 .
49 Lakshminarain v ITO 20 ITR 594 (SC) ; CIT v Saran Singh 14 ITR 152, 171 ; Madhava v CIT 75 ITR 599 .
50 Lakshminarain v CIT 20 ITR 594 (SC) ; Ranganatham v ITO 39 ITR 730 . Contrast the provisions of s 182 .
51 There is a dictum of Beaumont CJ in Gordhandas v CIT 11 ITR 183, 195, that the above-quoted words mean that tax
must be apportioned according to income-yielding capacity of different portions of property allotted to various members
or groups of members and not according to quantum of the interest or capital value of the share taken by each of them.
Allahabad High Court took the contrary view in Kailash v CIT 46 ITR 928 .
52 Kailash v CIT 46 ITR 928 ; Veerappa v CIT 70 ITR 737 .
53 Lakshminarain v CIT 20 ITR 594 (SC) ; Kalwa v Union of India 49 ITR 165 (SC).
54 ITO v Thimmayya 55 ITR 666, 671 (SC) ; Govinddas v ITO 103 ITR 123 (SC) .
55 Position was different under s 25A of 1922 Act: ITO v Thimmayya 55 ITR 666 (SC) . Cf. Karri v TRO 87 ITR 86, on
appeal TRO v Karri 145 ITR 739 (SC), where members were held not liable for tax due under assessment on Hindu
family made without inquiry or an order under sub-s. (2); and Omprakash v Union of India 144 ITR 247 .
56 103 ITR 123.
57 Kalwa v Union of India 49 ITR 165, 172 (SC).
58 Esthuri v ITO 49 ITR 977 . Cf. ITO v Thimmayya 55 ITR 666 (SC) .
59 See s 170, under ‘Succession’.
60 CIT v Saran Singh 14 ITR 152, 172 .

Page 18 of 18
61 CIT v Saran Singh 14 ITR 152 ; Ram Rakhamal v CIT 5 ITR 137, 151-52 .
62 CIT v Raghunandan 143 ITR 212 ; CIT v Raja 96 ITR 175 (penalty on Hindu family which had disrupted before, but
assessment on which was made after, commencement of this Act).
63 CIT v Sanichar 27 ITR 307 ; Mahankali v CIT 31 ITR 867 ; Raju v Coll 29 ITR 241 ; Jankidas v CIT 54 ITR 254 ; CIT
v Mothuram 66 ITR 638 ; Kandaswamy v CIT 72 ITR 212 ; CIT v Suresh 75 ITR
64 103 ITR 772.
65 Govardan v ITO 46 ITR 430 ; Muppana v CIT 51 ITR 131 ; Midathala v CIT 51 ITR 160 ; Momanram v CIT 59 ITR
135 ; CIT v Kiranchandra 98 ITR 141 ; Shriram v CIT 161 ITR 42 .
66 Balakrishna v CIT 246 ITR 186 .
67 Lakshmi Narayana v ITO 175 ITR 593 .
68 Pratap v CIT 214 ITR 364 ; CIT v Sri Krishna Motor 228 ITR 347 ; CIT v Harendra 234 ITR 679 ; Punjalal v CIT 253
ITR 718 .
69 CIT v Dalappa 176 ITR 455 . Cf. CIT v Tej 178 ITR 474 .
70 Union of India v Valliappan 238 ITR 1027 (SC) .
71 Piyarelal v CIT 11 ITR 215 ; Sher Singh v CIT 2 ITR 479, 482 ; Lachiram v CIT 4 ITR 279 ; Bansidhar v CIT 6 ITR
95 ; Hukamchand v CIT 13 ITR 46 ; Jyoti v CIT 18 ITR 777 ; Rajasingh v CIT 2 ITR 331 .
72 Dayashanker v CIT 124 ITR 691 ; Re, Gulab Singh 14 ITR 239 (AO ignored effect of judicial proceeding adopted to
bring about partition); Bansidhar v CIT 12 ITR 126, 148 ; Kirpal Singh v CIT 5 ITR 548 (family disrupted and formed
limited company); Sulakhe v CIT 39 ITR 394 (family disrupted and formed partnership to get tax benefit); Sheo Narain
v CIT 72 ITR 766 (evidence rejected on suspicion and conjectures). See also Jagannathram v CIT 19 ITR 353 .
73 Bansidhar v CIT 6 ITR 95, 98 .
73a Section 171 - Keshrimal Bapulal (HUF) v CIT 225 ITR 427 ; Subhash Chand (HUF) v CIT 191 ITR 454 ; CIT v Vidya
Devi 185 ITR 232 ; CIT v Jitendra Kumar Vidya Devi 184 ITR 247 ; Section 171(9) - CIT v Meera Prem Sunder 187
ITR 380 .
73b Section 171 - CIT v Maganlal Vithaldas Panchmatiya 199 ITR 772 ; CIT v Sehgal (HK) 190 ITR 131 .
End of Document
S. 172. Shipping business of non-residents
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > H.—
Profits of non-residents from occasional shipping business
H.—Profits of non-residents from occasional shipping business
(1) The provisions of this section shall, notwithstanding anything contained in the other provisions of this Act, apply
for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-
resident, which carries passengers, livestock, mail or goods shipped at a port in India74[* * *].
(2) Where such a ship carries passengers, livestock, mail or goods shipped at a port in India,75[seven and a half per
cent] of the amount paid or payable on account of such carriage to the owner or the charterer or to any person on
his behalf, whether that amount is paid or payable in or out of India, shall be deemed to be income accruing in
India to the owner or charterer on account of such carriage.
(3) Before the departure from any port in India of any such ship, the master of the ship shall prepare and furnish to
the76[Assessing Officer] a return of the full amount paid or payable to the owner or charterer or any person on his
behalf, on account of the carriage of all passengers, live-stock, mail or goods shipped at that port since the last
arrival of the ship thereat:
Provided that where the76[Assessing Officer] is satisfied that it is not possible for the master of the ship to furnish the return
required by this sub-section before the departure of the ship from the port and provided the master of the ship has made
satisfactory arrangements for the filing of the return and payment of the tax by any other person on his behalf,
the77[Assessing Officer] may, if the return is filed within thirty days of the departure of the ship, deem the filing of the return
by the person so authorised by the master as sufficient compliance with this sub-section.
(4) On receipt of the return, the77[Assessing Officer] shall assess the income referred to in sub-section (2) and
determine the sum payable as tax thereon at the78[rate or rates in force] applicable to the total income of a
company which has not made the arrangements referred to in section 194 and such sum shall be payable by the
master of the ship.
(4A) 79[No order assessing the income and determining the sum of tax payable thereon shall be made under sub-
section (4) after the expiry of nine months from the end of the financial year in which the return under sub-section
(3) is furnished:
Provided that where the return under sub-section (3) has been furnished before the 1st day of April, 2007,
such order shall be made on or before the 31st day of December, 2008.]
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(5) For the purpose of determining the tax payable under sub-section (4), the77[Assessing Officer] may call for such
accounts or documents as he may require.
(6) A port clearance shall not be granted to the ship until the Collector of Customs, or other officer duly authorised to
grant the same, is satisfied that the tax assessable under this section has been duly paid or that satisfactory
arrangements have been made for the payment thereof.
(7) Nothing in this section shall be deemed to prevent the owner or charterer of a ship from claiming before the expiry
of the assessment year relevant to the previous year in which the date of departure of the ship from the Indian
port falls, that an assessment be made of his total income of the previous year and the tax payable on the basis
thereof be determined in accordance with the other provisions of this Act, and if he so claims, any payment made
under this section in respect of the passengers, live-stock, mail or goods shipped at Indian ports during that
previous year shall be treated as a payment in advance of the tax leviable for that assessment year, and the
difference between the sum so paid and the amount of tax found payable by him on such assessment shall be
paid by him or refunded to him, as the case may be.
(8) 80[Forthe purposes of this section, the amount referred to in sub-section (2) shall include the amount paid or
payable by way of demurrage charge or handling charge or any other amount of similar nature.]
1. Section 172 [ Sections 44A, 44B and 44C of 1922 Act]: Shipping Business of Non-residents.—This section
makes special provisions for the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-
resident, which carries passengers, livestock, mail or goods shipped at a port in India. In the case of every such ship
an assessment must be made under this section, as it overrides all other provisions of the Act.81 While s 172 operates
notwithstanding other provisions of the Act, s 5 is subject to s 172 . Thus, the question of reading both provisions as
supplemental to each other does not arise.82 However, this section does not override s 90 which provides that where
the Central Government has entered into an agreement for granting relief of tax with the government of any country
outside India the provisions of that agreement shall prevail over the provisions contained in this Act; but the provisions
of this Act shall apply to the extent they are more beneficial to the assessee.83 Prior to the amendment made by the
Finance Act 1975, this section was not attracted if there was an agent of the non-resident from whom the tax would be
recoverable (ss 160 and 161).
The section has no application where a time charterer, charters a ship and makes payment to the owner, not on
account of the carriage of goods, but for the use and hire of the ship84 or for demurrage.85 Provisions of this section
are also not applicable to amount received for the purpose of towing a vessel.86 However, sub-s (8) was introduced by
the Finance Act, 1997 with retrospective effect from 1st April 1976 to include the amount paid or payable by way of
demurrage charge or handling charge or any other amount of similar nature.
The provisions of this section are intended to ensure the due recovery of tax from the owners or charterer of steamers
in respect of the profits made by them from the carrying of passengers or cargo from Indian ports. A summary
assessment in substitution of the regular assessment is contemplated by this section. [Cf. ss 174 and 175.] Seven and
a half per cent of the gross receipt87 is deemed to be the assessable profit for the purposes of the summary
assessment. A port clearance is not granted to the ship until the tax is duly paid.
Before the expiry of the assessment year relevant to the accounting year in which the ship sailed from the Indian port,
the assessee may exercise his option of being assessed in the regular course under s 143 . If such option is not
exercised, the assessment made under this section becomes the final assessment in the case.88 If, however, the
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option is exercised, the tax paid under this section must be adjusted against the tax found payable under the regular
assessment. The tax paid under this section is ‘advance tax’ and the assessee is entitled to interest under s 214 . The
Supreme Court in Glittre v CIT 89 has held that it is implicit from the language of s 172(7) that in substance, a legal
fiction is created by which the payments have been treated as advance tax, and therefore, the assessee would be
entitled to refund with interest for payments made in excess of the tax assessed. The court also observed that all the
provisions in the Act in respect of the payment of advance tax would necessarily apply.
The option of being assessed in the regular course is now meaningless in most cases in view of s 44B which was
inserted by the Finance Act, 1975 and which provides that notwithstanding anything to the contrary in ss 28 to 43A,
the profits of a non-resident from the business of operation of ships shall be deemed to be equal to seven and a half
per cent of his gross receipts comprised of the fare or freight paid in or outside India on account of carriage or
shipment at any Indian port and any fare or freight received in India on account of carriage or shipment at any foreign
port.90
As this section is not a substitute for assessment on the total income of a non-resident engaged in shipping business,
an assessment under this section does not justify the levy of surtax under the Companies (Profits) Surtax Act, 1964.91
This section is not exhaustive of the liability of the owner of the steamer: he may be taxable under s 5 in respect of
profits arising from the use of the ship otherwise than from the carrying of passengers or cargo from Indian ports.92
2. Writ, Direction or Order.—A writ, direction or order may be issued in appropriate cases.93 For the principles
underlying the grant of such relief, see s 293, under ‘Writs, directions and orders under Constitution’.
74 Words, etc. “, unless the Income-tax Officer is satisfied that there is an agent of the non-resident from whom the tax
will be recoverable under the other provisions of this Act” were omitted by the Finance Act, 1975 (25 of 1975), s 19(a)
(w.e.f. 1-6-1975).
75 Subs., for “one-sixth”, by the Finance Act, 1975 (25 of 1975), s 19(b) (w.e.f. 1-6-1975).
78 Subs. by the Finance (No. 2) Act, 1967 (20 of 1967), s 29, for “rate or rates for the time being” (w.r.e.f. 1-4-1967). See
Circular No. 5P, October 9, 1967.
Page 4 of 4
79 Ins. by the Finance Act, 2007 (22 of 2007), s 51 (w.e.f. 1-4-2007). See Circular No. 3 of 2008, February 2, 2008, 299
ITR (St.) 8.
80 Ins. by the Finance Act, 1997 (26 of 1997), s 45 (w.r.e.f. 1-4-1976). See Circular No. 763, February 18, 1998, 230 ITR
(St.) 54.
81 CBDT v Chowgule 192 ITR 40 ; Salgaocar v DC 187 ITR 381 .
82 CBDT v Chowgule 192 ITR 40 .
83 Arabian Express v Union of India 212 ITR 31 ; DIT v Venkatesh Karrier Ltd. 349 ITR 124 .
84 Union of India v Gosalia 113 ITR 307 (SC) ; Lima v Union of India 70 ITR 518 .
85 Salgaocar v DC 187 ITR 381 ; CBDT v Chowgule 192 ITR 40 ; CIT v Orient (Goa) P. Ltd. 325 ITR 554 .
86 CIT v Oceanic Shipping Service 334 ITR 132 .
87 ‘Dead freight’ is not to be included in computing the gross receipts: CIT v Pestonji 107 ITR 837 .
88 Sidhwa v CIT 50 ITR 337 .
89 225 ITR 739. See also board’s Circular No. 9 of 2001, July 9, 2001, 250 ITR (St.) 81.
90 CIT v Hongkong Oceans 238 ITR 955 (s 172 and s 44B operate in different fields).
91 CIT v Taiyo 244 ITR 177 .
92 Czechoslovak Co. v ITO 81 ITR 162 .
93 See the various cases cited above.
End of Document
S. 173. Recovery of tax in respect of non-resident from his assets
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > I.—
Recovery of tax in respect of non-residents
I.—Recovery of tax in respect of non-residents
Without prejudice to the provisions of sub-section (1) of section 161 or of section 167, where the person entitled to the
income referred to in clause (i) of sub-section (1) of section 9 is a non-resident, the tax chargeable thereon, whether in his
name or in the name of his agent who is liable as a representative assessee, may be recovered by deduction under any of
the provisions of Chapter XVII-B and any arrears of tax may be recovered also in accordance with the provisions of this Act
from any assets of the non-resident which are, or may at any time come, within India.
Section 173 [First Proviso to s 42(1) of 1922 Act]: Recovery of Tax from Non-resident’s Assets.—In the case of
non-residents, the tax on the income which is deemed under s 9(1)(i) to accrue in India and is chargeable as such may
be recovered by deduction at source or by an assessment on the non-resident or on his agent. Any arrears of such tax
may also be recovered from any assets of the non-resident which are, or may at any time come, within India. But the
arrears of tax cannot be recovered by filing a suit in the foreign country where the principal resides, since the courts of
one country will not enforce the revenue laws of another.94
No Limitation.— The general rule under s 231, prior to its deletion from April 1, 19891st April, 1989, was that
proceedings for recovery of tax could not be commenced after the expiration of one year from that last day of the
financial year in which the demand was made. But s 231 provided that this one year period of limitation did not apply
to cases of recovery of tax under this section from the non-resident’s assets in India.95 However, this section operates
only where the income is covered by s 9(1)(i) ; it cannot be invoked to enforce tax liability in respect of income which
falls outside that clause.96
94 See s 222 under ‘No recovery of Indian tax in foreign countries’.

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95 ITO v Subramonia 48 ITR 985 .
96 Sakalchand v ITO 47 ITR 673 .
End of Document
S. 174. Assessment of persons leaving India
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > J.—
Persons leaving India
J.—Persons leaving India
(1) Notwithstanding anything contained in section 4, when it appears to the97[Assessing Officer] that any individual
may leave India during the current assessment year or shortly after its expiry and that he has no present intention
of returning to India, the total income of such individual for the period from the expiry of the previous year for that
assessment year up to the probable date of his departure from India shall be chargeable to tax in that assessment
year.
(2) The total income of each completed previous year or part of any previous year included in such period shall be
chargeable to tax at the rate or rates in force in that assessment year, and separate assessments shall be made
in respect of each such completed previous year or part of any previous year.
(3) The97[Assessing Officer] may estimate the income of such individual for such period or any part thereof, where it
cannot be readily determined in the manner provided in this Act.
(4) For the purpose of making an assessment under sub-section (1), the97[Assessing Officer] may serve a notice
upon such individual requiring him to furnish, within such time, not being less than seven days, as may be
specified in the notice, a return in the same form and verified in the same manner98[as a return under clause (i) of
sub-section (1) of section 142 ], setting forth his total income for each completed previous year comprised in the
period referred to in sub-section (1) and his estimated total income for any part of the previous year comprised in
that period; and the provisions of this Act shall, so far as may be, and subject to the provisions of this section,
apply as if the notice were99[a notice issued under clause (i) of sub-section (1) of section 142 ].
(5) The tax chargeable under this section shall be in addition to the tax, if any, chargeable under any other provision
of this Act.
(6) Where the provisions of sub-section (1) are applicable, any notice issued by the1[Assessing Officer] under2[clause
(i) of sub-section (1) of section 142 or] section 148 in respect of any tax chargeable under any other provision of
this Act may, notwithstanding anything contained in3[clause (i) of sub-section (1) of section 142 or] section 148, as
the case may be, require the furnishing of the return by such individual within such period, not being less than
seven days, as the1[Assessing Officer] may think proper.
Section 174 [ Section 24A of 1922 Act]: Assessment of Person leaving India.—This section provides for
assessment in the case of a person who is likely to leave India during the current assessment year or shortly after its
expiry, without an intention of returning.4 In such a case the AO may assess him under s 143 in respect of the income
Page 2 of 3
of the previous year, and under s 147 in respect of the income of earlier years, and the notice calling for a return of
income may give him seven days or more to file a return instead of the usual thirty days. An assessment may also be
made under this section in such a case on the estimated income of the current year up to the probable date of the
assessee’s departure from India and even on the income of the period beyond the expiry of the assessment year if the
probable date of the assesee’s departure from India is after the expiry of the assessment year. The scheme of the Act
is to charge the income of the previous year and not the income of the assessment year.5 This section forms an
exception to the general principle, in that it provides for an assessment of the income of the assessment year itself.
The justification for this is the obvious exigency of the situation which calls for prompt recovery of tax before the
assessee leaves the country. [Cf. ss 175 and 176.]
A notice calling for a return issued under this section has to be treated for all purposes of the Act as if it were a notice
issued under s 142(1)(i) . Thus, if the assessee does not make a return in response to the notice, a best judgment
must be made under s 144 . Non-compliance with the notice may also attract penalty under s 271(1)(b) read with s
273B, and prosecution under s 276CC .
98 Subs., for “as a return under sub-section (2) of section 139 ”, by the Direct Tax Laws (Amendment) Act, 1987 (4 of
1988), s 126(18)(a)(i) (w.e.f. 1-4-1989). See Circular No. 528, December 16, 1988; 176 ITR (St). 154.
99 Subs., for “a notice issued under sub-section (2) of section 139 ”, by the Direct Tax Laws (Amendment) Act, 1987 (4 of
1988), s 126(18)(a)(ii) (w.e.f. 1-4-1989).
2 Subs., for “sub-section (2) of section 139 or sub-section (1) of”, by the Direct Tax Laws (Amendment) Act, 1987 (4 of
1988), s 126(18)(b) (w.e.f. 1-4-1989). See Circular No. 528, December 16, 1988; 176 ITR (St). 154.
1988), s 126(18)(b) (w.e.f. 1-4-1989).
4 CIT v Ramzan 64 ITR 74 .
5 See s 4, under ‘Tax is on income of previous year’.

Page 3 of 3
End of Document
S. 174A. Assessment of association of persons or body of individuals or
artificial juridical person formed for a particular event or purpose
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > JA.—
Association of persons or body of individuals or artificial juridical person formed for a particular
event or purpose
JA.—Association of persons or body of individuals or artificial juridical person formed for a particular event or
purpose
S. 174A. Assessment of association of persons or body of individuals or artificial juridical person formed for a
particular event or purpose
6[Notwithstanding anything contained in section 4, where it appears to the Assessing Officer that any association of
persons or a body of individuals or an artificial juridical person, formed or established or incorporated for a particular event
or purpose is likely to be dissolved in the assessment year in which such association of persons or a body of individuals or
an artificial juridical person was formed or established or incorporated or immediately after such assessment year, the total
income of such association or body or juridical person for the period from the expiry of the previous year for that
assessment year up to the date of its dissolution shall be chargeable to tax in that assessment year, and the provisions of
sub-sections (2) to (6) of section 174 shall, so far as may be, apply to any proceedings in the case of any such person as
they apply in the case of persons leaving India.]
6 Ins. by the Finance Act, 2002 (20 of 2002), s 69 (w.e.f. 1-4-2002). See Circular No. 8 of 2002, August 27, 2002, 258
ITR (St.) 13.
End of Document
S. 175. Assessment of persons likely to transfer property to avoid tax
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > K.—
Persons trying to alienate their assets
K.—Persons trying to alienate their assets
S. 175. Assessment of persons likely to transfer property to avoid tax
Notwithstanding anything contained in section 4, if it appears to the7[Assessing Officer] during any current assessment year
that any person is likely to charge, sell, transfer, dispose of or otherwise part with any of his assets with a view to avoiding
payment of any liability under the provisions of this Act, the total income of such person for the period from the expiry of the
previous year for that assessment year to the date when the7[Assessing Officer] commences proceedings under this
section shall be chargeable to tax in that assessment year, and the provisions of sub-sections (2), (3), (4), (5) and (6) of
section 174 shall, so far as may be, apply to any proceedings in the case of any such person as they apply in the case of
persons leaving India.
Section 175 : Assessment of Person likely to Transfer Property to Avoid Tax.—There was no provision in the
1922 Act corresponding to this section. This section, like ss 174 and 176, provides for assessment of the income of
the current assessment year, thus departing from the general scheme of the Act which is to charge the income of the
previous year and not the income of the assessment year itself. The object is to accelerate assessment on persons
who are likely to charge or dispose of their assets with a view to avoiding payment of any liability under this Act. This
section applies to such persons, the provisions which are applicable under s 174 to persons leaving India with no
present intention of returning to this country.
End of Document
S. 176. Discontinued business
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > L.—
Discontinuance of business, or dissolution
L.—Discontinuance of business, or dissolution
(1) Notwithstanding anything contained in section 4, where any business or profession is discontinued in any
assessment year, the income of the period from the expiry of the previous year for that assessment year up to the
date of such discontinuance may, at the discretion of the7[Assessing Officer], be charged to tax in that
assessment year.
(2) The total income of each completed previous year or part of any previous year included in such period shall be
chargeable to tax at the rate or rates in force in that assessment year, and separate assessments shall be made
in respect of each such completed previous year or part of any previous year.
(3) Any person discontinuing any business or profession shall give to the8[Assessing Officer] notice of such
discontinuance within fifteen days thereof.
(3A) 9[Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to
be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been
included in the total income of the person who carried on the business had such sum been received before such
discontinuance].
(4) Where any profession is discontinued in any year on account of the cessation of the profession by, or the
retirement or death of, the person carrying on the profession, any sum received after the discontinuance shall be
deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would
have been included in the total income of the aforesaid person had it been received before such discontinuance.
(5) Where an assessment is to be made under the provisions of this section, the8[Assessing Officer] may serve on
the person whose income is to be assessed or, in the case of a firm, on any person who was a partner of such
firm at the time of its discontinuance or, in the case of a company, on the principal officer thereof, a notice
containing all or any of the requirements which may be included in a notice10[under clause (i) of sub-section (1) of
section 142 ] and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice
issued10[under clause (i) of sub-section (1) of section 142 ].
(6) The tax chargeable under this section shall be in addition to the tax, if any, chargeable under any other provision
of this Act.
(7) Where the provisions of sub-section (1) are applicable, any notice issued by the8[Assessing Officer]
under11[clause (i) of sub-section (1) of section 142 or] section 148 in respect of any tax chargeable under any
other provisions of this Act may, notwithstanding anything contained in11[clause (i) of sub-section (1) of section
142 or] section 148, as the case may be, require the furnishing of the return by the person to whom the aforesaid
notices are issued within such period, not being less than seven days, as the8[Assessing Officer] may think
proper.
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1. Section 176, Sub-sections (1), (2) and (3) [ Section 25(1) and (2) of 1922 Act]: Assessment in Case of
Discontinued Business.— Sections 174, 175 and this section constitute exceptions to the general rule that the
subject of charge under this Act is the income of the previous year and not the income of the assessment year.12 In the
case of any business, profession or vocation [ s 2(36) ] which is discontinued in any assessment year, the AO may, in
his discretion, make an assessment under this section in the year of discontinuance on the entire business income,
computable under whatever head,13 of the period between the end of the previous year relevant to that assessment
year and the date of such discontinuance, in addition to the assessment, if any, made on the income of the previous
year.14 As the Supreme Court said in CIT v Srinivasan & Gopalan ,15 this section gives the AO ‘an option to make a
premature assessment on the profits earned up to the date of discontinuance in the year of discontinuance itself
instead of in the usual financial year’. But the assessment year for the broken period should be taken to be that which
is relevant to the previous year in which the broken period falls.16 The assessment on the profits of the said period and
the assessment on the profits of the previous year should be separate and distinct.17 This section applies only to cases
of discontinuance of business18 and not to cases of succession.19
Any person discontinuing any business, profession or vocation is under an obligation to give to the AO a notice of such
discontinuance within 15 days thereof [sub-s (3)]. Default in giving such notice may attract penalty under s 272A, but
would not entitle the department to treat the business as still continuing.20
Dissolution of an association of person or discontinuance of its business, and dissolution of a firm or discontinuance of
its business, are dealt with by ss 177 and 189 respectively.
There is no repugnancy or inconsistency of conflict between any of the provisions of s 170 (succession), s 171
(partition of a Hindu undivided family) and this section. Each section deals with a different set of circumstances. [See s
171, under ‘Discontinuance of or succession to family business’.]
2. ‘Discontinuance’.—The words ‘discontinued’ and ‘discontinuance’ in this section do not cover mere change of
ownership or a change in the constitution of the firm, but refer to a complete cessation of business.21 Change of
ownership may involve succession, as explained under s 170 . The business must be regarded as being continued
despite the successive changes of ownership.22 Thus, where there is succession there cannot be discontinuance, for
the two are mutually exclusive concepts.23 Cases of change of ownership are dealt with under s 170, under
‘Succession’.
Where a commercial asset, susceptible of being put to a variety of different uses in which gain might be acquired, is
put to a different use, that would not involve the discontinuance of the old business and the setting up of a new one.24
If a part of the assessee’s business becomes unprofitable and is dropped, either permanently or for the time being,
that would not mean discontinuance of the business or undertaking.25 Inactivity in trade does not imply discontinuance
of business.26 A concern may be a going concern though a very quiet and dormant one. [See s 28, under ‘Business
may be passive or dormant—Periods of lull and inactivity’.] Even if a company passes a resolution that it will undertake
no further business, the Department may hold that the resolution is colourable and that the company has not
discontinued its business.27 The trade may be continued even after a company has gone into liquidation or after the
dissolution of a firm or other business concern. [See s 28, under ‘Business carried on in course of administration, or
Page 3 of 6
winding-up or liquidating a concern’.]
It is a case of discontinuance and not succession where the managing agents of a company give up the managing
agency and new managing agents are directly appointed by the managed company under a fresh agreement.28 The
amalgamation of two separate and independent businesses belonging to different owners may result in the
discontinuance of those businesses and the creation of a new business.29 When a firm is dissolved, its business may,
on the facts of a given case, be held to be discontinued, even if a new firm having for its partners all or some of the
members of the dissolved firm starts carrying on a similar business on the same premises.30 Where the business of a
joint family or firm is split up on partition or dissolution, and portions or branches of the business are divided among
the members, there is a discontinuance of the old business, even if the members carry on their business in the same
premises and avail themselves of the old business connections because in such a case the assessee, viz. the joint
family or the firm, ceases to carry on the business, and there is no succession since the integrity of the business is not
preserved.31 [See under s 170, ‘Integrity of business: Succession to whole business’.]
3. Discontinuance of Professional Practice.—A firm may discontinue its profession though its partners may remain
in the profession, and similarly a partner may discontinue his profession though the firm may carry on the same. The
Calcutta High Court held in CIT v Mandal 32 that when a professional man, e.g. a solicitor, joins a firm, he does not
cease to carry on his profession, and when he retires from the firm and ceases to practise there would be
discontinuance of his profession even though the firm in which he a was a partner might continue to function after his
retirement with or without new partners. Likewise, in Re, Motichand & Devidas 33 it was held that where a firm is
dissolved by the death of a partner, the firm may be held to have discontinued its profession even if the remaining
partners form a new firm and carry on their profession; and that the business of the old firm may be held to have been
discontinued even if the new firm carries on its business under the same name and on the same premises as the old
firm, provided the new firm does not take over the business of the dissolved firm as a going concern.
If a man merely suspends his practice, e.g. during the period of imprisonment, he cannot be said to have discontinued
it. Whether a man discontinues his practice or merely suspends it, depends very largely upon the state of his mind and
that is to a very large extent, if not altogether, a question of fact. There need not be a complete cessation of the
profession for the rest of a man’s life in order to constitute discontinuance: an assessee may be held to have
discontinued his professional practice at a particular point of time even if he is found to have returned to it later.34 An
advocate discontinues his profession when he is elevated to the Bench.35
4. Sub-sections (3A) and (4): Receipts after Discontinuance of Business or Profession.—Sub-sections (3A) and
(4) provide that any sum received after the discontinuance of a business or profession36 is deemed to be income and
is chargeable to tax in the year of receipt, if the sum would have been chargeable as income had it been received
before such discontinuance. Such receipts are not assessable as income of the firm which has ceased to exist but are
taxable in the hands of the recipient.37 These sub-sections constitute exceptions to the rule that business or
professional receipts are chargeable only if the business or profession is carried on in the year of account. [See s 28,
under ‘Business should have been “carried on” in accounting year’.] There was no provision in the 1922 Act
corresponding to these sub-sections. [See also s 159, under ‘Income of deceased till date of death and income of
estate after that date’, and s 168, under ‘Income of estate of deceased person’.]
Fees earned by a professional person which are collected after his death by his executor are part of the estate and not
‘the income of the estate’ within s 168 . therefore such fees cannot be taxed in the hands of the executor under s 168
or be clubbed with the income of the estate, but the executor may be separately taxed in respect of such fees as the
‘recipient’ thereof within s 176(4) .38
Page 4 of 6
Any sum chargeable by virtue of these sub-sections should be assessed under the head ‘Business or profession’;39
and expenses incurred after the year of discontinuance to earn such sum should be allowed as a deduction.40 [Cf. s
41(5) .] However, the Calcutta High Court held in CIT v Datta 41 that in absence of further fiction that the amount shall
be deemed to be income chargeable under the head of ‘Business or profession’, the amount is not chargeable at all.
5. Sub-section (5) [ Section 25(6) of 1922 Act]: Service of Notice in Case of Discontinued Business.—One of
the countless victims of excessively elaborate legislation is the draftsman himself. The provisions of this sub-section
have been inadvertently duplicated in s 284, with the only difference that, unlike this sub-section, s 284 refers to the
case of an association of persons discontinuing its business. Either a reference to the case of an association should
be incorporated in this sub-section and s 284 should be deleted, or, this sub-section should be deleted.
9 Ins. by the Taxation Laws (Amendment) Act, 1975 (41 of 1975), s 49 (w.e.f. 1-4-1976). See Circular No. 204, July 24,
1976; 110 ITR (St.) 21.
10 Subs., for “under sub-section (2) of section 139 ”, by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), s
126(19)(a) (w.e.f. 1-4-1989).
10 Subs., for “under sub-section (2) of section 139 ”, by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), s
126(19)(a) (w.e.f. 1-4-1989).
1988), s 126(19)(b) (w.e.f. 1-4-1989).
1988), s 126(19)(b) (w.e.f. 1-4-1989).
12 See s 4 under ‘Tax is on income of previous year’.

Page 5 of 6
13 CIT v Chugandas 55 ITR 17, 23 (SC) and s 72(1), under ‘Profits…of any business may include income under other
heads’.
14 CIT v Hari Om 122 ITR 759, 764 .
15 23 ITR 87, 97.
16 CIT v Narayanan 74 ITR 616 .
17 CIT v Srinivansan 23 ITR 87, 97 (SC) ; CIT v Saran Singh 14 ITR 152, 164 (FB) .
18 CIT v Saurashtra Packaging 259 ITR 520 .
19 CIT v The Hindu 18 ITR 237, 252, on appeal CIT v Srinivasan 23 ITR 87 (SC) .
20 Gurudeo v ITO 131 ITR 486 .
21 CIT v Polson 13 ITR 384, 388 (PC) ; Meyyappa v CIT 11 ITR 247 ; Hanutram v CIT 6 ITR 290, 296 . See also CIT v
Figgies 24 ITR 405 (SC) ; CIT v Merwanji 68 ITR 663 .
22 City of London IT Comrs v Gibbs 24 TC 221, 239 (HL), 10 ITR Suppl 121, 125 .
23 Kaniram v CIT 23 ITR 314, 325 ; Mettur v CIT 47 ITR 781, 787 .
24 Sutherland v IR 12 TC 63 .
25 Highland Rly v Special Comrs 2 TC 151 .
26 Merchiston v Turner 5 TC 520 . Cf. Ghanshyamdas v CIT 19 ITR 349 .
27 Gladstone v Strick 30 TC 131 .
28 Ramgopal v CEPT 24 ITR 362 .
29 George v Cook 19 TC 121 ; Kannappa v CIT 5 ITR 49 . Cf. United Steel v Cullington 23 TC 91 (HL) where
amalgamation resulted in succession.
30 Re, Motichand 14 ITR 534; Hariram v CIT 12 ITR 367 ; Kannappa v CIT 5 ITR 49 .
Page 6 of 6
31 Nagjee v CIT 51 ITR 849 (SC) ; Annamalai v CIT 20 ITR 238 . ITT v Bachraj 14 ITR 191, 204-05, must be deemed
overruled on this point. Cf. CIT v Hanumanthappa 82 ITR 880 (SC) .
32 17 ITR 591, followed in Anima v CIT 115 ITR 272 .
33 14 ITR 534. Contrast CIT v Merwanji 68 ITR 663 .
34 CIT v Saratchandra 18 ITR 669 ; Parthasarathy v CIT 103 ITR 508 .
35 Re, lqbal 10 ITR 152; Hillerns v Murray 17 TC 77, 89 . But not when he becomes a QC: Seldon v Croom-Johnson 16
TC 740 .
36 Parthasarathy v CIT 103 ITR 508 ; CIT v Star Andheri 208 ITR 573 ; CIT v Sen 63 Taxman 366 . Contra CIT v Datta
180 ITR 86 .
37 Banyan v CIT 222 ITR 831 ; CIT v C. Lyall 252 ITR 398 ; CIT v Excel Production 217 ITR 528 ; CIT v Vockanardt
215 ITR 793 . Contra CIT v Star Andheri 208 ITR 573 ; Dhanamall v CIT 234 ITR 682 ; Subba v CIT 236 ITR 932 ;
CIT v Paily Pillai 243 ITR 557 .
38 CIT v Viswanatha 121 ITR 270.
39 See s 28(i), under ‘Scope’, p. 675, nn. 3 and 4. However, Madras High Court held in CIT v Viswanatha 121 ITR 270
that fees collected, after death of professional person, by his executor are taxable as ‘income from other sources’.
40 CIT v Foresole 153 ITR 349 ; United Construction v CIT 208 ITR 914 . See also s 29, under ‘No allowances in
respect of discontinued business’.
41 180 ITR 86.
End of Document
S. 177. Association dissolved or business discontinued
(1) Where any business or profession carried on by an association of persons has been discontinued or where an
association of persons is dissolved, the42[Assessing Officer] shall make an assessment of the total income of the
association of persons as if no such discontinuance or dissolution had taken place, and all the provisions of this
Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provision of
this Act shall apply, so far as may be, to such assessment.
(2) Without prejudice to the generality of the foregoing sub-section, if the43[Assessing Officer] or the44[* *
*]45[Commissioner (Appeals)] in the course of any proceeding under this Act in respect of any such association of
persons as is referred to in that sub-section is satisfied that the association of persons was guilty of any of the
acts specified in Chapter XXI, he may impose or direct the imposition of a penalty in accordance with the
provisions of that Chapter.
(3) Every person who was at the time of such discontinuance or dissolution a member of the association of persons,
and the legal representative of any such person who is deceased, shall be jointly and severally liable for the
amount of tax, penalty or other sum payable, and all the provisions of this Act, so far as may be, shall apply to any
such assessment or imposition of penalty or other sum.
(4) Where such discontinuance or dissolution takes place after any proceedings in respect of an assessment year
have commenced, the proceedings may be continued against the persons referred to in sub-section (3) from the
stage at which the proceedings stood at the time of such discontinuance or dissolution, and all the provisions of
this Act shall, so far as may be, apply accordingly.
(5) Nothing in this section shall affect the provisions of sub-section (6) of section 159 .
Section 177 [ Section 44 of 1922 Act]: Dissolution of Association of Persons or Discontinuance of its
Business.—The provisions of this section apply where an association of persons is dissolved or its business or
profession is discontinued. Identical provisions are contained in s 189 which deals with the dissolution of a firm or
discontinuance of its business or profession. [See under s 189 .] This section does not apply to Hindu undivided
families.46
The joint and several liability imposed by this section on the members of a dissolved association may be compared
Page 2 of 2
with similar liability imposed by s 171 on the members of a disrupted Hindu family.
Where an association of persons is dissolved, notices under this Act in respect of the income of the association may
be served on any person who was a member of the association immediately before its dissolution [ s 283(2) ].
A society registered under the Societies Registration Act, 1860 is a legal entity. Its members are not personally liable
for the tax levied on the society as an association of persons, so long as the society is not dissolved and its business
is not discontinued.47
42 Subs., for “Income-tax Officer”, by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), s 2 (w.e.f. 1-4-1988). See
Circular No. 545, September 21, 1989; 181 ITR (St.) 198. Also see Circular No. 549, October 31, 1989; 182 ITR (St.) 1
and Circular No. 551, January 23, 1990; 183 ITR (St.) 7.
44 The words and brackets “Deputy Commissioner (Appeals) or the” have been omitted by the Finance (No. 2) Act, 1998
(21 of 1998), s 65(a) (w.e.f. 1-10-1998). Earlier, the words and brackets “Deputy Commissioner (Appeals)” were
substituted, for “Appellate Assistant Commissioner”, by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), s 2
(w.e.f. 1-4-1988). See Circular No. 762, February 18, 1998; 230 ITR (St.) 12.
45 The words, etc. “or the Commissioner (Appeals)” have been inserted by the Finance (No. 2) Act, 1977 (29 of 1977), s
39, Sch. V, Part I, item 4 (w.e.f. 10-7-1978). See Circular No. 229, August 9. 1977, 111 ITR (St.) 9.
46 ITO v Ramprasad 86 ITR 145, 150 (SC) .
47 Swami Satchitanand v ITO 53 ITR 533 .
End of Document
S. 178. Company in liquidation
(1) Every person—
(a) who is the liquidator of any company which is being wound up, whether under the orders of a court or
otherwise; or
(b) who has been appointed the receiver of any assets of a company,
(hereinafter referred to as the liquidator) shall, within thirty days after he has become such liquidator,
give notice of his appointment as such to the48[Assessing Officer] who is entitled to assess the income of
the company.
(2) The48[Assessing Officer] shall, after making such enquiries or calling for such information as he may deem fit,
notify to the liquidator within three months from the date on which he receives notice of the appointment of the
liquidator the amount which, in the opinion of the48[Assessing Officer], would be sufficient to provide for any tax
which is then, or is likely thereafter to become, payable by the company.
(3) 49[The liquidator—
(a) shall not, without the leave of the50[Chief Commissioner or Commissioner], part with any of the assets of the
company or the properties in his hands until he has been notified by the48[Assessing Officer] under sub-
section (2); and
(b) on being so notified, shall set aside an amount equal to the amount notified and, until he so sets aside such
amount, shall not part with any of the assets of the company or the properties in his hands:
Provided that nothing contained in this sub-section shall debar the liquidator from parting with such
assets or properties for the purpose of the payment of the tax payable by the company or for making any
payment to secured creditors whose debts are entitled under law to priority of payment over debts due to
Government on the date of liquidation or for meeting such costs and expenses of the winding up of the
Page 2 of 3
company as are in the opinion of the51[Chief Commissioner or Commissioner] reasonable.
(4) If the liquidator fails to give the notice in accordance with sub-section (1) or fails to set aside the amount as
required by sub-section (3) or parts with any of the assets of the company or the properties in his hands in
contravention of the provisions of that sub-section, he shall be personally liable for the payment of the tax which
the company would be liable to pay:
Provided that if the amount of any tax payable by the company is notified under sub-section (2), the personal liability of the
liquidator under this sub-section shall be to the extent of such amount.]
(5) Where there are more liquidators than one, the obligations and liabilities attached to the liquidator under this
section shall attach to all the liquidators jointly and severally.
(6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law
for the time being in force.
Section 178 : Company in Liquidation.—There was no provision in the 1922 Act corresponding to this section.
Under this section the liquidator of any company which is being wound-up, whether under the order of a court or
otherwise, is bound, within 30 days of his appointment,52 to give notice thereof to the AO who in his turn is bound
within three months to intimate to the liquidator the estimated amount of tax liability of the company. Until the liquidator
has set aside an amount to meet the tax liability, he should not part with any of the assets except for paying secured
creditors entitled to priority over government dues. Under this section an amount should be set aside by the liquidator
for any notified tax which is, or is likely to become, payable because the department is treated as a ‘secured
creditor’.53 However, this section does not confer on the government any higher priority than that enjoyed under the
company law, and the income-tax dues arising after the winding-up of a company cannot get priority to the claims of
workmen and secured creditors under ss 529A and 530 of the Companies Act.54 [See s 222, under ‘Priority for tax
dues: Liquidation of company and insolvency’). If the liquidator fails to set aside the amount notified by the AO, he
would be personally liable for the company’s tax to the extent of that amount.55 [Cf. ss 159(4) and 179 which impose
personal liability on legal representatives of a deceased person and the directors of a private company, respectively, in
certain cases.] Where there are more liquidators than one, their liabilities are joint and several under this section.
The provisions of this section override anything to the contrary in company law or any other law in force. They apply
equally to every person who is appointed the receiver of any assets of a company. Contravention of this section is
punishable as an offence under s 276A read with s 278AA .
The section operates only in respect of the income accrued before the order of winding-up of the company, and it has
no application to the income accruing after such order is passed.56
Page 3 of 3
49 Subs. by the Finance Act, 1965 (10 of 1965), s 41 (w.e.f. 1-4-1965), see Circular No. 3P, October 11, 1965, for the
following sub-sections (3) and (4):—
“(3) On being notified by the Income-tax Officer under sub-section (2), the liquidator shall set aside an amount equal to the
amount so notified and until he so sets aside such amount, he shall not part with any of the assets of the company or the
properties in his hands except for the purpose aforesaid or for making any payment to secured creditors whose debts are
entitled under law to priority of payment over debts due to Government on the date of liquidation.
(4) The liquidator shall, if he has not set aside the amount notified under sub-section (2), be personally liable to the extent of that
amount for the payment of the tax on behalf of the company.”. See Circular No. 3P, October 11, 1965.
50 Subs., for “Commissioner”, by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), s 2 (w.e.f. 1-4-1988).
51 Subs., for “Commissioner”, by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), s 2 (w.e.f. 1-4-1988). See
Circular No. 179, September 30, 1975, 102 ITR (St.) 9.
52 Bir Arjna v ITO 204 ITR 258 .
53 Imperial Chit Fund v ITO 219 ITR 498 (SC).
54 Re, Giovanola Binny 182 ITR 134; Re, Starit India 242 ITR 275; Syndicate Bank v Official Liquidation 242 ITR 281 ;
ACIT v Official Liquidator of Minal Oil and Industries Ltd. 290 ITR 643 .
55 Cf. Mariappa v ITO 77 ITR 785 ; Bir Arjna v ITO 204 ITR 258 .
56 ITO v Official Liquidation 111 ITR 77 ; Polyolefins v Kosmek 244 ITR 269 .
End of Document
S. 179. Liability of directors of private company in liquidation
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > M.—
Private companies
M.—Private companies
(1) 57 58 [59[Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where any tax due from a
private company in respect of any income of any previous year or from any other company in respect of any
income of any previous year during which such other company was a private company] cannot be recovered,
then, every person who was a director of the private company at any time during the relevant previous year shall
be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be
attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.
(2) 60[Where a private company is converted into a public company and the tax assessed in respect of any income of
any previous year during which such company was a private company cannot be recovered, then, nothing
contained in sub-section (1) shall apply to any person who was a director of such private company in relation to
any tax due in respect of any income of such private company assessable for any assessment year commencing
before the 1st day of April, 1962.]
61[Explanation.—For the purposes of this section, the expression “tax due” includes penalty, interest or any other sum
payable under the Act.]
Section 179 : Personal Liability of Directors or Private Company.— Section 159(4) imposes a personal liability in
certain cases on the legal representative of a deceased person; and s 178(4) on the liquidator of any company, public
or private. This section imposes a personal liability on the directors of a private company. But it is not applicable to a
company which is a public company by virtue of s 43A of the Companies Act, 1956 in relation to tax pertaining to the
period subsequent to its it becoming a public company.62 There was no corresponding provision in the 1922 Act. The
section as amended in 1975 has been held to have retrospective effect for any assessment year covered by this Act.63
Prior to October 1, 1975 1st October, 1975, the section operated only in the case of a private company in liquidation.64
From that date the provisions of the section are extended (i) to all private companies, whether in liquidation or not, and
(ii) to companies converted into public companies in respect of the period (from the assessment year 1962-63
onwards) during which they were private companies. Consistent with these amendments, the sub-heading above the
section has been appropriately altered, but the reference to ‘liquidation’ still lingers inadvertently in the marginal note
Page 2 of 4
to the section.
Prior to the above amendments, the section did not apply to a company which was dissolved or struck off the register
under s 560 of the Companies Act 1956 without being wound-up.65
This section introduces a dangerous innovation in fiscal legislation. It cuts at the root of the doctrine of limited liability
of companies. Whereas under company law a director is not personally liable for the company’s debts unless a court
of competent jurisdiction finds him guilty of misfeasance or other wrong, the vicarious liability under this section can be
imposed on a director by the AO without an adjudication by a court. Secondly, whereas company law proceeds on the
basic principle of jurisprudence that a director is presumed to be innocent till he is proved to be a wrongdoer, this
section is an instance of the disquieting drift in modern Indian legislation towards presuming a citizen to be a
wrongdoer till he is proved to be innocent. A director is liable under this section unless he proves the absence of gross
neglect, misfeasance or breach of duty on his part.
The AO has no jurisdiction to invoke this section unless he has recorded a finding that the income-tax due for the
previous year cannot be recovered from the company.66 Where the director of a private limited company had not been
given an opportunity of being heard, nor was any order passed under s 179, the recovery proceedings against the
director were held to be not valid.67 Additionally, it has been observed that an individual director would be liable only
insofar as the outstanding tax dues relate to assessment years after he became a director.68
Before action under s 179 can be initiated against a director, the Revenue has to show (a) that the director was
responsible for the conduct of the business during the previous year in relation to which the liability exists; and (b) that
it has taken effective steps to recover the outstanding dues from the company but has not been able to recover the
entire outstanding liability.69 The AO should record that non-recovery of tax from the company was solely due to gross
neglect, misfeasance or breach of duty of the director.70
In proceedings under this section, the burden is on the individual director to prove that the non-recovery was not due
to his gross negligence, and such a provision is not unconstitutional.71 It is for the directors to discharge the burden
cast upon them that they could not be attributed to gross negligence, misfeasance and breach of duty.72 Where the
facts demonstrate that the non-recovery of tax was not due to the negligence of the directors, action under this section
was held as invalid.73 But the resignation from the directorship of the company ipso facto does not absolve the director
from the liabilities incurred during the period he was a director of the company.74
In proceedings under this section, tax due will not include penalty and interest.75
57 Subs., for “Nothwithstanding anything contained in the Companies Act, 1956 (1 of 1956), when any private company is
wound up after the commencement of this Act, and any tax assessed on the company, whether before or in the course
of or after its liquidation, in respect of any income of any previous year”, by the Taxation Laws (Amendment) Act, 1975
(41 of 1975), s 50(a) (w.e.f. 1-10-1975).
Page 3 of 4
58 The existing s 179 was renumbered as sub-section (1) thereof, by the Taxation Laws (Amendment) Act, 1975 (41 of
1975), s 50 (w.e.f. 1-10-1975).
59 Subs., for “M.—Private company in liquidation”, by the Taxation Laws (Amendment) Act, 1975 (41 of 1975), s 50 (w.e.f.
1-10-1975).
60 Ins. by the Taxation Laws (Amendment) Act, 1975 (41 of 1975), s 50(b) (w.e.f. 1-10-1975).
61 Ins. by the Finance Act, 2013 (17 of 2013), s 45 (w.e.f. 1-6-2013). See Memorandum explaining the provisions in
Finance Bill, 2013 (17 of 2013); 351 ITR (St.) 102.
62 Rajamoni v Dy. CIT 195 ITR 873 (SC) .
63 Union of India v Manik 172 ITR 1 ; Union of India v Praveen 173 ITR 303 . Cf. Ratanlal v ITO 130 ITR 797 (SLP
dismissed 142 ITR St 8).
64 Hardip Singh v ITO 118 ITR 57 (SC) and sequel in Basant Singh v TRO 233 ITR 508 ; Bellav Tahsildar 71 ITR 26;
Bidya Devi v CIT 245 ITR 196 ; Roop Chandra v CIT 229 ITR 570 .
65 Yeshwant v ITO 94 ITR 370 ; Venkatasubbiah v TRO 94 ITR 375 ; Gadadhar v TRO 96 ITR 543 .
66 Reddy v CIT 232 ITR 306 ; Bhagwandas v DCIT 238 ITR 127 ; Rajendran v ITO 253 ITR 139 ; Dipak Dutta v UOI
268 ITR 302 ; Indubhai T. Vasa (HUF) v ITO 282 ITR 120 .
67 Jagdish v CIT 183 ITR 143 .
68 Arvind Kumar Gupta v Tax Recovery Officer 276 ITR 373 .
69 Amit Suresh Bhatnagar v ITO 308 ITR 113 .
70 Maganbhai Hansrajbhai Patel v ACIT 353 ITR 567 .
71 Sundararaman v CIT 215 ITR 9 .
72 Ebrahim H. v DCIT 332 ITR 122 ; Pravinbhai M. Kheni v ACIT 353 ITR 585 .
73 Khaders v CIT 229 ITR 450 .
74 Darshan v CIT 222 ITR 608 .

Page 4 of 4
75 Dinesh T. Tailor v TRO 326 ITR 85 ; Ebrahim H. v DCIT 332 ITR 122 ; Sanjay Ghai v ACIT 352 ITR 468 ;
Maganbhai Hansrajbhai Patel v ACIT 353 ITR 567 .
End of Document
S. 180. Royalties or copyright fees for literary or artistic work
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XV Liability in Special Cases > N.—
Special provisions for certain kinds of income
N.—Special provisions for certain kinds of income
Where the time taken by the author of a literary or artistic work in the making thereof is more than twelve months, the
amount received or receivable by him during any previous year on account of any lump sum consideration for the
assignment or grant of any of his interests in the copyright of that work or of royalties or copyright fees (whether receivable
in lump sum or otherwise), in respect of that work, shall, if he so claims, be allocated
for purposes of assessment in such manner and to such period as may be prescribed:
76[Provided
that nothing contained in this section shall apply in relation to the previous year relevant to the assessment
year commencing on or after the 1st day of April, 2000.]
Explanation.—For the purposes of this section, the expression “author” includes a joint author, and the expression ‘lump
sum”, in regard to royalties or copyright fees, includes an advance payment on account of such royalties or copyright fees
which is not returnable.
Section 180 [ Section 12AA of 1922 Act]: Royalties or Copyright Fees for Literary or Artistic Work.—This
section is inoperative from the assessment year 2000-01 onwards. The question whether royalties, or the price of
assignment, total or partial, of copyright, are taxable as income or are to be regarded as being on capital account, has
been dealt with under s 4, ‘Royalties for copyright’. The provisions of this section have no bearing on the question
whether the payments received by a writer or an artist are income or capital.
Page 2 of 2
The effect of this section is not to bring to charge any amount which on general principles is a non-taxable receipt. The
only effect and object of this section is to grant relief to author of literary or artistic works by providing that what is
taxable as income in their hands should be allocated, at their option, over a period of years and should bear tax at a
lower rate than the normal rate of tax which might be attracted if the entire amount is charged as the income of a
single year.77
Rule 9(2) prescribes the mode of spreading the income covered by this section over three years. The contents of this
rule constitute a striking example of the way in which a mind which revels in calculations can provide a complex
formula for a simple problem.
Section 80QQA provides another type of benefit, by way of deduction from income, to authors of certain books in
Indian languages.
76 Ins. by the Finance Act, 1999 (27 of 1999), s 67 (w.e.f. 1-4-2000). See Circular No. 779, September 14, 1999, 240 ITR
(St.) 3.
77 Cf. Thayat v CIT 63 ITR 565 .
End of Document
S. 180A. Consideration for know-how
78[Where the time taken by an individual, who is resident in India, for developing any know-how is more than twelve
months, he may elect that the gross amount of any lump sum consideration received or receivable by him79[during the
previous year relevant to the assessment year commencing on the 1st day of April, 2000, or earlier assessment years] for
allowing use of such know-how shall be treated for the purposes of charging income-tax for that year and for each of the
two immediately preceding previous years as if one-third thereof were included in his income chargeable to tax for each of
those years respectively and if he so elects, notwithstanding anything contained in any other provision of this Act,—
(a) such gross amount shall be so treated, and
(b) the assessments for each of the two preceding previous years shall, if made, be accordingly rectified under
section 154, the period of four years specified in sub-section (7) of that section being reckoned from the end of the
financial year in which the assessment relating to the previous year in which the amount was received or
receivable by such individual is made.
Explanation.—For the purposes of this section, the expression “know-how” has the meaning assigned to it in
section 35AB .]
Section 180A : Consideration for Know-how.—This section enables a resident individual to spread over three
years, the consideration received for allowing the use of know-how, if such consideration is taxable as his income.
[See s 4, under ‘Payments for know-how’, Cf. s 35AB .] The section is inoperative from the assessment year 2000-01
onwards.
78 Ins. by the Finance Act, 1985 (32 of 1985), s 31 (w.e.f. 1-4-1986). See Circular No. 421, June 12, 1985; 156 ITR (St.)
130.
Page 2 of 2
79 Subs., for “during the previous year”, by the Finance Act, 1999 (27 of 1999), s 68 (w.e.f. 1-4-2000).
End of Document
S. 181.
S. 181.
80[* * *]
80[* * * *]
Deleted section 181 [Third Proviso to Section 8 of 1922 Act]: Tax-free Securities Issued by a State
Government.—If a state government issued a tax-free security, income-tax was payable by the state government
under this section. The tax liability of the holder of such a security was dealt with by s 86A (now deleted).
80 Section 181 and the sub-heading have been omitted by the Finance Act, 1988 (26 of 1988), s 36 (w.e.f. 1-4-1989).
See Circular No. 528, December 16, 1988; 176 ITR (St.) 154.
Omitted section 181 .— Section 181 and the sub-heading, prior to their omission by the Finance Act, 1988, with effect from 1st
April, 1989, stood as under:—
‘O.—Liability of State Governments
S. 181 . Interest on tax free securities of a State Government.—Income-tax shall be payable by a State Government on the
interest on any security issued by it tax free 1[at such rate not exceeding twenty-five per cent as may be notified by the Central
Government in the Official Gazette from time to time].’.
1. Ins. by the Finance Act, 1965 (10 of 1965), s 42 (w.e.f. 1-4-1965).
80 Section 181 and the sub-heading have been omitted by the Finance Act, 1988 (26 of 1988), s 36 (w.e.f. 1-4-1989).
See Circular No. 528, December 16, 1988; 176 ITR (St.) 154.
Page 2 of 2
S. 181.
Omitted section 181 .— Section 181 and the sub-heading, prior to their omission by the Finance Act, 1988, with effect from 1st
April, 1989, stood as under:—
‘O.—Liability of State Governments
S. 181 . Interest on tax free securities of a State Government.—Income-tax shall be payable by a State Government on the
interest on any security issued by it tax free 1[at such rate not exceeding twenty-five per cent as may be notified by the Central
Government in the Official Gazette from time to time].’.
1. Ins. by the Finance Act, 1965 (10 of 1965), s 42 (w.e.f. 1-4-1965).
End of Document
CHAPTER XVI Special Provisions Applicable to Firms
Income Tax, 10e, 2 Vols, HB > Volume 2 > CHAPTER XVI Special Provisions Applicable to Firms
A new scheme for the taxation of partnership firms and their partners was introduced by the Finance Act, 1992 from the
assessment year 1993-94. A firm is to be taxed as a separate entity and there will be no distinction between a registered
firm and an unregistered firm. The gross total income of the firm is to be determined under different heads, as in the case of
any other taxable entity. The gross total income so computed is to be reduced by the salary, bonus, commission, or any
remuneration payable or paid to a partner [ s 40(b) ]. The payment of remuneration only to a ‘working partner’ [defined in
Explanation 4 to s 40(b) ] is allowable. Only individuals are capable of being working partners.
Any salary, interest, bonus, commission or remuneration due to or received from the firm by a partner, duly authorised by
and in accordance with the terms of the partnership deed, is chargeable to income-tax under the ‘Business’ head to the
extent of the amount allowed as a deduction to the firm [ s 28(v) ]. The partner is not liable to tax in respect of his share of
income from the firm [ s 10(2A) ] because the total income of the firm is to be taxed in its own hands. Thus, the system of
levying tax on firms as well as their partners has been removed.
A.—Assessment of firms
C.—Changes in constitution, succession and dissolution
End of Document
S. 182.
> A.—Assessment of firms
S. 182.
1[* * * *]
1 Section 182 has been omitted by the Finance Act, 1992 (18 of 1992), s 65 (w.e.f. 1-4-1993).
Omitted section 182 .—Prior to its omission (w.e.f. 1-4-1993) by the Finance Act, 1992, section 182 stood as under:—
‘ S. 182 . Assessment of registered firms.—(1) Notwithstanding anything contained in sections 143 and 144 and subject to
the provisions of sub-section (3), in the case of a registered firm, after assessing the total income of the firm,—
(i) the income-tax payable by the firm itself shall be determined; and
(ii) the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly.
(2) If such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance
with the provisions of sections 70 to 75 .
(3) When any of the partners of a registered firm is a non-resident, the tax on his share in the income of the firm shall be
assessed on the firm at the rate or rates which would be applicable if it were assessed on him personally, and the tax so
assessed shall be paid by the firm.
(4) A registered firm may retain out of the share of each partner in the income of the firm a sum not exceeding thirty per cent
thereof until such time as the tax which may be levied on the partner in respect of that share is paid by him; and where the tax so
levied cannot be recovered from the partner, whether wholly or in part, the firm shall be liable to pay the tax, to the extent of the
amount retained or could have been so retained.’. Circular No. 636, August 31, 1992, 198 ITR (St.) 1.
End of Document
S. 183.
S. 183.
2[ * * * *]
1. Deleted Sections 182 and 183 [ Section 23(5) of 1922 Act]: Assessment of Registered and Unregistered
Firms.—These sections have been omitted by the Finance Act, 1992 with effect from April 1, 19931st April, 1993, but
the selectively updated commentary thereon is retained.
These sections which deal with the assessment of firms, substantially correspond to s 23(5) of the 1922 Act except
that the old section did not contain a provision corresponding to s 182(4) . These sections provide machinery for
collecting or recovering the tax and do not affect the computation of taxable income.3
A firm is an ‘assessee’ under s 2(7), whether or not it is registered under s 185 for the purposes of this Act. [See cll.
(7), (23), (31),(39) and (48) of s 2, ante.] Where a firm is registered, the registration affects the assessment procedure.
There are three distinct steps in assessment proceedings: (i) computation of the taxable income, (ii) determination of
the tax payable, and (iii) demand for the tax so found due.4 Registration of the firm makes no difference for the
purposes of the first stage, but it does make a difference for the purposes of the second and third stages.5 A firm is a
unit of assessment6 and the income of the firm is computed in its hands as that of an entity, irrespective of whether the
firm is registered or unregistered. These sections, which draw a distinction between registered and unregistered firms,
come into operation only after the total income of the firm has been computed or ‘assessed’ under s 143 or 144 .7 As
regards the next two steps, viz. the determination of the tax payable and the demand, the question of registration has
a material bearing.
The scheme of taxation relating to registered and unregistered firms is institutional.8

Page 2 of 33
S. 183.
(a) Before 1956.—Prior to the amendments made by the Finance Act, 1956, the position under the 1922 Act was as
follows.
Where the firm was unregistered, the tax payable by the firm itself was determined as in the case of any other distinct
entity and the levy was made on the firm itself. On the other hand, where the firm was registered, the firm did not itself
pay the tax and therefore the tax payable in respect of the firm’s income was not determined; but each partner’s share
in the firm’s income was added to his other income, the tax payable by each partner on the basis of his total income
(including his share of the firm’s income) was determined, and the levy was made on the partners individually. In either
case, there was no double taxation. If the firm was registered, the tax was collected from the partner individually and
no levy was made on the firm itself. If the firm was unregistered and the tax had been paid by the firm itself, no tax was
payable by the partners in respect of their respective shares which had already borne tax in the hands of the firm.
(b) After 1956.—The position under this Act, as also under the 1922 Act after 1956, is the same as that set out
above, but with one material difference. Income-tax at special rates is now assessable on a registered firm, commonly
known as the ‘registered firm’s tax’; while the partners of a registered firm are liable, as before 1956, to be taxed in
their individual assessments in respect of their shares of the firm’s income. So there is double taxation in the case of a
registered firm, and partial relief against such double taxation is afforded by s 67(1) .
Tax is not payable by a partner of an unregistered firm in respect of his share in the income of the firm on which tax is
payable by the firm, although such share is to be included in his total income for the purpose of determining the rate
applicable to his taxable income. [See under s 86(iii) .] When an unregistered firm is assessed as a unit, the rates of
tax applicable may be higher than those which would be applicable to the total income of partner, inclusive of his share
of the firm’s income, but a partner would not be entitled to any refund of the tax paid by the firm at the higher rates.
The reason is that an unregistered firm is a distinct assessable entity for the purposes of the Act and pays the tax is
discharge of its own liability and not on behalf of its partners.9
The computation of a partner’s share in the firm’s income is dealt with by s 67 . Section 182(2) enacts that where the
share of any partner of a registered firm is a loss, it should be set off against his other income or carried forward and
set off in accordance with the provisions of ss 70 to 75. Section 67(4) is to the same effect. This personal right of set-
off is denied to the partners of an unregistered firm. [See under ss 75 to 77.]
The AO cannot treat a registered firm as unregistered in any case. On the other hand, s 183(b) empowers the AO to
assess an unregistered firm as if it were a registered firm, if such a course would be more advantageous to the
revenue.10 The AO is required to establish that such recourse to s 183(b) would be advantageous to the revenue.11 Up
to the assessment year 1970-71, there was one difference between a registered firm assessed under s 182(1) and an
unregistered firm assessed under s 183(b) as if it were a registered firm. In the case of a registered firm, while tax is
assessed on the partners individually in respect of their shares of the firm’s income, the firm itself is also assessable to
the registered firm’s tax; whereas under s 183(b) though the AO could assess the individual partners of an
unregistered firm in respect of their shares of the firm’s income he had no power to levy the registered firm’s tax on the
firm. From the assessment year 1971-72 this difference does not subsist, and the firm assessed under s 183(b) is
liable to pay the registered firm’s tax.
Registration of the firm does not estop the department from finding that one of the partners of the firm is only a
benamidar or name-lender for another partner or for an outside. Upon such a finding the ostensible partner’s share of
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S. 183.
the firm’s income may be included in the total income of the beneficial owner of the share. [See ss 184 and 185, under
‘Registration does not prevent department from assessing partner’s share of profits in hands of another person’]. The
explanation to s 185(1) now disentitles the firm to registration in certain cases where a partner is a benamidar for
another person.
Where a firm has been assessed as an unregistered firm and tax has been recovered from it, and subsequently,
registration is granted as a result of appeal, the department cannot assess a partner in respect of his share of profits in
the firm without first cancelling the original assessment on the unregistered firm and following the procedure
prescribed by ss 182 and 158.12
Assessment in a case where there is a change in the constitution of a firm, or succession to one firm by another, or
dissolution of a firm or discontinuance of its business, is dealt with by ss 187, 188 and 189 respectively.
2. Determination as to who are Partners of Unregistered Firm.—The Bombay High Court held in Gokuldass v
Kikabhai Abdulali 13 that when assessing a firm as an unregistered firm, it is the duty of the AO to determine the
partners of the firm and to give notice to all the individuals who are alleged to be partners, so that they may appear
and show cause against being treated as partners. If the AO completes the assessment on the unregistered firm
without notice to all the alleged partners, he would have no right to take recovery proceedings against an alleged
partner who was not heard and whose liability as a partner has not been duly adjudicated upon.
3. Computation of Registered Firm’s Income is Basis of Assessment on Individual Partners.—When a

registered firm is assessed and its total income computed, the individual partner are to be taxed under s 182 in respect
of their respective shares of the firm’s income so computed, and it is not open to the department to assess separately
a partner of the firm in respect of his share of profit alleged to have been made by the firm which were not included in
the firm’s total income computed in the assessment on the firm. This was laid down by the Bombay High Court in the
case of CIT v Dwarkadas Vassanji 14 which has been followed by the Punjab15 and Madras16 High Courts. The
Karnataka High Court has taken the same view.17
4. Deductions Allowable to Partner from his Share of Profits of Firm.—It is not open to an individual partner in his
own assessment proceedings to challenge the figure of income of the firm computed in the assessment on the firm,
nor is it open to him to claim any deduction which could have been claimed by the firm. But it is open to him to claim
deduction from his share of the firm’s income in respect of expenditure incurred by him wholly and exclusively for
earning his share of income, eg interest paid by him on moneys borrowed for the purpose of investment in the firm [ s
67(3) ]. [See s 29, under ‘Deductions allowable to partner from his share of profits of firm’, and under s 67(3) .]
5. Sub-partnership: Diversion of Partner’s Income by Overriding Title.—The Supreme Court held in Murlidhar
Himatsingka v CIT 18 that if any portion of a partner’s share of income of a registered firm is diverted from him by
overriding title, eg under an agreement of sub-partnership, such portion would not be taxable in the partner’s hands.
The same principle applies where the diversion by overriding title arises under a deed of partition which obliges a
partner to hand over a portion of his share of income to a member of his erstwhile joint family.19 [See also ss 184 and
185, under ‘Partner in a representative capacity or sharing profits with outsiders or as benamidar for another’.]
6. Amendment of Partners Completed after Assessment on Firm.— Section 155(1) provides that where in respect
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S. 183.
of any completed assessment on a partner it is found on the assessment or reassessment of the firm or on any
reduction or enhancement made in the income of the firm in appeal or revision or on a reference that the share of the
partner in the income or loss of the firm has not been included in the assessment of the partner or, if included, is not
correct, the partner’s assessment may be amended within four years from the end of the financial year in which the
final order was passed in the case of the firm. [See under ss 154 and 155(1).] But the completed assessment on a
partner cannot be disturbed for including his share of the firm’s income without recourse to s 147 or 155, since
assessment proceedings against a partner are separate and independent from assessment proceedings against the
firm.20
7. Direct Assessment on Partner without Assessment on Firm.—Where a firm has not made a return and has not
offered its income for assessment, the department may assess a partner directly in respect of his share of the firm’s
income, without resorting to the machinery provided in these sections and without making an assessment on the firm.
In the case of an unregistered firm it is open to the department to assess an individual partner in respect of his share
of the firm’s income without making any assessment at all on the firm.21 However, once the department has exercised
its option and assessed the partners individually, it cannot thereafter assess the same income in the hands of the firm
as an unregistered firm.22 This principle, which was well established under the 1922 Act, still holds good under the
present law. But even after the partners have been assessed individually, it would be open to the department to
assess the registered firm or assess an unregistered firm as a registered firm under s 183(b), because in the case of a
registered firm the firm as well as the partners are assessable entities.23
8. Section 182(3) : Non-resident Partner.—Where a partner of a registered firm is not resident in India, the tax
payable in respect of his share of the firm’s income is levied on and is payable by the firm itself, but at the rates which
would be applicable if the assessment were on the partner personally,24 and his income from any other sources should
not be included to determine the rates.25
The Privy Council held in Badridas Daga v CIT 26 and the Supreme Court in Ramanathan Chettiar v CIT 27 that a
non-resident partner of a registered resident firm is not entitled to exclude from his total income a proportion of his
share of the firm’s income corresponding to the portion of the firm’s income which accrued or arose outside India.28
Rejecting the contention to the contrary, the Privy Council said:
If the appellants’ contention is correct it would be necessary for the Income-tax Officer not only to determine the
total income of each firm as he is directed to do by s 23 [of the 1922 Act] but also to determine what part of that
income was such that if it were the income of a person not resident or no ordinarily resident in British India it
would not be part of his total income within the meaning of the Income-tax Act. Without such a determination it
would not be possible to assess the taxable income of a non-resident partner. But there is nothing to require the
Income-tax Officer to undertake this task.
Section 182(3) is a procedural provision and does not exclude the operation of s 64 . There is no distinction between
a non-resident minor and a resident minor and the former’s income will be included in the hands of his father, a non-
resident assessee.29
9. Section 182(4) : Registered Firm’s Liability for Partner’s Tax.—There was no provision in the 1922 Act
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S. 183.
corresponding to this sub-section. It provides that the registered firm may retain out of the share of each partner in the
firm’s income a sum not exceeding 30 per cent thereof, until the partner has paid the tax in respect of his share of the
firm’s income. If the partner commits default in paying his tax, the firm is liable to pay the tax to the extent of the
amount which the firm is entitled to retain under this sub-section,30 irrespective of the question whether the firm has in
fact retained any amount or not. But before the firm can be made liable for the tax of the partner, the irrecoverability of
tax from the partner should be established by the AO.31 To invoke this sub-section, the AO is also required to record
the fulfilment of the statutory conditions and issue a notice of demand under s 156 of the Act.32 To the general rule that
the tax levied on a partner of a registered firm cannot be recovered from the firm or ultimately from the other
partners,33 this sub-section34 and proviso (ii) to s 187(1) constitute exceptions. [See further under ss 188A and 189
which impose joint and several liability on partners for the tax payable by the firms, whether registered or
unregistered.]
10. Appeal.—An appeal lies under s 246 against an assessment made on a firm, registered or unregistered. In the
case of a registered firm or an unregistered firm assessed under s 183(b) as if it were a registered firm. Section 247
confers a right of appeal on every partner who is individually assessable in respect of his share of the firm’s income.
[See further under s 247 .] See also s 267 for amendment of the assessment made, or a fresh assessment to be
made, on a partner, consequential upon a change made in appeal in the firm’s assessment.
11. Writ, Direction or Order.—A writ, direction or order may be issued in appropriate cases.35 [For the principles
underlying the grant of such relief, see s 293, under ‘Writs, directions and orders under Constitution’.]
12. Reference.—In the context of s 182, the undernoted case held that referable questions of law arose36 or under s
256 .
B.—Registration of Firms
Sub-heading B and ss 184, 185 and 186 were substituted by new ss 184 and 185 by the Finance Act, 1992 with effect
from April 1, 19931st April, 1993. The following selectively updated commentary is on the substituted sections.
Substantial parts thereof will continue to be relevant for similar provisions in the new ss 184 and185, which are
operative from assessment years 1993-94 onwards.
13. Substituted Sections 184 and 185 [ Section 26A of 1922 Act]: Partner and Partnership.—The topic of partner
and partnership had been dealt with under s 2(23) . Reference may be made to the general principles noted there
under various headings: ‘Validity of partnership’, ‘Illegal partnerships’, ‘Genuine and sham partnerships’, ‘Two firms
consisting of same partners’, ‘Joint family, company or firm, or same individual in different capacities, as partner’, ‘Firm
is an assessable entity’.
14. Registration of Firms.—A firm can trade without being registered under this Act.37 The right of registration is
given by the Act to firms in order to enable them to get the benefit of lower rates of tax than those which would be
applicable to the whole income of the firm when charged as a unit of assessment. If a firm desires to have this benefit,
it must conform strictly to the requirements prescribed by the law.38
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S. 183.
The question of registration is of vital importance in assessing firms. An unregis-tered firm is charged as a unit of
assessment; while in the case of a registered firm although tax at special rates (the registered firm’s tax) is levied on
the firm, the substantive levy is on each individual partner in respect of his share of the firm’s income. This difference
in procedure is provided by ss 182 and 183 and has been dealt with under those sections. Registration of a firm under
the Partnership Act or any other Act would not avail for the purposes of this Act.
For the first assessment year under this Act 1962-63, a firm, even though it was registered under the 1922 Act, has to
apply for registration under s 184, and not to file a declaration under s 184(7) .39
15. Conditions of Registration.—The following conditions are essential to the registration of a firm under s 185 :
(i) On behalf of the firm an application should be made to the AO before the end of the accounting year, and the
application should comply with the requirements of s 184 and rr. 22 to 24.
(ii) The firm should be evidenced by an instrument of partnership.
(iii) The instrument should specify the individual shares of the partners.
(iv) The partnership should be valid and genuine, and should actually be constituted as specified in the
instrument.40
If all the above conditions are fulfilled, the AO is bound to register the firm,41 unless the assessee has committed any
of such defaults that entail a best judgment assessment under s 144, in which event he may refuse registration [ s
185(5) ]. The AO has no power to refuse registration to a firm except on the grounds permitted by law; e.g., he cannot
refuse registration on the ground that accounts are not maintained,42 or that profits cannot be properly deduced from
the method of accounting adopted by the firm,43 or that no interest is paid on the partners’ capital or advances to the
firm despite a term for the payment of such interest in the partnership deed,44 or that one partner took up an
independent contract in alleged violation of clauses of partnership deed.45
(a) Requirements Prescribed by Section 184 and Rules.— Rules 22 to 25 deal with the registration of firms. The
undermentioned cases46 dealt with the effect of the corresponding rules under the 1922 Act.
Section 184(3) provides inter alia that the application for registration should be signed by all the partners47 personally.
If the application is not signed personally by all the partners but is signed by their agents, it would be invalid, even if
the agent was duly authorised.48 The only exceptional cases are where a partner is dead or a lunatic or an idiot, or is
absent from India, in which cases the application may be signed by his representative or his duly authorised agent.
Where the partners of two or more firms enter into a bigger partnership, each of them should personally sign the
application for registration of the bigger firm.49 However, an application not personally signed by all the partners should
not be rejected outright, but the AO should give the partners an opportunity under s 185(2) to rectify the defect.50
Further, the use of fingerprints instead of signatures by some of the partners is not a defect requiring rectification, and
cannot be a ground for refusing registration.51 But a sub-partner is not required to sign the application for registration.52
Section 2(23) enacts that a partner for the purposes of this Act includes a minor admitted to the benefits of
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S. 183.
partnership, but the application for registration has not to be signed by a minor53 [ s 184(3) ].
The application for registration should be made before the end of the accounting year relevant to the assessment year
for which registration is sought; but the AO has power to condone delay54 [ s 184(4) ]. In a case where a wrong
application form for registration was filed, it was held that the AO should consider the application for registration afresh
after allowing an opportunity to the assessee to make an appropriate application for registration.55 The assessee must
be heard before the application is rejected as time-barred.56
Rule 22 prescribes the form in which the application should be made. The application should be accompanied by the
original instrument of partnership unless the production or the original has been dispensed with by the AO. But an
application would not be invalid merely because it is not accompanied by the instrument of partnership.57 The
prescribed form requires the application to disclose particulars of the apportionment of the income among the
partners.58 If the apportionment of the firm’s income among the individual partners is disclosed in the application,
registration should be granted even if in the books of the firm the shares of some of the partners who constitute a
smaller separate firm are collectively credited to the account of such smaller firm.59 Registration cannot be refused if
there is a genuine mistake in apportioning and crediting the partners’ shares of profit.60 Similarly, registration cannot
be refused if the profit of the firm, instead of being credited to the partner’s separate accounts, is taken to a reserve
account and the partners’ shares are shown therein,61 or if the partners do not adhere to the term relating to payment
of interest as provided in the partnership deed and mentioned in the registration application,62 or if a small part of the
profits is carried forward to the next year’s account, since it would be divided among the partners along with the profits
of the next year.63 Under the prescribed form of application for registration it is enough to certify that the profits will be
divided among the partners in their profit-sharing ratio; it is not necessary to make such division before the application
for registration.64
Section 185(1) provides that if the AO is satisfied that there is or was a genuine firm in existence, constituted as
shown in the instrument of partnership, he should register the partnership. If he is not so satisfied, he must pass an
order refusing to grant registration. Under s 185(6), which applies from the assessment year 1989-90, where a firm
has made an application for registration and has furnished the return of income, it shall be deemed to have been
registered on the expiry of the period for serving notice under s 143(2), subject to the power of the AO to intimate any
defect and reject the application if the defect is not cured as provided under s 185(2) .
The AO has no power to reconsider the registration on the ground that subsequent to the grant of registration there
was an error in allotment of shares of profits in the firm among the partners.65
Defect.—Where the application for registration did not comply with the provisions contained in the rules66 or where a
recital or averment contained in the application was not in accordance with facts,67 the AO was held justified in
refusing to register the firm under the 1922 Act. The Andhra Pradesh High Court held that even under that Act the AO,
whose duty was to act in a fair and just manner, was bound to bring to the notice of the assessee a curable defect and
give him an opportunity to rectify it.68
A similar view was taken by the Bombay High Court as regards the duty of the CIT while seeking to revise the AO’s
order granting renewal of registration under that Act.69 In any event, under this Act the AO cannot reject an application
for registration,70 or a declaration under s 184(7),71 merely on the ground that it is not in order; he should intimate the
defect to the firm and give it an opportunity to rectify the defect within one month from the date of intimation [ s 185(2)
and (3)]. But sub-ss (2) and (3) of s 185 do not protect cases of fraud, and a forged signature is not a ‘defect’ which
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can be permitted to be rectified.72 Similarly, protection is not available where the assessee consciously admits that
there was a division of profits not in accordance with the instrument of partnership.73
(b) There must be an ‘Instrument of Partnership’.—It is not necessary that the partnership agreement should be
signed by all the partners. If the agreement had not been signed by one of the partners but that partner has assented
to the agreement and joins the other partners in applying for registration, the firm would be entitled to registration.74
Registration cannot be refused merely on the ground that the instrument of partnership is not complete, that is, it does
not contain in itself the complete agreement constituting the partnership but requires supplementation by other
evidence.75
The section requires that the firm should be evidenced by an ‘instrument of partnership’. But ‘instrument’ does not
mean only a regular partnership deed.76 If the terms of the partnership are contained in a number of documents, or is
correspondence between the partners, those documents or letters would constitute an instrument of partnership and
the firm may be registered.77
The partnership deed may provide that on the death of a partner the firm would not stand dissolved but the legal
representative of the deceased partner would be entitled, though not bound, to come in as partners in place of the
deceased partner.78 In such a case the constitution of the firm would be changed when upon the death of a partner his
representatives elect to continue the partnership, and a fresh instrument of partnership should be executed.79 But a
fresh deed of partnership need not be executed if the original deed itself provides that on the death of a partner his
share shall belong to the remaining partners in determinate shares.80 A Full Bench of the Allahabad High Court held in
Badrinarain v CIT 81 that the execution of a fresh instrument of partnership is not necessary when a minor admitted to
the benefits of partnership attains majority and elects to become a partner, provided the redistribution of the shares in
losses is ascertainable from the original instrument. But where the fresh deed was executed after a minor attained
majority, it could not be said to be illegal merely because, after attaining majority, the partner accepted the liability
during the period of his minority.82 [See further s 187, under ‘Meaning of change in constitution of firm’.]
Where an instrument of partnership provides that the partnership shall be for a fixed term, the registration of the firm
cannot be granted in respect of an accounting year subsequent to the expiry of the term, when the instrument of
partnership is no longer operative.83
The instrument evidencing the partnership should be one which relates to the accounting year (and not the
assessment year) since it is the income of the accounting year which is the subject of charge and which is to be
apportioned among the partners for the purpose of computing the tax payable by each individual partner.84
Instrument Executed after End of Accounting Year.—If a partnership did not in fact exist prior to the execution of
the partnership deed, but the deed merely states that the partnership should be deemed to have come into existence
at an earlier date, that would not create a partnership as from that earlier date, since no deed can alter the past,85 and
registration cannot be granted for the period prior to the date of the deed.
In Mitter & Sons v CIT and Auddy & Bros. v CIT 86 Sinha J, delivering the majority judgment of the Supreme Court,
laid down the following propositions under the 1922 Act:
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S. 183.
(i) The word ‘constitute’ was used in s 26A of that Act not in the narrow sense of ‘creating’ or ‘setting up’, but in
the wider sense of ‘putting a thing in legal shape’.
(ii) A partnership which originated in a verbal agreement but the terms of which were subsequently reduced to
writing was a partnership ‘constituted under an instrument’; it was not necessary that the partnership should
be constituted by the instrument itself.87
(iii) In view of the scheme of the old s 26A and the relevant rules, in order that a firm might be entitled to
registration the instrument of partnership had to be in existence in the relevant accounting year.88
Section 184(1) requires that the partnership should be ‘evidenced by an instrument’, unlike the old s 26A which
required the partnership to be ‘constituted under an instrument’. Although this section requires the application for
registration to be made before the end of the accounting year, accompanied by the original instrument evidencing the
partnership, the section also contemplates an instrument of partnership which is not in existence in the accounting
year. This view is supported on the ground that the AO is empowered to condone delay and accept an application
made after the end of the accounting year,89 and it has been approved by the Supreme Court in Wazidali Abid Ali v
CIT. 90
If the partnership deed is executed before the close of the relevant accounting year, recording the verbal creation of
the firm earlier in the year or before the commencement of the year, registration should be granted from the date of
commencement of the firm or the year, and not from the date of execution of the deed.91 But in such a case, the deed
must record the anterior date on which the partnership was formed.1 Where, however, the partnership deed in
existence in the relevant accounting year is defective,2 registration cannot be granted even if the defect is rectified by
another deed executed after the close of the year,3 unless the defect is one which does not go to the validity of the
partnership or the statutory conditions of registration.4
If a firm is reconstituted in the course of an accounting year and the reconstituted firm is for some reason not entitled
to registration, that would not debar the originally constituted firm from claiming registration at least for that part of the
accounting year during which it had existed.5 Similarly, if a firm is dissolved in the course of an accounting year, the
fact that the declaration for continuance of registration is made for the whole of that accounting year would not debar
the firm from getting registration at least up to the date of dissolution.6
(c) Instrument must Specify Individual Shares of Partners.—No firm can be registered unless the instrument of
partnership specifies the individual shares of the partners in the profits of the partnership.7 Where the partnership is
evidenced by a deed which does not specify the individual share of each of the partners, registration must be refused.8
Thus, where the deed provided that certain minors admitted to the benefits of partnership,9 or the named heirs of a
deceased partner,10 should as a body be collectively entitled to a specified share, the income-tax authorities were held
justified in refusing to register the firm. However, the specification of shares need not be express, it may be implied:
the section is satisfied if the deed can be reasonably construed as clearly implying that the shares of the partners or
minors are equal.11 After the retirement of a partner, the firm would not be entitled to registration on the basis of the
original partnership deed, unless the shares of the continuing partners in the event of a retirement are specifically
provided for by that deed or by a separate document.12
If the shares of the partners are not expressly specified in the instrument of partnership, but can be ascertained from
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S. 183.
the application and the required information supplied therewith, the requirements of section are satisfied. The
Supreme Court in Progressive Financers v CIT 13 held that in order to determine whether the ratio for sharing the
losses is specified, the instrument of partnership has to be construed reasonably by reading it as a whole and after
taking into consideration the relevant circumstance disclosed by the instrument of partnership, the account books for
the relevant year and the statements made in that behalf in the application for registration. It approved the principle in
s 13(b) of the Indian Partnership Act that the partners are entitled to share equally in the profits earned and must
contribute equally to the losses sustained by the firm, and also the rule that where the shares in the profits are
unequal, the losses must be shared in the same proportion as the profits if there is no agreement as to how the losses
are to be apportioned.
If a partnership deed specifies the profit-sharing ratio, it is implicit in such a provision that losses would be shared in
the same proportion. Section 184(1)(ii) merely requires ‘the individual shares of the partners’ to be specified in the
instrument. If the individual shares in profits are specified, and the individual shares in losses follow as a legal and
logical consequence, it must be held that the deed also specifies shares in losses. It is only where the shares of the
partners are unequal and a minor is admitted to the benefits of partnership, that it may be necessary to specify in the
deed how the amount of loss represented by the minor’s share would be borne by the partners.14 A Full Bench of the
Andhra Pradesh High Court has held that in such a partnership deed if there is a provision to share the losses
amongst the major partners in the same proportion in which they share the profits, but nothing is said regarding the
amount of loss represented by the minor’s share, then the major partners would, in proportion to their respective
shares, bear the entire loss;15 and if the provision for the major partners to share the losses does not lay down the
actual sharing ratio, the losses would be shared in the same proportion in which the profits are shared.16 Where the
partners, including minor partners, were to share the profits in the ratio of capital contributed, it was held to be implied
that only the major partners would share the losses in proportion to the capital contribution.17 However, if the minor is
made specifically liable to share the loss of the firm, the firm is not entitled to registration.18
Where a firm (or firms) enter into a bigger partnership with others, it is valid in law only if the members of the smaller
firm are individually the partners of the bigger firm; and therefore if the individual share of each of such partners is not
specified in the instrument, registration cannot be granted to the bigger firm.19 But if such a defect in the instrument is
corrected by a subsequent partnership deed in which the shares of the individual partners of the smaller firm are
separately specified, the firm would be entitled to registration,20 provided the subsequent deed is executed in the
relevant accounting year.21 The Supreme Court ruled in Kylasa Sarabhaiah v CIT 22 that a deed of partnership should
be reasonably construed and held that the firm was entitled to registration where the relevant clause of the partnership
deed merely set out the collective share of the smaller firm but the preamble to the deed indicated how that share
would be divided among the members of the smaller firm. The Bombay High Court has held that where a deed of
bigger partnership between the partners of smaller firm does not specify the individual shares of the partners of the
smaller firms, but the deeds of partnership of the smaller firm specifying the individual shares of the partners are on
the record of the department and are relied on by the bigger firm, the bigger firm would be entitled to registration since
in such a case the deeds of partnership of the bigger and smaller firms would collectively constitute the instrument of
partnership of the bigger firm.23 The Madras24 and Madhya Pradesh25 High Courts have taken the same view. A Hindu
undivided family as such cannot be a partner; the adult members of the family can be partners but in that case it is
necessary to specify their individual shares.26 [See further s 2(23), under ‘Joint family, company or firm…as partner’.]
The shares of sub-partners need not be specified in the instrument of partnership.27
The share of a partner may be a fixed periodic amount.28 If the individual shares of the partners are specified in the
instrument of partnership, registration cannot be refused merely because there is a genuine mistake in apportioning
the profits29 or a mistake that was rectified,30 or the divisible profits are estimated or calculated on a basis different
from the basis of calculating taxable profits,31 or the partners allow the profits to accumulate in the business and credit
each partner with his share instead of actually distributing and withdrawing the profits every year,32 or there is failure to
distribute the loss suffered amongst the partners,33 or some of the partners are paid salary without a provision for such
payment in the partnership deed,34 or one of the partners of the firm misappropriated amounts and did not enter the
same in the books of account35 or the shares which the partners are actually entitled to receive in the profits are made
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S. 183.
to depend upon the time which they devote to the business of the firm,36 or the existing partners’ shares are liable to
be affected by the introduction of new partners,37 or on other insignificant grounds.38 Registration cannot be refused on
the ground that there was no evidence to show that profits were distributed in accordance with profit sharing ratio as
per the deed of partnership.39 Similarly, registration cannot be refused where a portion of the profit was transferred to a
dissolution settlement account and utilised for discharging liabilities of partners which arose on account of the
dissolution of the erstwhile firm.40
(d) Genuine and Sham Partnerships.—An instrument of partnership is not a magical talisman protecting its
executants from the imposition of higher tax.41 When a document purporting to be an instrument of partnership is
tendered on behalf of a firm and an application is made for registration of the firm as evidenced by such instrument,
the AO is entitled to inquire whether the instrument is intended by the parties to have real effect as governing their
rights and liabilities inter se in relation to the business or whether it has been executed by way of pretence in order to
escape liability for tax and without intention that its provisions should in truth have effect as defining the rights of the
parties as between themselves.42 An assessment order passed on the firm does not preclude such an inquiry in
registration proceedings.43 Where there was a clear finding that the assessee firm was not genuine and its business
was actually carried on by another firm, it was held that the firm was not entitled for registration.44 However, when the
disparity between the shares specified in the instrument and the actual distribution of profits is so great as to render
the entire scheme of the partnership a sham, registration can be refused/cancelled.45
There may be no fraud or malafides on the part of the taxpayer, yet even a simulate arrangement may justify a refusal
to recognise the firm.46 But bare suspicion will not be sufficient to justify the inference of fact that a partnership is not
genuine,47 as the Supreme Court pointed out in Umacharan Shaw v CIT .48 The mere fact that a former employee49 or
a relative50 is taken up as a partner, or that a partner does not bring in any capital,51 or that one of the partners failed
to show capital contribution,52 or that a partner occupies a dominant position and is in control of the business53 or that
a sleeping partner is ignorant about the details of the partnership and has not withdrawn his share of profits,54 or that
no notice of partnership is given to the constituents of the business55 or to the bank,56 or that a third party is authorised
to operate the firm’s bank account,57 or that the firm is not registered under the Partnership Act,58 or that no separate
capital account is opened,59 or that the partners who are former members of a disrupted Hindu family continue to live
and dine together,60 would not constitute evidence for a finding that the partnership is not genuine. But a combination
of several of these factors and other infirmities may justify the inference that the partnership is not genuine.61 A firm in
which invalid trusts were partners was held to be invalid, and not entitled to registration.62 Similarly, when a
partnership is not carrying on any business activity,63 or has ceased to carry on its earlier business activities,64 as
opposed to a temporary interval65 registration can rightly be refused.
It If the partnership is genuine and actually exists in the terms specified in the deed, the fact that it was formed with a
view to of diminishing the incidence of taxation,66 or that it did not carry on business in a particular year,67 or that there
is a wrong recital in the partnership deed regarding the date of its execution68 or the reason for forming the
partnership69 or the business carried on by it,70 or that all the businesses carried on are not mentioned in the deed,71
or that a partner has done business in contravention of the law or of the agreement of partnership,72 or that a partner
may have brought the capital from his joint family73 or form another firm in which he is a partner,74 is irrelevant and
would not justify a refusal to register the firm. Similarly, the mere fact that two firms have common partners and a
common business is not sufficient to conclude that the partnership is a sham, and to refuse registration.75
(e) Registration—Effect of Undisclosed Income/Secret Profits.—The requirements of registration are quite

different in the 1961 Act. Unlike the 1922 Act, there is no requirement of renewal of registration on an annual basis. An
enquiry into the genuineness of the firm has to be made only in the first year and not for the subsequent years as was
required under the 1922 Act.76The Supreme Court held that if a firm had earned profits in the black market which had
not been distributed as per the partnership deed, it would not be entitled for renewal of registration under the 1922
Act.77Similarly, if it is found that there was undisclosed business income, it will be a ground to refuse renewal of
Page 12 of 33
S. 183.
registration.78 It has been rightly held, under the 1922 Act, that undisclosed profits which had not been divided
amongst partners would not be a ground for refusal for registration under the 1922 Act as long as the partnership is
evidenced by an instrument of partnership and there is no reason to doubt the genuineness of the firm.79 Under the
1961 Act also, it has been held that non-disclosure of income has not been prescribed as a ground for cancellation of
registration under s 156(1) .80 Unexplained cash credit was treated as deemed income under s 68 . The firm could not
be denied confirmation of registration on the ground that such deemed income was not distributed amongst the
partners.81
16. Partner in a Representative Capacity or Sharing Profits with Outsiders or as Benamidar for Another
Person.—The Supreme Court held in CIT v Abdul Rahim 82 that a partnership cannot be held not genuine or be
denied registration merely because a partner had joined in a representative capacity, or is a trustee or benamidar for
an outsider or for another partner, or is otherwise not beneficially entitled to the whole or part of his share of profits.83
In that case the firm was held entitled to registration although there was a private arrangement between two of the
partners (to which the other partners were not parties) that one will pass on his share of profits to the other. A firm
would be entitled to registration although a partner may divide his share of profits with others, eg sub-partners or
members of another firm.84 Registration cannot be refused where the father has provided funds to the son to invest in
the firm.85 In CIT v Bagyalakshmi & Co .86 the Supreme Court held the firm to be entitled to registration although two
partners who had been members of a joint family were not entitled to the entire beneficial interest in their shares of
profits but had to divide their shares with other members of their family which was partitioned. Subba Rao J. Subba
Rao J. observed:
A contract of partnership has no concern with the obligation of the partners to others in respect of their shares of
profit in the partnership. It only regulates the right and liabilities of the partners. A partner may be the karta of a
joint Hindu family; he may be a trustee; he may enter into a sub-partnership with others; he may, under an
agreement, express or implied, be the representative of a group of person; he may be a benamidar for another. In
all such cases he occupies a dual position. Qua the partnership, he functions in his personal capacity; qua the
third parties, in his representative capacity. The third parties, whom one of the partners represents, cannot
enforce their rights against the other partners nor can the other partner do so against the said third parties. Their
right is only to a share in the profits of their partner-representative in accordance with law or in accordance with
the terms of the agreement, as the case may be.87 [See also under ss 182-183, ‘Sub-partnership: Diversion of
partner’s income by overriding title.]
Special Statutory Provisions.—The above legal position is now modified by the explanation to s 185(1) which
disentitles a firm to registration in two cases where a partner is a benamidar for another person. The explanation
provides that for the purposes of ss 185 and 186 a firm shall not be regarded as genuine if any partner [including a
minor admitted to the benefits of partnership s 2(23) ] was, in relation to the whole or any part of his share in the
income or property of the firm, at any time during the accounting year, a benamidar:
(i) of any other partner88 (except where the benamidar is the spouse or minor child of the other partner to whom
the benamindar’s share beneficially belongs), or
(ii) of any outsider,89 and any of the other partners knew or had reason to believe that the benamidar relationship
existed and such knowledge or belief had not been communicated by such other partner to the AO in the
Page 13 of 33
S. 183.
prescribed manner.90 Rule 24A prescribes the form and the time in which such communication should be
made.
When the explanation came into operation from the assessment year 1971-72, it covered only cases falling within (i)
above. Category (ii) has been added from the assessment year 1976-77.
The other statutory provision on the point is Benami Transactions (Prohibition) Act, 1988.91 That Act makes it a crime
to enter into a benami transaction. But the effect of that Act is not to render every partnership invalid where a partner is
a benamidar for another. The Act defines ‘benami transaction’ as meaning ‘any transaction in which property is
transferred to one person for a consideration paid or provided by another person’. No doubt a partner’s interest in a
firm is property. But if a partner who is a benamidar for another has been made a partner in circumstances which do
not amount to a benami transaction within Act, e.g. where no consideration (say, partner’s capital in the firm) has been
paid or provided by another, the partnership would not be hit by that Act.
A trustee or a representative, e.g. a karta or other coparcener who is a partner as representing his joint family, cannot
be treated as a benamidar.92
17. Joint Family Business Converted into Partnership Business.—Where the members of a joint family agree to
carry on the family business in partnership, the question arises whether such a partnership can be registered under s
185 . A partnership agreement purported to be executed by the members of a joint family is not binding on the
department.93 If the partnership agreement is not genuine and is put up merely by way of pretence in order to escape
liability to tax, registration should be refused as it should be in the case of any other firm in such circumstances.94 But
if the partnership is genuine, a disruption of the joint family is not essential to the validity of the partnership. The Privy
Council ruled in Sundar Singh Majithia v CIT 95 that there is nothing in the Act to prohibit the members of a Hindu
undivided family, while remaining joint, from entering into a partnership in respect of a business, being a portion of the
joint property, which they have partitioned among themselves, and that registration of such a partnership should not be
refused merely because the joint family as such continues to exist.96 Thus, where the members divide the family
business among themselves and agree to carry it on in partnership, and the firm is found to be genuine and in
existence, registration should be granted under this section, irrespective of whether the joint family continues to exist
or is deemed under s 171(1) to exist and whether an order has or has not been made under s 171(3) recording a
partition of the joint family properties.97 The conversion of joint family business into partnership business may be
effected by a deed of partnership and appropriate entries in the books, e.g. dividing the book balances in the names of
the persons to whom the shares have been allotted without a deed transferring the business assets from the family to
the firm and without a formal assignment of the book debts by notice to the debtors.1 [See further s 2(23), under ‘Joint
family, company or firm, or same individual in different capacities, as partner’, and s 171, under ‘Property divided
among members by way of partial partition’.]
Effect of Section 171(9) .—Sub-section (9) of s 171 provides that in the case of a Hindu joint family hitherto
assessed as undivided, a partial partition effected after 31st December, 1978 will not be recognised under that section
and the joint family shall continue to be assessable under the Act as if no such partition had taken place. It seems that
in cases falling under s 171(9), if the members of a joint family, while remaining joint, convert a portion of the joint
family property into a partnership business, the firm may not be recognised as such for the purposes of the Act and
may not be entitled to registration under s 184, assuming s 171(9) is constitutionally valid. [See under s 171(9) .]
18. Validity of Partnership.—Just as the AO would be justified in refusing registration if he finds as a fact that the
Page 14 of 33
S. 183.
firm is not genuine, he would also be justified in refusing registration if he finds as a matter of law that the partnership
purported to be constituted under the instrument is not valid or has no existence in law.2 Cases dealing with the
validity of partnership, the question as to who can be a partner in a firm, two firms consisting of the same partners, the
position of a joint family, company or firm as a partner, etc, have been dealt with under s 2(23), pp. 69-76, and under s
4, ‘Income tainted with illegality’.
The AO is only empowered to register the firm with the constitution specified in the instrument of partnership which
has been put forward. Therefore where minors or other persons who are incompetent to be partners are partners of
the firm according to the instrument, the partnership cannot be treated as one between the remaining partners, and
registered as such.3 Seven persons, representing seven trusts, formed a partnership. This was held to be invalid as
the trust deed did not authorise the trustees to join a firm as partners.4
License obtained to run liquor business obtained in the name of the individual partner but the business being carried
on by the firm was held to be not legal, as under the State licensing laws transfer of liquor license is not permissible.5
In similar facts, where partner had taken permission and approval from the concerned authority it was held to be
entitled for registration.6
19. Sub-partnership.—A sub-partnership is entitled to registration.7 The Supreme Court, in CIT v B. Posetty and Co
.,8 held that a sub-partnership formed to finance the business of a partner of the main firm doing abkari business is not
in violation of the Abkari Act, and therefore, not illegal.
20. Section 184(7) and (8): Registration Ensures for Subsequent Years.—Under the 1922 Act registration enured
only for a year,9 and a fresh application for renewal of registration10 had to be made every year in cases where there
was no change in the constitution of the firm or in the shares of the partners. In such cases no application for renewal
is required to be made under this Act but the registration once granted, or deemed to have been granted under s
185(6) has effect, under s 184(7), for every subsequent assessment year, provided that the firm furnishes, before the
expiry of the time for filing the return of income under s 139,11 a declaration, signed by all the partners,12 that there is
no change in the constitution of the firm or in the shares of the partners as evidenced by the instrument of
partnership.13 However, the AO is required to examine whether the declaration is in accordance with the provisions of
the Act and the rules, and record that the registration shall have effect for the subsequent year.14 Where one of
partners has signed the application for the continuation of registration in dual capacity, ie, as an individual and as a
karta of a Hindu undivided family, the firm is entitled to continuation of registration.15 Further, the fact that an expelled
partner has not signed the application will not disentitle a firm from the continuation of registration.16 The AO is
empowered to condone delay and permit the declaration to be filed at any time before the assessment is made.17
Where the belated return filed under s 148 is accepted by the AO as a valid return, it would also be valid for the
purposes of continuation of registration on the basis of declaration under s 184(1) .18 A fresh declaration filed belatedly
was treated as having been filed under s 184(7) and the continuation of the registration was allowed. Clause (ii) of the
proviso to ss 184(7) and 185(3) should not be read in a manner to deprive a genuine firm from being entitled to
continuation of registration.19 The AO cannot reject a declaration merely on the ground that it is not in order; he should
intimate the defect to the firm and give it an opportunity to rectify the defect within one month from the date of
intimation20 [ s 185(3) ].
In cases covered by s 184(7), the registration would have effect for subsequent years even if there is a defect in the
partnership deed which was not noticed in a prior year,21 or the profits are not apportioned among the partners in such
subsequent years,22 or the assessee had, in a settlement proceeding, agreed to have the income of another firm,
included in the total income of the assessee firm23 or the declaration under this sub-section had been rejected by the
AO for a prior year24 or the order granting registration for the prior year was still under challenge in other
Page 15 of 33
S. 183.
proceedings.25 However, for any assessment year for which past registration has effect under s 184(7), the registration
may be cancelled under s 186 . [See further under s 180 .]
The board has issued instructions that where a firm has filed an application for registration for a particular year, and
during its pendency, files a declaration under s 184(7) for the subsequent year, the AO, if he refuses registration for
the first year, should given the firm an opportunity to file an application for registration for the subsequent year.26
If and when any change in the constitution or in the partners’ shares takes place in an accounting year, the firm should
apply for fresh registration27 [ s 184(8) ]. See further s 187, under ‘Meaning of change in constitution of firm’.
21. Registration does not Prevent Department from Assessing Partner’s Share of Profits in Hands of Another
Person.— Sections 184 and 185 are only procedural sections and have nothing to do with a charge to tax or with a
liability to pay the tax.28 Registration of a firm does not prevent or estop the department from taxing in the hands of any
individual that portion of the firm’s profits which is in fact received by him.29
Kania, J.Kania, J. said in Shapurji Pallonji v CIT 30 that registration ‘does not preclude the Officer from inquiring
whether the income shown against the individual partner’s name is the true income of that partner or stands in his
name as a nominee of another partner or another person’. In that case a registered firm consisted of three partners—
the assessee, his son and his brother—whose shares were duly specified in the partnership deed. The department
found that the son was merely a name-lender or benamidar, and his share in fact belonged to the father. It was held
that the registration of the firm did not prevent the income-tax authorities from including in the father’s total income not
only his own share of the profits but also the share of the profits which was nominally taken by his son.31 Similarly,
where one of the partners is found to be receiving his share of the profits on behalf of the joint family of which he is a
member, the joint family may be assessed on that share of profits.32 However, when the AO grants registration to a
firm on the strength of the partnership deed and the application form, which show certain persons as partners, in the
assessment on the firm he must divide the firm’s profits among those partners and cannot seek to make a division
otherwise; though in the assessment on an individual partner or any other person, the question as to who has really
received a share of the firm’s profits may be determined.33
However, the question of invoking the above principles may not arise in practice in those cases covered by the
explanation to s 185(1) where a partner is a benamidar for another partner or for an outsider. In such cases the firm is
not treated as a genuine firm, with the result that it would not be entitled to registration in the first instance, and if
registration is already granted, it may be cancelled under s 186 . See also Benami Transactions (Prohibition) Act,
198834 which has been dealt with under ‘Special statutory provision’.
22. Section 185(5) [ Section 23(4) of 1922 Act]: Refusal to Register Firm in Case of Best Judgment
Assessment.—This sub-section provides that where there is on the part of the firm such failure as entails a best
judgment assessment under s 144, the AO may refuse to register the firm.35 But it is not necessary that the AO must
invariably, in all such cases, pass an order refusing to continue the registration.36 Section 186(2) further provides that
in such cases the registration which is granted or which has effect under s 184(7) for the relevant assessment year
may be cancelled.37 In either case the AO must pass an order refusing to register, or cancelling the registration of, the
firm; he cannot, while making an assessment under s 144 merely treat the firm as unregistered.38 Further, before
cancelling the registration under s 186(2) the AO should give the firm 14 days’ notice and also an opportunity of being
heard.39 If notice has not been given, the Tribunal should set aside the order and direct the ITO/AO to proceed afresh
in accordance with law; it cannot proceed to direct continuation of the registration.40 However, registration cannot be
Page 16 of 33
S. 183.
refused or cancelled on the ground that the assessee’s account are incorrect or incomplete or no method of
accounting has been regularly employed by assessee,41 though in such cases also a best judgment assessment may
be made under s 145(2) . Where due to unavoidable circumstances the preparation of accounts was delayed and the
assessment was completed under s 144, it was held that the cancellation of registration was not justified.42 [See s 144,
under ‘Cases in which best judgment assessment is compulsory’ and ‘Cases in which best judgment assessment is
discretionary’, and under s 145(2) ]. Registration may be refused simultaneously under both sub-s (1) and sub-s (5) of
s 185 .43 The failure to assess a firm as an association of persons under s 184(5) is not a rectifiable mistake under s
154 .44
23. Section 185(6) : Firm Deemed to be Registered.—This sub-section, which was inserted by the Direct Tax Laws
(Second Amendment) Act, 1989 with effect from April 1, 19891st April, 1989, provides that where a firm has made an
application for registration and has furnished the return of income for any assessment year after 1988-89 [sub-s (7)], it
shall be deemed to have been registered under s 185 on the expiry of the period for serving notice under s 143(2) in
respect of such return. However, even in such a case the AO has the power under s 185(2) to intimate to the firm any
defect in the application and to reject the application if such defect is not rectified.
24. Penalty and Suit.—A deliberately false statement made in an application for registration was punishable as an
offence under s 277, and abatement of such offence was punishable under s 278 . Where an offence under this Act is
committed by a firm, not only the firm itself but also every partner and every person in charge of the firm may be liable
to punishment in the circumstances set out in s 278B . Distribution of the profits of a registered firm otherwise than in
accordance with the shares of the partners as shown in the instrument of partnership may also entail a penalty under s
271(4) .
No suit will lie against the government for a declaration that the order refusing to register a firm is illegal and that the
plaintiffs are the partners of the firm.45
25. Appeal.—[See s 246, under ‘Appeal against order refusing to register firm… or cancelling registration’; s 251,
under ‘Appeal against refusal to grant registration’ and ‘No power to cancel registration in appeal against assessment’;
and under s 267 .]
26. Reference to Court.—The question as to the existence of a partnership would be a question of law if it depends
on the construction of a document.46 In other cases, it may be a mixed question of fact and law.47 Whether a
partnership is genuine and actually exists with the constitution specified in the deed, is a question of fact.48 But the
question whether there is any evidence to support the Tribunal’s finding on the point is a question of law.49 Where
minors were admitted to the benefits of partnership and the circumstances were such as to give rise to a suspicion that
the minors were nominees of their father but the circumstances did not justify the inference of fact drawn by the
tribunal that the minors were really the nominees of their father, the court set aside the finding as not being supported
by any evidence.50 Similarly, in Umacharan Shaw v CIT 51 the finding of the tribunal that the firm, consisting of the
members of a disrupted Hindu family, was not genuine was set aside by the Supreme Court on the ground that it was
not supported by any evidence but was based on surmises and suspicion. The court can interfere if the AO has
perversely refused to exercise his power to register the firm.52
256 .
Page 17 of 33
S. 183.
27. Writ, Direction or Order.—A writ, direction or order may be issued in appropriate cases.55 [For the principles
underlying the grant of such relief, see s 293, under ‘Writs, directions and orders under Constitution’.]
56[* * * *]
2 Section 183 has been omitted by the Finance Act, 1992 (18 of 1992), s 65 (w.e.f. 1-4-1993).
Omitted section 183 .—Prior to its omission (w.e.f. 1-4-1993) by Finance Act, 1992, section 183 stood as under:—
‘ S. 183 . Assessment of unregistered firms.—In the case of an unregistered firm, the 1[Assessing Officer]—
(a) may determine the tax payable by the firm itself on the basis of the total income of the firm; or
2[(b) if, in his opinion, the aggregate amount of the tax payable by the firm if it were assessed as a registered firm and the tax
payable by the partners individually if the firm were so assessed would be greater than the aggregate amount of the tax payable
by the firm under clause (a) and the tax which would be payable by the partners individually, may proceed to make the
assessment under sub-section (1) of section 182 as if the firm were a registered firm; and, where the procedure specified in this
clause is applied to any unregistered firm, the provisions of sub-sections (2), (3) and (4) of section 182 shall apply thereto as
they apply in relation to a registered firm.]’.
1. Subs., for “Income-tax Officer”, by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), s 2 (w.e.f. 1-4-1988).
2. Subs. by the Taxation Laws (Amendment) Act, 1970 (42 of 1970), s 32 (w.e.f. 1-4-1971), for the following:—
“(b) if, in his opinion, the aggregate amount of the tax payable by the partners if the firm were treated as a registered firm would
be greater than the aggregate amount of the tax which would be payable by the firm under clause (a) and the tax which would
be payable by the partners individually, may proceed to make the assessment under clause (ii) of sub-section (1) of section 182
as if the firm were a registered firm; and where the procedure specified in this clause is applied to any unregistered firm, the
provisions of sub-sections (2), (3) and (4) of section 182 shall apply thereto as they apply in the case of a registered firm.”.
3 CIT v Amritlal 34 ITR 130, 136 (SC) .
4 CIT v Khemchand 6 ITR 414, 423 (PC) .
5 ITO v Radhakrishan 66 ITR 590 (SC) ; Subramaniam v Tahsildar 47 ITR 759 .
6 See s 4, and s 2(23), under ‘Firm is an assessable entity’.
7 Badridas v CIT 17 ITR 209, 211 (PC) .
8 Jain v Union of India 77 ITR 107 (SC) ; Adinarayana v ITO 52 ITR 987 ; Mukandlal v Union of India 148 ITR 461 .
9 CIT v Angadi 157 ITR 426, 434 .
10 Sarupchand v Union of India 37 ITR 81 where the Supreme Court held that the question of greater benefit to revenue
must be considered afresh by AO in a case where appellate authority finds that assessee had made a loss instead of
profit on the basis of which AO had, in original assessment, assessed unregistered firm as registered.
Page 18 of 33
S. 183.
11 CIT v Saraf Trading 239 ITR 41 .
12 Arulanandam v ITO 43 ITR 511, 521 .
13 33 ITR 94; J.K. Hosiery v CIT 81 ITR 557, 564-65 .
14 23 ITR 109.
15 Satyapal v CIT 27 ITR 109 .
16 CIT v Adaikappa 91 ITR 90 .
17 CIT v Lakshmana 117 ITR 847 .
18 62 ITR 323, overruling Mahaliram v CIT 33 ITR 261 . See s 4, under ‘Diversion by overriding title’.
19 Motila v CIT 31 ITR 735 . Cf. CIT v Chandulal 107 ITR 91 ; CIT v Mahendrasingh 123 ITR 938 (assessee taxed
under s 64 in respect of his wife’s and minor son’s shares on the basis of sub-partnership between them). See
comment on Mahendrasingh under ss 64(1)(i) and (iii), ‘Share of spouse or minor child in firm’.
20 Prannath v CIT 38 ITR 595 ; Lachhmandas v CIT 46 ITR 366 .
21 CIT v Murlidhar 60 ITR 95 (SC) ; Thakkar v CIT 27 ITR 658 ; Hazariram v CIT 46 ITR 766 ; Choodharmal v CIT 69
ITR 88 ; Satishchand v ITO 75 ITR 623 ; CIT v Lalita 159 ITR 186 ; Syed Ibrahim v ITO 47 ITR 665 (resident partner
of non-resident firm).
22 CIT v Imperial 201 ITR 555 .
23 CIT v Chaganlal 70 ITR 314 ; Kalekhan v CIT 86 ITR 196 ; Paul Mathews v CIT 195 ITR 716, 733 (amendment of
the assessment of firm and its partners is necessary).
24 Gnanam v CIT 43 ITR 485 ; CIT v Narainda 102 ITR 767 ; Iqtida v ITO 41 ITR 165 . Other income of non-resident
partner may be taxed at source or directly in his hands or in the name of his agent under s 161 .
25 CIT v Rangiah 241 ITR 719 (FB) .
26 17 ITR 209.
27 78 ITR 10.
Page 19 of 33
S. 183.
28 Gnanam v CIT 43 ITR 485 .
29 CIT v B. Narasimha Rao 263 ITR 62 .
30 Tarapore v ITO 133 ITR 785 .
31 Nagalinga Nadar v Asst. CIT 207 ITR 578 ; CIT v Sannanna 190 ITR 18 .
32 CIT v Sannanna 190 ITR 18 .
33 ITO v Radhakrishan 66 ITR 590 (SC) ; Kalva v ITO 71 ITR 422 (SC) (principle also applies where registration is
granted to firm after its dissolution).
34 Chulairam v ITO 94 ITR 463 .
35 See p. 2028, n. 8; p 2029, n. 10; and p. 2027, n 1.
36 Arjun Dass and Sons v CIT 183 ITR 118 .
37 Shapurji v CIT 13 ITR 113, 120 .
38 Ravulu v CIT 30 ITR 163, 172 (SC) ; Mitter v CIT and Auddy v CIT 36 ITR 194, 202 (SC) ; Patel v CIT 42 ITR 224
(SC) ; Ramamohan v CIT 89 ITR 274 (SC) ; Raju v CIT 17 ITR 51, 62 ; Khimji v CIT 25 ITR 462 ; Greenfields v CIT
35 ITR 61 .
39 CIT v Amar Singh 161 ITR 315 (SC) ; Ganga v CIT 106 ITR 132 .
40 Kurien v CIT 63 ITR 675, 676 ; CIT v Rahmat 152 ITR 676, 680 .
41 Agarwal v CIT 77 ITR 10 (SC) ; CIT v Sivakasi 53 ITR 204 (SC) ; CIT v Abdul Rahim 55 ITR 651 (SC) ; Ratanchand
v CIT 155 ITR 720 (SC) ; CIT v Kandath Motors 224 ITR 663 (SC) ; Atmaram v CIT 22 ITR 305 ; CIT v Thangapalam
74 ITR 478 ; Manilal v CIT 109 ITR 24 ; Madan v CIT 209 ITR 374 .
42 Kurien v CIT 63 ITR 675 .
43 Grand Hotel v CIT 36 ITR 453 .
44 See under ‘Requirements prescribed by section 184 and rules’.

Page 20 of 33
S. 183.
45 CIT v Jethanand 234 ITR 843 .
46 Ravulu v CIT 30 ITR 163 (SC) ; CIT v Jayalakshmi 79 ITR 549 (SC) ; Ramamohan v CIT 89 ITR 274 (SC) ; Saeed v
CIT 15 ITR 51 ; Bhuramal v CIT 28 ITR 62 ; Greenfields v CIT 35 ITR 61 ; CIT v Govinda 41 ITR 186 ; Kanhaiyalal v
CIT 55 ITR 568 ; Nagappa v CIT 56 ITR 569 ; Bela Singh v CIT 62 ITR 250 ; Laxmi Trading v CIT 62 ITR 770 ;
Kurien v CIT 63 ITR 675 ; Kanhaiyalal v CIT 72 ITR 507 ; Pannalal v CIT 73 ITR 503 ; Kishorechand v CIT 77 ITR 76
; Sitaram v CIT 79 ITR 575 ; CIT v Ganpatji 117 ITR 291 .
47 Pratapmal v CIT 29 ITR 489 (SC) ; CIT v Jagannath 156 ITR 220 (SC) (see comment on this case at, pp. 2037, n.
69); Benares Cloth Dealers v ITO 50 ITR 507 ; Rampatmal v CIT 65 ITR 596 ; Kishorechand v CIT 77 ITR 76 ; Steel v
CIT 33 ITR 1 (SC) ; Kalachand v CIT 10 ITR 501 ; CIT v Dillo Ram 235 ITR 43 .
48 Ravulu v CIT 30 ITR 163 (SC) ; CAgIT v Keshab 18 ITR 569 (SC) ; CIT v Ravula 14 ITR 232 ; Greenfields v CIT 35
ITR 61 ; Koduri v CIT 47 ITR 465 ; CIT v Chidambarathanu 223 ITR 557 .
49 Dulichand v CIT 29 ITR 535 (SC) ; Textile Supply v CIT 36 ITR 242 (SC) ; Jabablpur Ice v CIT 27 ITR 88 ; United
Cotton Factory v CIT 32 ITR 117 . See further s 2(23), under ‘Joint family, company or firm… as partner’.
50 See under ‘Defect’.
51 CIT v Kanhaiya Lal 273 ITR 425 .
52 CIT v Agardih 27 ITR 540 ; CIT v Roopnarain 60 ITR 314, 332-33 .
53 Dilipsinhji v CIT 54 ITR 91 .
54 CIT v Raghunandan 97 ITR 398 (illness) ; CIT v Khemraj 114 ITR 75 (mistake of counsel); Subhkaran v Kazi 152
ITR 231 (mistake of accountant); CIT v Sagar 159 ITR 177 (disputes among partners).
55 CIT v Ideal Trading 207 ITR 705 ; CIT v Potato Suppliers 187 ITR 677 .
56 Mohammed Khalil v ITO 46 ITR 458 . Contra Pannalal v ITO 75 ITR 309 ; Kalinga v CIT 99 ITR 102 ; CIT v National
Spg., 179 ITR 108 .
57 Billimora Engg v CIT 156 ITR 153 .
58 Khanjanlal v CIT 83 ITR 175 (SC) [the Supreme Court went too far in suggesting in this case that if firm is assessed
in respect of profits not entered in the books and therefore not apportioned among the partners, registration must
necessarily be refused to the firm: the correct principle is that laid down in Variety Hall v CIT 84 ITR 202 ]; Kanhaiyalal
v CIT 55 ITR 568 ; Rao v CIT 58 ITR 685 ; Sokkalingam v CIT 60 ITR 671 ; Laxmi Trading v CIT 62 ITR 770 (losses)
. Cf. CIT v Voleti 84 ITR 764 (apportionment of profits is not necessary for continuance of registration in subsequent
years); CIT v Hyderabad Stone Depot 109 ITR 686, 696-99 (FB) (even under 1922 Act non-disclosure of
apportionment was a curable defect).
Page 21 of 33
S. 183.
59 CIT v Shantilal 31 ITR 903, overruled on another point in Mitter v CIT 36 ITR 194 (SC) ; Chhotalal v CIT 34 ITR
351 ; Asha v CIT 87 ITR 57 .
60 CIT v Hariram 116 ITR 886 ; Gurudeo v ITO 131 ITR 486 ; Hari v CIT 167 ITR 309 ; CIT v Ramchandra 211 ITR
136 .
61 St. Joseph’s Stores v CIT 45 ITR 380 .
62 CIT v Madanlal 50 ITR 477 ; Kurien v CIT 63 ITR 675 .
63 Decision to the contrary in Chintalapati v CIT 48 ITR 968 is incorrect.
64 CIT v Mothooram 120 ITR 279 (SLP rejected 142 ITR St 5); CIT v Krishna Steels 124 ITR 47 ; Nainsukhdas v CIT
139 ITR 467 ; CIT v Khanna Theatre 184 ITR 156 . Cf. Kuriakose v CIT 71 ITR 109 . For the prescribed form under
1922 Act see Sher-e-Punjab v CIT 88 ITR 421 (SC) ; Surajmalls v CIT 43 ITR 491 ; Tyresoles v CIT 49 ITR 515 ; Rao
v CIT 58 ITR 685 ; Full Mould v CIT 116 ITR 505 .
65 Ravindra v CIT 225 ITR 1040 .
66 Hardutt v CIT 18 ITR 106 ; Muthappa v CIT 30 ITR 560 ; Khimji v CIT 25 ITR 462 ; Greenfields v CIT 35 ITR 61 ;
Haji v CIT 51 ITR 250 ; Abdul Shakoor v CIT 69 ITR 467 ; Kishorechand v CIT 77 ITR 76 . Cf. CIT v Kishorechand 44
ITR 622 .
67 Banjee v CIT 5 ITR 47 ; Chiranjilal v CIT 5 ITR 44 ; Greenfields v CIT 35 ITR 61 ; Meerasahib v CIT 48 ITR 950 .
68 CIT v Hyderabad Stone Depot 109 ITR 686, 696-99 (shares of partners not specified in application for registration);
Kanthaiyalal v CIT 72 ITR 507 .
69 Dattatraya v CIT 150 ITR 460, relying on board’s circular dated 11th April, 1955, (application for renewal not signed
by one of the partners).
70 CIT v Amar Singh 161 ITR 315, 319 (SC) (application instead of declaration is rectifiable defect); Ganga v CIT 106
ITR 132, Alankar v CIT 116 ITR 89 and Billimora Engg v CIT 156 ITR 153 (partnership deed not filed); Brij Rattan v
CIT 136 ITR 722 and CIT v J.B. Coal 164 ITR 450 (application not signed by one of the partners); CIT v Commerical
Finance 138 ITR 281 (guardian’s consent to minor’s admission to benefits of partnership not filed); CIT v Punjab Sweet
House 161 ITR 600 (application in wrong form); CIT v Jagjit 176 ITR 276 ; Paul Mathews v CIT 195 ITR 716 ; CIT v
Potato Supplier 187 ITR 677 . Cf. Singh v CIT 137 ITR 63, 71 (defect in partnership deed).
71 Santal v CIT 86 ITR 76 and CIT v Ganesh 147 ITR 781 (death of partner in accounting year) (Cf. K.C. Trunk Factory
v CIT 106 ITR 348 ); CIT v Ghosh 159 ITR 459 (declaration signed by receiver); CIT v Ghosh 167 ITR 125, Vijoy v
CIT 176 ITR 50 and CIT v India Sea Foods 192 ITR 515 (declaration not signed by all partners); Mathew v CIT 161
ITR 9 (declaration filed before end of accounting year), dissenting from CIT v Trinity 97 ITR 81 ; Krishna v CIT 237 ITR
223 . Cf. Anil v CIT 141 ITR 457 (delay in rectifying defect cannot be condoned).
Page 22 of 33
S. 183.
72 Matreja v CIT 106 ITR 378 ; Paul Mathew v CIT 274 ITR 220 - affirmed in appeal in Paul Mathew v CIT 288 ITR 190
.
73 Ekambaranathan v CIT 247 ITR 238 .
74 Ramlal v CIT 5 ITC 150 ; CIT v Dwarkadas 80 ITR 283 ; Badrinarain v CIT 115 ITR 858, 869 (FB) [overruled on
another point in Vishwanath v CIT 146 ITR 249 (FB) : but see Wazidali v CIT 169 ITR 761, 777 (SC) ]; CIT v Sagar
159 ITR 177 . The Supreme Court left the question open in Pratapmal v CIT 29 ITR 489, 493 . Decision in CIT v
Jagannath 156 ITR 220 (SC), rendered without considering relevant case law, should be confined to facts of the case
viz that one partner’s signature on partnership deed and also on application for registration were forged (see facts set
out in Jagannath v CIT 92 ITR 207 ). Observation that law is settled by Ravaulu v CIT 30 ITR 163, 166 (SC), that
partnership deed must be signed personally by each partner is incorrect: in Ravulu the Supreme Court was referring to
appliction for registration and not to partnership deed.
75 Ramlal v CIT 5 ITC 150 .
76 Contrary view in Padamparshad v CIT 25 ITR 335 is incorrect.
77 CIT v East India Lamp 129 ITR 426 ; Haridas v CIT 4 ITC 475 ; Chhotalal v CIT 34 ITR 351 ; CIT v New Life Const
107 ITR 361 ; CIT v Rajmohan 190 ITR 236 (several partnership deeds together constitution an ‘instrument of
partnership’); CIT v Chowdhury 142 ITR 692 ; CIT v Kinema 152 ITR 216 ; CIT v Krishnaiah 157 ITR 257 . Cf. Phiroj v
CIT 59 ITR 645 .
78 In absence of such express provision in deed, inference to this effect may be drawn from facts: Saroj v CIT 156 ITR
497 (SC) .
79 Re, Makerwal 101 ITR 422; Plywood Products v CIT 257 ITR 433 . Contra Giridharilal v CIT 17 ITR 282 . Cf.
Shivkisan v CIT 105 ITR 359 ; K.C. Trunk Factory v CIT 106 ITR 348 ; Badrinarain v CIT 115 ITR 858, 869 (FB),
overruled on another point in Vishwanath v CIT 146 ITR 249 (FB) : but see Wazidali v CIT 169 ITR 761, 777 (SC) .
See also p. 2395, n. 12; p. 2414, n. 89; and p. 2395, n. 13.
80 CIT v Ganesar 149 ITR 48 ; CIT v Punjab Sweet House 161 ITR 600 . Cf. Udaipur Soap v CIT 167 ITR 613 (share
of deceased partner going to his heirs).
81 115 ITR 858, followed in CIT v Bajaj 143 ITR 218 and Besant v CIT 145 ITR 96, (and overruled on another point in
Vishwanath v CIT 146 ITR 249 (FB) : but see Wazidali v CIT 169 ITR 761, 777 (SC) ; CIT v United Comm. 112 ITR
953 ; CIT v Mathurprasad 115 ITR 372 ; Bhagat v CIT 123 ITR 164 ; Ashiyana v CagIT 132 ITR 497 ; CIT v
Ramakrishna 144 ITR 797, 806 (minor made full fledged partner); CIT v Chandmal 222 ITR 255 ; p. 2396, n. 14 and p.
2396, nn. 15 and 16; p. 2415, n. 4; board’s circular dated 20th March, 1969. Cf. Bharat v CIT 54 ITR 109 ; CIT v Gauri
107 ITR 274 (FB) ; CIT v Durgaprasad 146 ITR 580 ; CIT v Phair 154 ITR 141 (FB) .
82 CIT v Sonda Ram 180 ITR 227 ; Basantlal v CIT 196 ITR 19 ; CIT v Nathalal 246 ITR 784 .
83 CIT v Arokiaswami 16 ITR 404 ; National Motor v CIT 48 ITR 986 . Cf. CIT v Gelli 8 ITR 121 .
Page 23 of 33
S. 183.
84 CIT v Dayaram 31 ITR 997 ; Khimji v CIT 25 ITR 462 ; Bhausa v CIT 62 ITR 75; CIT v Arokiaswami 16 ITR 404 . Cf.
Krishna Iyer v CIT 3 ITC 286 (term of partnership specified in the instrument expired in middle of the accounting year);
CIT v Gelli 8 ITR 121 .
85 Ayrshire v IR 14 TC 754 ; Waddington v O’ Callaghan 16 TC 187 ; Dawjee v CIT 49 ITR 698 ; Taylor v Chalklin 26
TC 463 ; Mohammed Rowther v CIT 30 ITR 747, 753 ; Evans Fraser v CIT 137 ITR 493, 520-22 .
86 36 ITR 194.
87 Overruling Kalsi v CIT 24 ITR 353, Padamparshad v CIT 25 ITR 335, Berry v CIT 28 ITR 227 and CIT v
Birdhichand 28 ITR 280 ; Dheer v CIT 34 ITR 477 ; Ramjidass v CIT 34 ITR 483 ; Manvi v CIT 39 ITR 173 .
88 Overruling CIT v Shantilal 31 ITR 903 on this point.
89 Joshi v CIT 162 ITR 268 ; Billimora Engg v CIT 156 ITR 153 (requirement that registration application should be
accompanied by instrument of partnership is directory, and even if mandatory, it can be waived).
90 169 ITR 761, 779-80. Contrary view in CIT v Joseph 77 ITR 292, CIT v Abdul Kareem 117 ITR 233, 243, and
Mahadevasa v CIT 145 ITR 187 is no longer law.
91 CIT v Patel 37 ITR 412 (SC) ; Niadarmal v CIT 37 ITR 349 ; Krutartha v CIT 41 ITR 320 ; Kalwant v CIT 45 ITR 569
; Raju v CIT 48 ITR 737 ; CIT v Joseph 77 ITR 292 ; CIT v Rahmat 152 ITR 676 ; CIT v Tuli Veneer 218 ITR 98 .
View taken in Malankara v CIT 66 ITR 200 that partnership, to be entitled to registration at all, must be in existence
during whole of the accounting year is patently incorrect.
1 Sulaiman v CIT 36 ITR 169 .
2 Uttam Kumar v CIT 186 ITR 188 (SC) ; CIT v Oriental 227 ITR 244 .
3 Patel v CIT 42 ITR 224 (SC) ; Ramamohan v CIT 188 ITR 212 (SC) ; Singh v CIT 137 ITR 63 ; Phiroj v CIT 59 ITR
645. Cf CIT v Dwarkadas 80 ITR 283 .
4 Imperial Automobiles v CIT 87 ITR 695 ; CIT v Bombay Stores 87 ITR 613 ; CIT v Lakshmi Talkies 145 ITR 191 and
CIT v Kainema 152 ITR 216 (when deficiency in stamp duty is subsequently made good, instrument becomes effective
from date of execution); Tue Steel v CIT 220 ITR 58 .
5 Wazidali v CIT 169 ITR 761 (SC) ; CIT v Abdul Kareem 117 ITR 233 ; Beniprasad v CIT 128 ITR 659 ; CIT v
Chandigarh Bottling 160 ITR 780 ; CIT v Gobindram 178 ITR 682 ; Ramchand v CIT 179 ITR 1 . Contrary view in
Udaipur Soap v CIT 167 ITR 613, Ayodhya v CIT 168 ITR 605 (FB) (wrongly overruling CIT v Gopi 163 ITR 568,
K.C. Trunk Factory v CIT 106 ITR 348 and Jawaharlal v CIT 110 ITR 884 is incorrect, and the last two decision were
rightly criticised in CIT v Sunderlal 156 ITR 617 .
Page 24 of 33
S. 183.
6 CIT v Ganesh 147 ITR 781 ; CIT v Sunderlal 156 ITR 617 ; Wazidali v CIT 169 ITR 761 (SC) ; CIT v Patliputra
Engg., 154 ITR 854 ; CIT v Ramdayal 173 ITR 527 ; CIT v Mohammed Hussian 175 ITR 18 . Cf. Navarathina v CIT
216 ITR 60 .
7 Patel v CIT 42 ITR 224 (SC) ; Sulaiman v CIT 36 ITR 169 ; Hind Steel v CIT 197 ITR 80 .
8 Kannappa v CIT 5 ITR 49 ; CIT v Rupachand 50 ITR 295 ; See also Steel v CIT 33 ITR 1 (SC) where the point was
conceded.
9 CIT v Abdulla 10 ITR 7 ; Karnidan v CIT 48 ITR 922 ; CIT v Shivlal 62 ITR 298 ; Khummaji v CIT 91 ITR 333 ;
Premsukh v CIT 106 ITR 1004 .
10 Khimji v CIT 25 ITR 462 ; Harkisondas v CIT 136 ITR 288 .
11 Parekh v CIT 63 ITR 485 (SC) ; Progressive Financers v CIT 224 ITR 595 (SC) ; CIT v Kishorechand 44 ITR 622 ;
Umamaheswar v CIT 52 ITR 749 ; Kishorechand v CIT 77 ITR 76 ; CIT v Nikhera 114 ITR 294 ; CIT v Kinema 152
ITR 216 ; Bhagwanchand v CIT 127 ITR 770 (part of the profits reserved for charity).
12 Dastur Dadi v CIT 49 ITR 554 . Cf. Tyresoles v CIT 49 ITR 515 where there was such a separate document . See
also p. 2038, n. 74.
13 224 ITR 595; Mandyala v CIT 102 ITR 1 (SC) ; CIT v PMS (Agencies) 219 ITR 16 ; CIT v Tamil Puthakalayam 240
ITR 599 ; Commissioner of Agricultural Income-tax v P.V. Balakrishnan Nair 264 ITR 563 (SC), (2004) 186 CTR 101
(SC).
14 Mandyala v CIT 102 ITR 1 (SC) ; Progressive Financers v CIT 224 ITR 595 (SC) ; J.D. Enterprises v CIT 221 ITR 67
; Harkisondas v CIT 136 ITR 288, 302-05 (general proposition that shares in losses should also be shown is incorrect);
CIT v Bhaichand 161 ITR 129 ; Metharam v CIT 169 ITR 194 (FB) . See also; p. 2038, nn. 75 and 76; p. 2061 n. 47.
15 CIT v Hyderabad Stone Depot 109 ITR 686, approving Addepally v CIT 79 ITR 306 and disapproving Khummaji v
CIT 91 ITR 333 ; Conpro v CIT 151 ITR 1 ; CIT v Vijai Kumar 231 ITR 625 .
16 CIT v Krishna Mining 122 ITR 362 ; CIT v Nand Lal 226 ITR 312 .
17 Progressive Financers v CIT 224 ITR 595 (SC) .
18 CIT v Badri Nath Ganga Ram 273 ITR 485 ; CIT v Oriental T. Maritime 227 ITR 244 .
19 Jabalpur Ice v CIT 27 ITR 88 ; Kannappa v CIT 5 ITR 49 ; United Cotton Factory v CIT 32 ITR 117 ; Benares Cloth
Dealers v ITO 51 ITR 507 .
20 CIT v Shantilal 31 ITR 903, overruled on another point in Mitter v CIT 36 ITR 194 (SC) .
Page 25 of 33
S. 183.
21 Patel v CIT 42 ITR 224 (SC) ; CIT v Ram Saran 87 ITR 224 .
22 56 ITR 219.
23 Chhotalau v CIT 34 ITR 351 ; CIT v New Life Const., 107 ITR 361 .
24 Asha v CIT 87 ITR 57, holding that its earlier contrary view in Guruswami v CIT 48 ITR 692 and Periasamy v CIT 52
ITR 134 is not good law. Jodhamal v CIT 53 ITR 655 was, wrongly decided.
25 Sanjay v CIT 134 ITR 248 .
26 Re, Ramkumar 22 ITR 474; Benares Cloth Dealers v ITO 51 ITR 507 .
27 CIT v Agardih 27 ITR 540 .
28 CIT v Doshi 176 ITR 371 .
29 See p. 2035, n. 55.
30 CIT v Kanhaiyalal 207 ITR 248 ; CIT v Agrawal 210 ITR 215 ; Doshi v CIT 222 ITR 73 ; CIT v Organisation of
Chemicals 247 ITR 721 .
31 CIT v Satram 42 ITR 543 ; CIT v D’Costa 49 ITR 1 (household expenses of partners debited to firm’s profit and loss
account); CIT v National Garage 60 ITR 487 ; Challa v CIT 82 ITR 731 .
32 Kikabhai v CIT 4 ITC 178 ; Khemji v CIT 13 ITR 421 ; Gumthannavar v CIT 62 ITR 821 . Cf. IR v Lebus 27 TC 136,
147 (CA) .
33 CIT v Khanna Theatre 184 ITR 156 .
34 Sokkalingam v CIT 60 ITR 671 ; Srinivasa v CIT 63 ITR 102 .
35 CIT v Nehru College 250 ITR 223 .
36 CIT v Mangoomal 7 ITR 208 .
37 Ibid.
38 CIT v Kashmir Boot 207 ITR 295 ; CIT v Narbada Shankar 211 ITR 277 ; CIT v Gnanagiri Trading 216 ITR 19 . See
Shanker v CIT 77 ITR 884, which was wrongly decided.
Page 26 of 33
S. 183.
39 CIT v Meenakshisundaram 232 ITR 98 . Contrast Vijayalakshmi v CIT 181 ITR 263 .
40 CIT v Rangavilas 95 Taxman 564 .
41 Bisseswarlal v CIT 4 ITC 365, 369, per Rankin CJ.
42 Sundar Singh v CIT 10 ITR 457, 461-62 (PC), per Sir George Rankin; Raju v CIT 77 ITR 982 ; Manilal v CIT 109 ITR
278 ; CIT v Shanmugha 141 ITR 656 ; Nayantara v CIT ,207 ITR 639; CIT v Vijaya Traders 218 ITR 83 .
43 CIT v Lalit 125 ITR 586 ; Ekambaranathan v CIT 247 ITR 238 .
44 Oswal Trading v CIT 233 ITR 385 .
45 Narain Automobiles v CIT 278 ITR 516 .
46 Raju v CIT 17 ITR 51, 62 ; Ayrshire v IR 14 TC 754, 764 .
47 Krishna Flour v CIT 44 ITR 501 (SC) ; Ratnaswamy v CIT 46 ITR 1148 ; Abdul Rahman v CIT 56 ITR 556 ; CIT v
Narayanlal 63 ITR 546 ; Rattan v CIT 65 ITR 465 ; Allauddin v CIT 22 ITR 545 ; Gangamirthammal v CIT 74 ITR 473
; Phulchand v CIT 103 ITR 174 . Cf. CIT v Bombay Trust Corpn. 4 ITR 323, 331 (PC) ; CIT v Gokaldas 11 ITR 462,
469 ; and other cases cited under s 143(3), under ‘Materials for assessment’.
48 37 ITR 271.
49 Suwalal v CIT 17 ITR 269 . Cf. Abba v CIT 6 ITR 470 .
50 Krishna Flour v CIT 44 ITR 501 (SC) ; Ratnaswamy v CIT 46 ITR 1148 ; Abdul Rahman v CIT 56 ITR 556 .
51 Chandrakant v CIT 193 ITR 1 (SC) ; Suwalal v CIT 17 ITR 269 ; Sahabuddin v CIT 46 ITR 203 ; Himalaya Engg v
CIT 57 ITR 762 ; Achalsinhji v CIT 157 ITR 537 ; Virendra v CIT 171 ITR 263 . Cf. Ghulam v CIT 5 ITR 506, 510-11 ;
Ishwar Bhuvan Hindu Hotel v CIT 281 ITR 139 .
52 CIT v Oriental Trading Corporation 270 ITR 564 .
53 Ratnaswamy v CIT 46 ITR 1148 ; Murlidhar v CIT 50 ITR 628 ; Abdul Rahman v CIT 56 ITR 556 ; City Tobacco v
CIT 64 ITR 478 ; Jammula v CIT 96 ITR 625 ; Dhingra v CIT 102 ITR 643 ; Gulraj v CIT 148 ITR 326 ; Mahavir v CIT
149 ITR 539 (relative of partners conducting firm’s business). See also s 2(23), under ‘Validity of partnership’.
54 United Patel Const v CIT 59 ITR 424 ; Chitra v CIT 86 ITR 203 . For a contrary view, see Deep Enterprise v CIT 262
ITR 174 (This case was however, decided more on the basis of concurrent findings of fact by the lower authorities, than
on the ignorance of the sleeping partner).
Page 27 of 33
S. 183.
55 Suwalal v CIT 17 ITR 269 Cf. Noor Mohammad v CIT 10 ITC 426 .
56 Murlidhar v CIT 50 ITR 628 ; Himalaya Engg v CIT 57 ITR 726 ; Jammulal v CIT 96 ITR 625 .
57 CIT v Dhaniram 158 ITR 531 .
58 Murlidhar v CIT 50 ITR 628 .
59 Suwalal v CIT 17 ITR 269 ; Sahabuddin v CIT 46 ITR 203 . Cf. Hafiz v CIT 7 ITR 625 ; Abowath v CIT 7 ITC 38 .
60 Murlidhar v CIT 50 ITR 628 .
61 S.P. Gramophone v CIT 158 ITR 313 (SC) .
62 Ajit Traders v CIT 181 ITR 451 .
63 CIT v Y. Narayana Murthy 270 ITR 275 ; Thayyil Enterprises v ITO 287 ITR 414 - mere letting out building is not a
business activity.
64 Madras Pack Marine Co. v CIT 278 ITR 85 .
65 Mandsaur Starch and Chemicals v CIT 127 ITR 727 .
66 CIT v Sivakasi 53 ITR 204, 211 (SC) ; Re, Central Talkies 9 ITR 44; Mulla Fida Ali v CIT 5 ITR 615, 619 ;
Sookinaboo v CIT 6 ITC 13 ; Ayrshire v IR 14 TC 754, 764 . See further s 1, under ‘Disposition of property so as not to
attract tax’.
67 Mandsaur v CIT 127 IRE 727 .
68 Ram Mills v CIT 95 ITR 279 ; Dwarkaprasad v CIT 117 ITR 39 ; CIT v Rameshwar 156 ITR 411 .
69 Chitra v CIT 6 ITR 203 .
70 Kanodia v CIT 22 ITR 311 .
71 Rajulbandi v CIT 52 ITR 824 . The observation that the business not mentioned in the deed should be treated as that
of an unregistered firm is incorrect; CIT v Thomas 142 ITR 332, 342 . The decision in CIT v Hassanally 81 ITR 282
that registration should be refused unless partnership business is carried on in strict compliance with various clauses of
partnership deed proceeds, on too narrow a view. See further s 28(i), under ‘Business of firm…’.
Page 28 of 33
S. 183.
72 CIT v Thomas 142 ITR 332 ; CIT v Suraj 144 ITR 943 ; CIT v Three Aces 176 ITR 160 .
73 CIT v Roopnarain 60 ITR 314 .
74 CIT v Sivakasi 53 ITR 204 (SC) ; CIT v Chander 60 ITR 188 (SC) ; Siddhi v CIT 60 ITR 771 .
75 CIT v Hazarimal Milapchand Surana 262 ITR 573 .
76 Addl. CIT v Chanderbhan Harichand & Co. 126 ITR 709 .
77 Khanjan Lal Sewak Ram v CIT 83 ITR 175 (SC), AIR 1972 SC 61, (1971) 3 SCC 662 .
78 Kanhaiya Lal Radha Krishna v CIT 55 ITR 568 .
79 Variety Hall & Ramakrishna Textiles v CIT 84 ITR 202 .
80 CIT v Swaroop Chand 154 ITR 660 .
81 CIT v Shiv Om Katir Udyog 279 ITR 322 .
82 55 ITR 651. The Supreme Court left open the question whether the position would be different if (i) partnership is only
between two persons of whom one is a benemidar of the other or (ii) a ‘dummy’ is taken as partner with the consent of
other partners. In former case there would be no valid firm in existence according to Kerala High Court in Ouseph v CIT
64 ITR 145 ; in latter case, coupled with other damaging facts, Supreme Court upheld finding that firm was not genuine
in S.P. Gramophone v CIT 158 ITR 313 .
83 Seth v CIT 29 ITR 1013 ; Aruna v State of Madras 55 ITR 642, 649 ; CIT v Narayanlal 63 ITR 546 ; City Tobacco v
CIT 64 ITR 478 ; CIT v Agarwal 75 ITR 451 ; J.K. Hosiery v CIT 81 ITR 557, 583-85, and CIT v Ramkrishna 117 ITR
218 (trustee of charity can be a partner); CIT v Hind Comm. 96 ITR 722 ; Manilal v CIT 109 ITR 24 ; CIT v Dhaniram
158 ITR 531 ; Shubham v IAC 174 ITR 502 .
84 CIT v Sivakasi 53 ITR 204 (SC) ; CIT v Hukumchand 78 ITR 18 (SC) ; CIT v Chander 60 ITR 188 (SC) ; CIT v
Roopnarain 60 ITR 314 ; Siddhi v CIT 60 ITR 771 ; CIT v Jupiter Construction Co. 274 ITR 454 (manager of an
association of persons can be a partner).
85 Ashoka Motor v ITO 226 ITR 595 .
86 55 ITR 660.
87 55 ITR 660, 664; Ram Laxman v CIT 66 ITR 613 (SC) ; CIT v Chander 60 ITR 188, 194 (SC) ; Shanthi v CIT 97 ITR
356 .
Page 29 of 33
S. 183.
88 CIT v Chandra 203 ITR 435 ; CIT v Jayalakshmi Oil 228 ITR 443 .
89 CIT v Palliveedu 204 ITR 141 .
90 Ganga v CIT 137 ITR 274 .
91 174 ITR St 37. The Act is constitutional: Mohammed Anwaruddin v Sabina 179 ITR 442 .
92 See board’s circulars dated 24th September, 1976 and 22nd June, 1977: 105 ITR St 54 and 108 ITR St 22.
93 Doraiswami v CIT 49 ITR 565 ; Re, Mullick 6 ITR 99; Piyarelal v CIT 1 ITR 215 ; Jattu v CIT 6 ITC 162 ; Re, Gulab
Singh 14 ITR 246.
94 Sundar Singh v CIT 10 ITR 457, 461-62 (PC); Bisseswarlal v CIT 4 ITC 365 ; Ghanshyamdas v CIT 6 ITC 198 ;
Lachiram v CIT 4 ITR 279 ; Kalu Ram v CIT 254 ITR 307 . Cf. Murlidhar v CIT 50 ITR 628 .
95 10 ITR 457, 464, applied in Chandrakant v CIT 193 ITR 1 (SC) ; CIT v KTS Nagamanickam 237 ITR 556 .
96 Above mentioned Privy Council case was overlooked in CIT v Gostha 14 ITR 219 .
97 South Indian Lucifer v CIT 43 ITR 319 ; Bansidhar v CIT 12 ITR 126 ; Bhimraj v CIT 26 ITR 185 ; Jakka v CIT 22
ITR 264, overruled on another point in CIT v Dwarkadas 41 ITR 528 (SC) ; Ghewarchand v CIT 111 ITR 391 ;
Waman v CIT 14 ITR 116 .
1 Bhimraj v CIT 26 ITR 185 ; South Indian Lucifer v CIT 43 ITR 319, 327 . Cf. Doraiswami v CIT 49 ITR 565 .
2 Bihari v CIT 217 ITR 746 (SC), followed by the Supreme Court in Moti Lal v CIT 234 ITR 472 and CIT v Rangila 254
ITR 230 ; Ajit Traders v CIT 181 ITR 451 . Cf. CIT v Ramakrishna 105 ITR 86 (question whether the partnership was
opposed to public policy).
3 CIT v Dwarkadas 41 ITR 528 (SC) ; Hoosen v CIT 5 ITR 182 ; CIT v Balkishan 52 ITR 784 ; Addl. CIT v Uttam
Kumar Pramod Kumar 115 ITR 796 - affirmed in 186 ITR 188 (SC).
4 CIT v Swashraya 286 ITR 265 .
5 CIT v Swarna Bar Restaurant 334 ITR 387 .
6 CIT v Hotel New Indraprastha 335 ITR 87 .

Page 30 of 33
S. 183.
7 CIT v Degaon 214 ITR 650 (SC) ; Murlidhar v CIT 62 ITR 323, 329 (SC) ; CIT v Laxmi 24 ITR 173 ; CIT v Jodhamal
77 ITR 341 ; CIT v Sitaram 186 ITR 385 ; CIT v Uppala Rameswar 187 ITR 653 .
8 223 ITR 333.
9 Mitter v CIT and Auddy v CIT 36 ITR 194, 198 (SC) .
10 CIT v Arokiaswami 16 ITR 404 ; Saeed v CIT 15 ITR 51 ; Re, Bisesardas 4 ITR 66; Hardutt v CIT 18 ITR 106 ;
Kalachand v CIT 10 ITR 501 ; CIT v Gelli 8 ITR 121 ; Re, Makerwa 10 ITR 422; CIT v Gopal 34 ITR 548 ; Greenfields
v CIT 35 ITR 61 ; Shivkisan v CIT 105 ITR 359 .
11 CIT v Bishwanath 161 ITR 382 . There was divergence of view whether under s 184(7), as it stood prior to 1st April,
1971, the declaration had to be filed along with the return or could be filed prior or subsequent thereto: Madivalappa v
CIT 77 ITR 235 ; Shanti v CIT 87 ITR 38 ; Nand Singh v CIT 91 ITR 202 ; CIT v Sitaram 102 ITR 560 ; Dilsukhari v
CIT 102 ITR 640 ; Halima v CIT 104 ITR 190 ; Indo Traders v CIT 111 ITR 355 ; CIT v Universal Trading 114 ITR
412 ; Purusottam v CIT 115 ITR 377 ; CIT v Murlidhar 118 ITR 392 .
12 Subba Rao v CIT 77 ITR 241 ; CIT v Ratnaswamy 106 ITR 154 ; CIT v Ramkisan Trading 202 ITR 716 ; CIT v
Swastik 210 ITR 399 ; CIT v Subash 230 ITR 16 .
13 Jagjivandas v CBDT 132 ITR 769 ; Shivkisan v CIT 105 ITR 359 ; CIT v New Pacca Arhtia Assn., 110 ITR 727
(change in form of declaration from 1971); CIT v Chanderbhan 126 ITR 709 (fact that some of the partners make
secret profits without knowledge of other partners is immaterial); Pandey v CIT 96 ITR 515 (new deed merely
extending duration of partnership). Decisions in CIT v Standard Plastic 107 ITR 431 and CIT v Central India Corpn.
140 ITR 521 that registration enures even after expiration of the period mentioned in original partnership deed and
without any new deed, are incorrect. See also p. 2061, n. 47. Cf. K.C. Trunk Factory v CIT 106 ITR 348 ; Tambe v CIT
110 ITR 309 ; Durgaprasad v CIT 134 ITR 601 ; CIT v Ghanshyam 147 ITR 110 .
14 CIT v Nitya Nand 227 ITR 154 (SC) ; V.M. Automobiles v CIT 230 ITR 724 .
15 CIT v Anjeneyulu 197 ITR 324 .
16 CIT v Toolsidass 192 ITR 568 .
17 CIT v Bhatia 149 ITR 148 (mistake or partners); CIT v Agarwalla 190 ITR 256 . AO had no such power prior to 1971:
CIT v New India 111 ITR 197 . See also s 1, under ‘General power to condone delay’; CIT v Dahyabhai 206 ITR 391 ;
Sanjay Const v CIT 225 ITR 693 ; Mukunchand v CIT 226 ITR 907 ; Bharat Construction Company v CIT 330 ITR
285 (delay in filing declaration); CIT v Rajasthan Construction Co. 274 ITR 44 (Form 11/11A).
18 Special Steel v CIT 249 ITR 504 .
19 CIT v Girish Chand Amar Nath 274 ITR 236 .
20 See under ‘Defect’.

Page 31 of 33
S. 183.
21 In cases of such defect AO could refuse renewal of registration under 1922 Act. See further s 186(1), under
‘Cancellation of registration’.
22 CIT v Voleti 84 ITR 764 ; CIT v K.P. Gupta 95 Taxman 537 .
23 CIT v Ramraj 241 ITR 297 .
24 Purusottam v CIT 115 ITR 377 (accepted by board in circular dated 29th December, 1980 : 131 ITR St 58).
25 CIT v Riviera Apartments 119 Taxman 379 .
26 CIT v Mothooram 121 ITR 59 . Cf. CIT v Panda 121 ITR 342 .
27 K.C. Trunk Factory v CIT 106 ITR 348 ; Udaipur Soap v CIT 67 ITR 613 ; Mohatta v CIT 153 ITR 247, 252 .
28 Shapurji v CIT 13 ITR 113 .
29 Bhagatram v CEPT 29 ITR 521, 528 (SC) .
30 13 ITR 113.
31 CIT v Abdul Rahim 55 ITR 651 (SC) . Cf. CIT v Gokaldas 11 ITR 462 (mere suspicion does not justify an inference of
fact); CIT v Mishra 147 ITR 424 .
32 Kirpaldas v CIT 10 ITR 505 .
33 CIT v Kanodia 77 ITR 515 (SC) ; Varjivandas v CIT 34 ITR 21 ; Deo Sharma v CIT 41 ITR 235 ; Kewalram v CIT 88
ITR 243 .
34 174 ITR St 37.
35 See s 144, under ‘ Cases in which best judgment assessment is compulsory’.
36 CIT v Panduranga 223 ITR 400 .
37 CIT v Standard Mercantile 157 ITR 139 (SLP rejected 155 ITR St 65); Gopal Stores v CIT 215 ITR 265 .
38 Nand Singh v CIT 91 ITR 202 . Kakkar v CIT 194 ITR 327 .
Page 32 of 33
S. 183.
39 General Mechanical Works v CIT 151 ITR 752 ; CIT v Builders Union 197 ITR 177 ; CIT v Trimurti Builders 269 ITR
225 (discussing the respective areas of operation of ss 185(5) and 186(2).
40 ACIT v Hindustan Traders 272 ITR 413 .
41 See p. 2390, nn. 42 and 43 CIT v Jekisondas 66 ITR 515 .
42 CIT v Kesava Prabhu 197 ITR 618 .
43 CIT v Jekisondas 66 ITR 515 .
44 CIT v Kartar Singh 302 ITR 66 .
45 Gov-Gen-in-C v Mulla 13 ITR 10 . Contra Nachiappa v Sec. of State 1 ITR 330 (suit to declare registration void).
46 CIT v Sivakasi 53 ITR 204, 211 (SC) ; Pratt v Strick 17 TC 459 ; Fenston v Johnstone 23 TC 29 ; John v IR 15 TC
602, 610 .
47 Champaran v State of Bihar 49 ITR 152 (SC); Morden v Monks 8 TC 450, 460, 464-65 (CA).
48 Ladhuram v CIT 44 ITR 521 (SC) ; Ratanchand v CIT 155 ITR 720 (SC) ; Banerjee v CIT 30 ITR 423 .
49 Sundar Singh v CIT 10 ITR 457, 462 (PC) ; Krishna Flour v CIT 44 ITR 501 (SC) ; CIT v Sivakasi 53 ITR 204 (SC) ;
Sahabuddin v CIT 46 ITR 203 ; Bhimraji v CIT 26 ITR 185 ; Jagannathram v CIT 19 TR 353 ; Allauddin v CIT 22 ITR
545 ; Suwalal v CIT 17 ITR 269 ; Gangamirthammal v CIT 74 ITR 473 ; Manilal v CIT 109 ITR 278 . Cf. Madura v CIT
30 ITR 764 .
50 CIT v Gokaldas 11 ITR 462 .
51 37 ITR 271; Murlidhar v CIT 50 ITR 628 .
52 Chiranjilal v CIT 5 ITR 44, 46 .
53 CIT v Rajasthan Construction Co 258 ITR 657 ; CIT v Dillo Ram and Co 235 ITR 43 ; CIT v Abhaykumar
Jaswantkumar 196 ITR 689 .
54 CIT v Mohd Bux Shokat Ali (No2) 256 ITR 357 ; Munshi Hussain v ITAT 241 ITR 148 ; CIT v DK Trading Co 238 ITR
887 ; CIT v Gnan Ganga Science Institute 238 ITR 473 ; CIT v Venkateswara Traders 232 ITR 788 ; CIT v Rajwant
Singh and Co 209 ITR 539 ; CIT v Agarwalla (BL) 190 ITR 256 ; CIT v Anant Raj Agencies (Properties) 184 ITR 52 .
Page 33 of 33
S. 183.
55 Mohammed Khalil v ITO 46 ITR 458 (violation of principles of natural justice); Abdul Khader v ITO 141 ITR 159 ;
Rangappa v CIT 145 ITR 250 ; Kashinath v ITO 147 ITR 230 .
56 In effect, sub-heading ‘B.—Registration of firms’ has been omitted by the Finance Act, 1992 (18 of 1992), s 66 (w.e.f.
1-4-1993). Circular No. 636, August 31, 1992, 198 ITR (St.) 1.
End of Document
S. 184. Assessment as a firm
(1) 57[A firm shall be assessed as a firm for the purposes of this Act, if—
(i) the partnership is evidenced by an instrument; and
(ii) the individual shares of the partners are specified in that instrument.
(2) A certified copy of the instrument of partnership referred to in sub-section (1) shall accompany the return of
income of the firm of the previous year relevant to the assessment year commencing on or after the 1st day of
April, 1993, in respect of which assessment as a firm is first sought.
Explanation.—For the purposes of this sub-section, the copy of the instrument of partnership shall be certified in writing by
all the partners (not being minors) or, where the return is made after the dissolution of the firm, by all persons (not being
minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner
who is deceased.
(3) Where a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every
subsequent year if there is no change in the constitution of the firm or the shares of the partners as evidenced by
the instrument of partnership on the basis of which the assessment as a firm was first sought.
(4) Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised
instrument of partnership along with the return of income for the assessment year relevant to such previous year
and all the provisions of this section shall apply accordingly.
(5) 58[Notwithstanding anything contained in any other provision of this Act, where, in respect of any assessment
year, there is on the part of a firm any such failure as is mentioned in section 144, the firm shall be so assessed
that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever
name called, made by such firm to any partner of such firm shall be allowed in computing the income chargeable
under the head “Profits and gains of business or profession” and such interest, salary, bonus, commission or
remuneration shall not be chargeable to income-tax under clause (v) of section 28 .]
Page 2 of 3
57 Sections 184 and 185 have been substituted, for the sub-heading “B.—Registration of firms” occurring before section
184 and for sections 184, 185 and 186, by the Finance Act, 1992 (18 of 1992), s 66 (w.e.f. 1-4-1993). Prior to their
substitution, sections 184 and 185 stood as under:—
‘ S. 184 . Application for registration.—(1) An application for registration of a firm for the purposes of this Act may be made to
the 1[Assessing Officer] on behalf of any firm if—
(i) the partnership is evidenced by an instrument; and
(ii) the individual shares of the partners are specified in that instrument.
(2) Such application may, subject to the provisions of this section, be made either during the existence of the firm or after its
dissolution.
(3) The application shall be made to the 1[Assessing Officer] having jurisdiction to assess the firm, and shall be signed—
(a) by all the partners (not being minors) personally; or
(b) in the case of a dissolved firm, by all persons (not being minors) who were partners in the firm immediately before its
dissolution and by the legal representative of any such partner who is deceased.
Explanation.—In the case of any partner who is absent from India or is a lunatic or an idiot, the application may be signed by
any person duly authorised by him in this behalf, or, as the case may be, by a person entitled under law to represent him.
(4) The application shall be made before the end of the previous year for the assessment year in respect of which registration is
sought:
Provided that the 1[Assessing Officer] may entertain an application made after the end of the previous year, if he is satisfied that
the firm was prevented by sufficient cause from making the application before the end of the previous year.
(5) The application shall be accompanied by the original instrument evidencing the partnership, together with a copy thereof:
Provided that if the 1[Assessing Officer] is satisfied that for sufficient reason the original instrument cannot conveniently be
produced, he may accept a copy of it certified in writing by all the partners (not being minors), or, where the application is made
after the dissolution of the firm, by all the persons referred to in clause (b) of sub-section (3), to be a correct copy, or a certified
copy of the instrument; and in such cases the application shall be accompanied by a duplicate copy of the original instrument.
(6) The application shall be made in the prescribed form and shall contain the prescribed particulars.
(7) Where registration is granted 2[or is deemed to have been granted] to any firm for any assessment year, it shall have effect
for every subsequent assessment year:
Provided that—
(i) there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership
on the basis of which the registration was granted; and
3[(ii) the firm furnishes, before the expiry of the time allowed under 4[sub-section (1) of section 139 ] for furnishing the return of
income for such subsequent assessment year, a declaration to that effect, in the prescribed form and verified in the prescribed
manner, so, however, that where the 1[Assessing Officer] is satisfied that the firm was prevented by sufficient cause from
furnishing the declaration within the time so allowed, he may allow the firm to furnish the declaration at any time before the
assessment is made.]
(8) Where any such change has taken place in the previous year, the firm shall apply for fresh registration for the assessment
year concerned in accordance with the provisions of this section.
S. 185 . Procedure on receipt of application.—(1) On receipt of an application for the registration of a firm, the 1[Assessing
Officer] shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and—
(a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he
shall pass an order in writing registering the firm for the assessment year;
(b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm.
5[Explanation.—For the purposes of this section and section 186, a firm shall not be regarded as a genuine firm if any partner of
the firm was, in relation to the whole or any part of his share in the income or property of the firm, at any time during the previous
year, a benamidar—
(a) of any other partner to whom the first-mentioned partner does not stand in the relationship of a spouse or minor child, or
(b) of any person, not being a partner of the firm, and any of the other partners knew or had reason to believe that the first-
mentioned partner was such benamidar and such knowledge or belief had not been communicated by such other partner to the
1[Assessing Officer] in the prescribed manner.]
6[(2) Where the 1[Assessing Officer] considers that the application for registration is not in order, he shall intimate the defect to
the firm and give it an opportunity to rectify the defect in the application within a period of one month from the date of such
Page 3 of 3
intimation; and if the defect is not rectified within that period, the 1[Assessing Officer] shall, by order in writing, reject the
application.
(3) Where the 1[Assessing Officer] considers that the declaration furnished by a firm in pursuance of sub-section (7) of section
184 is not in order, he shall intimate the defect to the firm and give it an opportunity to rectify the defect in the declaration within
a period of one month from the date of such intimation; and if the defect is not rectified within that period, the 1[Assessing Officer]
shall, by order in writing, declare that the registration granted to the firm shall not have effect for the relevant assessment year.]
(4) Where a firm is registered for any assessment year, the 1[Assessing Officer] shall record a certificate on the instrument of
partnership or on the certified copy submitted in lieu of the original instrument, as the case may be, to the effect that the firm has
been registered under this Act, for that
assessment year; and where a declaration under sub-section (7) of section 184 is furnished by the firm, for the relevant
subsequent assessment year.
(5) Notwithstanding anything contained in this section, where, in respect of any assessment year, there is, on the part of a firm,
any such failure as is mentioned in section 144, the 1[Assessing Officer] may refuse to register the firm for the assessment year.
7[(6) Notwithstanding anything contained in sub-sections (1) to (4), where a firm has made an application for registration in
relation to an assessment year and has furnished the return for that assessment year, such firm shall be deemed to have been
registered under this section on the expiry of the period for serving notice as specified in the proviso to sub-section (2) of section
143 in respect of such return:
Provided that nothing in this sub-section shall affect the power of the Assessing Officer to intimate the defect to the firm under
sub-section (2) and where any such intimation is sent, all the provisions of sub-section (2) shall apply.
(7) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Second
Amendment) Act, 1989, shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of
April, 1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as
references to those provisions as for the time being in force and applicable to the relevant assessment year.]’. See Circular No.
636, August 31, 1992, 198 ITR (St.) 1.
2. Ins. by the Direct Tax Laws (Second Amendment) Act, 1989 (36 of 1989), s 19 (with retrospective effect from 1-4-1989).
3. Subs. by the Taxation Laws (Amendment) Act, 1970 (Act 42 of 1970), s 33 (w.e.f. 1-4-1971), for the following:—
“(ii) the firm furnishes, along with its return of income for the assessment year concerned, a declaration to that effect, in the
prescribed form and verified in the prescribed manner.”.
4. Subs., for “sub-section (1) or sub-section (2) of section 139 (whether fixed originally or on extension)”, by the Direct Tax Laws
(Amendment) Act, 1989 (3 of 1989), s 57(3) (w.e.f. 1-4-1989).
5. Subs. by the Taxation Laws (Amendment) Act, 1975 (41 of 1975), s 51 (w.e.f. 1-4-1976), for the following Explanation which,
in its turn, was inserted by the Taxation Laws (Amendment) Act, 1970 (42 of 1970), s 34 (w.e.f. 1-4-1971):—
“Explanation.—For the purposes of this section and section 186, a firm shall not be regarded as a genuine firm if any partner of
the firm was, in relation to the whole or any part of his share in the income or property of the firm, at any time during the previous
year, a benamidar of any other partner to whom the first-mentioned partner does not stand in the relationship of a spouse or
minor child.”.
6. Subs. by the Taxation Laws (Amendment) Act, 1970 (42 of 1970), s 34 (w.e.f. 1-4-1971), for the following:—
“(2) The Income-tax Officer shall not reject an application for registration merely on the ground that the application is not in order,
but shall intimate the defect to the firm and give it an opportunity to rectify the defect in the application within a period of one
month from the date of such intimation.
(3) If the defect is not rectified within such time, the Income-tax Officer may reject the application.”.
7. Ins. by the Direct Tax Laws (Second Amendment) Act, 1989 (36 of 1989), s 20 (with retrospective effect from 1-4-1989).
58 Subs. by the Finance Act, 2003 (32 of 2003), s 69 (w.e.f. 1-4-2004), for the following:—
‘(5) Notwithstanding anything contained in the foregoing provisions of this section, where, in respect of any assessment year,
there is on the part of a firm any such failure as is mentioned in section 144, the firm shall not be assessed as such for the said
assessment year and, thereupon, the firm shall be assessed in the same manner as an association of persons, and all the
provisions of this Act shall apply accordingly.’. See Circular No. 7 of 2003, September 5, 2003; 263 ITR (St.) 62.
End of Document
S. 185. Assessment when section 184 not complied with
59[Notwithstanding anything contained in any other provision of this Act, where a firm does not comply with the provisions
of section 184 for any assessment year, the firm shall be so assessed that no deduction by way of any payment of interest,
salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall
be allowed in computing the income chargeable under the head “Profits and gains of business or profession” and such
interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of section 28 .]
1. Sections 184 and 185 .—The Finance Act, 1992 inserted new ss 184 and 185 in place of the old ss 184, 185 and
186. However, some common concepts and expressions have been retained in the new sections, and to that extent,
the commentary on the substituted sections will continue to be relevant.
Under the new provisions, a copy of the partnership instrument duly certified has to accompany the return of income
for the relevant year for which assessment as a firm is first sought (s 184 ). The requirement of filing of certified copy
of the partnership deed along with the return of income is mandatory.60 Thereafter, assessment as a firm will continue
to be made so long as the constitution of the firm remains unchanged. Whenever there is a change in the constitution
of a firm (s 187 ), a copy of the new partnership instrument has to be similarly filed. Where a firm does not comply with
the provisions of s 184 for any assessment year, the firm shall be assessed for the assessment year in the same
manner as an association of persons, and all the provisions of this Act shall accordingly apply (s 185 ).
The main features of the provisions for the assessment of firms, stated briefly, are as under:
(i) The partnership must be evidenced by an instrument.
(ii) The individual shares of the partners should be specified in that instrument.
Page 2 of 5
(iii) Certified copy of the instrument of partnership should be enclosed with the return of income of the firm of the
previous year relevant to the assessment year in respect of which assessment as a firm is first sought.
(iv) Once the firm is assessed as such for any assessment year, it shall be assessed in the same capacity for
every subsequent year if there is no change in the constitution of the firm or in the shares of the partners.
(v) If there is any change in the constitution in the previous year, the firm shall furnish a certified copy of the
revised instrument of partnership along with the return of income for the assessment year.
(vi) If, for any assessment year, there is on the part of a firm any such failure as is mentioned in s 144, the firm
shall be assessed as an association of persons.
(vii) Similarly, if the firm does not comply with the provisions of s 184 for any assessment year, the firm shall be
assessed for that assessment year as an association of persons (s 185 ).
2. Deleted Section 186(1) [ Rule 6B under 1922 Act]: Cancellation of Registration.— Section 186 is no more on
the statute book from the assessment year 1993-94. Under the 1922 Act, if it was discovered after a firm was
registered that there was no genuine firm in existence, the AO could cancel the registration under r. 6B of the Indian
Income-tax Rules, 1922, and where the firm was already assessed he could reassess the firm under the old s 34 as
an unregistered firm.61 A similar provision for cancelling registration is contained in this sub-s (1). However, after
cancelling registration under this sub-section the AO does not have to follow the procedure of making a reassessment
under s 147 which corresponds to the old s 34 ; but he should amend the assessments of the firm and its partners on
the footing that the firm is an unregistered firm, and exercise for that purpose powers similar to those conferred in
cases of rectification by s 154 .
Under this sub-section the AO may cancel the registration which is granted or deemed to have been granted under s
185 for the first year of registration, or he may cancel the registration for a subsequent year which is effective under s
184(7) . When a firm is once registered, and continues to exist without any change in its constitution or in the shares of
its partners, the registration continues to have effect under s 184(7) for every subsequent assessment year provided
the firm files a declaration of no change as provided in proviso (ii) to s 184(7) .
A firm may be registered either by an order of the ITO under s 185(1)(a) or on a reversal of his order refusing
registration under s 185(1)(b) . If the latter course is followed, the ITO cannot cancel registration under s 186(1), since
that would amount to a breach of the judicial hierarchy.62
The position under this Act may be summed up as follows:
(i) A genuine firm, once registered, and continuing without any change in its constitution or in the shares of its
partners, must be treated as registered for subsequent years as a matter of course—subject to the filing of
the declaration under s 184(7) —notwithstanding any defect in the original partnership deed, unless the
commissioner in exercise of his revisional power under s 263 cancels the original order of registration within
two years from the date of that order.63
(ii) If the firm is found in a subsequent year to be invalid, in other words, it is found that there is no firm in
existence at all in the eye of the law, the assessee would be assessable as an association of persons and
Page 3 of 5
any registration wrongly granted in the past cannot be effective for such subsequent year, for there would be
no firm which could possibly be treated as either registered or unregistered.
(iii) If the firm was never genuine and was wrongly registered in the past, or was genuine but ceases to be a
genuine firm, the AO may cancel its registration under this sub-section for the year for which it was
registered or for which its past registration has effect under s 184(7) . This power of cancellation can be
exercised only within eight years from the end of the relevant assessment year,64 and only after giving the
firm a reasonable opportunity of being heard.65 But the power of cancellation conferred by this sub-section
can be exercised only if the firm is not genuine,66 and not on any other ground such as the non-existence of
the partnership deed in the accounting year for which the registration was granted67 or a legal defect in the
deed68 or the profits are not fully disclosed69 or are not apportioned among the partners70 or a portion of the
profits is not actually divided amongst partners, but is shown in a reserve account with specific shares of
partners for division in following year.71 On the other hand, if the profits are voluntarily and knowingly
apportioned among the partners in a ratio different from that indicated in the partnership deed, the
registration may be cancelled under this section on the ground that there is ‘no genuine firm in existence as
registered’.72 Similarly, where the seizure of documents shows concealment of income and division of profits
among persons who are not partners, registration may be cancelled.73
3. Sub-section (2) [ Section 23(4) of 1922 Act]: Cancellation of Registration upon Best Judgment
Assessment.—[See under s 185(5) .]
4. Sub-sections (3) and (4): Amendment of Assessment on Cancellation of Registration.—[See under s.ub-s
(1).]
5. Appeal.—An appeal lies under s 246 against an order cancelling the registration of a firm under this section. [See s
246, under ‘Appeal against order refusing to register firm…or cancelling registration’.]
6. Writ, Direction or Order.—A writ, direction or order may be issued in appropriate cases.74 For the principles
underlying the grant of such relief, see s 293, under ‘Writs, directions and orders under Constitution’.
7. Reference and Appeal.—In the context of s 185, the undernoted cases held that referable questions of law
arose75 or did not arise76 under s 256 . In the context of section 185, the undernoted cases held that substantial
question of law did arise.76a
59 Subs. by the Finance Act, 2003 (32 of 2003), s 70 (w.e.f. 1-4-2004), for the following:—
‘ S. 185 . Assessment when section 184 not complied with.—Where a firm does not comply with the provisions of section
184 for any assessment year, the firm shall be assessed for that assessment year in the same manner as an association of
persons, and all the provisions of this Act shall apply accordingly.’.
60 Bhaskar and Co. v CIT 331 ITR 91 .

Page 4 of 5
61 Narayana v ITO 35 ITR 388 (SC) .
62 CIT v Deokinandan Om Prakash 276 ITR 497 .
63 See s 184(7) (now deleted).
64 Cf. Chagganlal v CIT 36 ITR 337 (Hyderabad IT Act).
65 Milan Supari v ITO 184 ITR 106 ; Paul Mathews v CIT 195 ITR 716 ; CIT v Builders’ Union 197 ITR 177 ; Kakkar v
CIT 194 ITR 327 ; CIT v Malthuram 232 ITR 453 ; Gopal Stores v CIT 215 ITR 265 . Cf. Punjab Ice Factory v CIT
160 ITR 761 .
66 CIT v Sivkasi 53 ITR 204 (SC) ; CIT v Udayalaxmi Hardware 183 ITR 159 (SLP rejected 180 ITR (St) 39); Puran Mal
v CIT 197 ITR 170 ; Jewat v CIT 213 ITR 399 (minor had signed the partnership deed as a full-fledged partner);
Frontier v CIT 221 ITR 878 . Contra Mahabir v CIT 102 ITR 466 ; CIT v Ramakrishna 144 ITR 797 ; CIT v Balaji 144
ITR 807 . Cf. Rameswar v ITO 77 ITR 421, 429 [there can be no cancellation of registration granted by CIT(A) on
appeal.]
67 Sheonath v ITO 47 ITR 493 ; CIT v Bajaj 143 ITR 218 ; CIT v Kirana 161 ITR 726 .
68 Mahabir v CIT 102 ITR 466 was really a case of a legal defect which, did not justify cancellation.
69 CIT v Swaroop 154 ITR 660 .
70 CIT v Voleti 84 ITR 764, 770 . Contra CIT v K.P. Gupta 95 Taxman 537 .
71 CIT v Rathinasabapathy 215 ITR 309 .
72 Setharam v CIT 123 ITR 150 ; Bheruram v CIT 257 ITR 795 . Power of cancellation under this section was stretched
too far in Bhagat v CIT 123 ITR 164 .
73 Kerala Liquor v CIT 222 ITR 333 .
74 Sheonath v ITO 47 ITR 493 (excess of jurisdiction); Rameswar v ITO 77 ITR 421 (violation of principles of natural
justice); Shubham v IAC 174 ITR 502 (apparent error); Mahesh Prasad v ITO 188 ITR 239 .
75 CIT v Laxmi Wine Merchants 251 ITR 882 ; CIT v Oriental Trading Co 227 ITR 695 ; Kankaria Textiles v CIT 200
ITR 408 ; CIT v Manoj Industries 192 ITR 598 ; Shankerji Construction Co v CIT 192 ITR 563 ; Shri Ram Washer
Rahat Industries v CIT 187 ITR 85 ; CIT v Chharmal Manghandas 181 ITR 216 .
76 Plywood Products v CIT 257 ITR 433 ; CIT v Purwar General Mills 243 ITR 877 ; CIT v Arjun Dass Surinder Kumar &
Co 239 ITR 859 ; CIT v SM Bhatiya Associates 226 ITR 675 ; CIT v Rajesh Corporation 214 ITR 484 ; CIT v Agrawal
Page 5 of 5
Refrigeration 210 ITR 215 ; CIT v Jaipur Oil Company 203 ITR 661 ; CIT v Agra Wines 201 ITR 875 ; CIT v Genuine
Coffee and Tea 198 ITR 105 ; CIT v Indore Body Builders 275 ITR 59 .
76a CIT v Rajasthan Construction Co 248 ITR 100 .
End of Document
S. 186.
S. 186.
77[* * * *]
77 Section 186 has, in effect, been omitted by the Finance Act, 1992 (18 of 1992), s 66 (w.e.f. 1-4-1993).
Section 186 as it stood upto 31-3-1993.—By the Finance Act, 1992, for the then sections 184, 185 and 186, two new
sections 184 and 185 have been substituted (w.e.f. 1-4-1993). In effect, section 186 has been omitted (w.e.f. 1-4-1993). The
said section 186, prior to such omission (w.e.f. 1-4-1993), stood as under:—
‘ S. 186 . Cancellation of registration.—(1) If, where a firm has been registered 1[or is deemed to have been registered], or its
registration has effect under sub-section (7) of section 184 for an assessment year, the 2[Assessing Officer] is of opinion that
there was during the previous year no genuine firm in existence as registered, he may, after giving the firm a reasonable
opportunity of being heard 3[* * *] cancel the registration of the firm for that assessment year:
Provided that no such cancellation shall be made after the expiry of eight years from the end of the assessment year in respect
of which registration has been granted 4[or is deemed to have been granted] or has effect:
5[Provided further that the Assessing Officer shall not cancel the registration granted under sub-section (1) of section 185
except with the previous approval of the Deputy Commissioner.]

(2) If, where a firm has been registered 6[or is deemed to have been registered] or its registration has effect under sub-section
(7) of section 184 for any assessment year, there is, on the part of the firm, any such failure in respect of the assessment year
as is mentioned in section 144, the 7[Assessing Officer] may cancel the registration of the firm for the assessment year, after
giving the firm not less than fourteen days’ notice intimating his intention to cancel its registration and after giving it a reasonable
opportunity of being heard.
(3) Where the registration of a firm is cancelled for any assessment year, the 7[Assessing Officer] shall amend the assessments
of the firm and its partners for that assessment year on the footing that the firm is an unregistered firm.
(4) The provisions of section 154 shall, so far as may be, apply to the amendments of the assessments of the firm and its
partners under sub-section (3) of this section, the period of four years specified in sub-section (7) of that section being reckoned
from 8[the end of the financial year in which the order cancelling the registration was passed].’.
1. Ins. by the Direct Tax Laws (Second Amendment) Act, 1989 (36 of 1989), s 21(a)(i) (with retrospective effect from 1-4-1989).
3. The words “and with the previous approval of the Deputy Commissioner,” were omitted by the Direct Tax Laws (Second
Amendment) Act, 1989 (36 of 1989), s 21(a)(ii) (with retrospective effect from 1-4-1989).
4. Ins. by the Direct Tax Laws (Second Amendment) Act, 1989 (36 of 1989), s 21(a)(iii) (with retrospective effect from 1-4-1989).
5. Ins. by the Direct Tax Laws (Second Amendment) Act, 1989 (36 of 1989), s 21(a)(iv) (with retrospective effect from 1-4-1989).
Page 2 of 2
S. 186.
6. Ins. by the Direct Tax Laws (Second Amendment) Act, 1989 (36 of 1989), s 21(b) (with retrospective effect from 1-4-1989).
8. Subs., for “the date of the order cancelling the registration”, by the Taxation Laws (Amendment) Act, 1984 (67 of 1984), s 32
(w.e.f. 1-10-1984).
End of Document
S. 187. Change in constitution of a firm
> C.—Changes in constitution, succession and dissolution
(1) Where at the time of making an assessment under section 143 or section 144 it is found that a change has
occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of
making the assessment:
78[* ***]
(2) For the purposes of this section, there is a change in the constitution of the firm—
(a) if one or more of the partners cease to be partners or one or more new partners are admitted, in such
circumstances that one or more of the persons who were partners of the firm before the change continue as
partner or partners after the change; or
(b) where all the partners continue with a change in their respective shares or in the shares of some of them:
79[Provided that nothing contained in clause (a) shall apply to a case where the firm is dissolved on the
death of any of its partners.]
1. Section 187 [ Section 26(1) of 1922 Act]: Scope of Section.—This section deals with the case where at the time
of making an assessment it is found that a change has occurred in the constitution of a firm, while s 188 deals with the
case of succession. These two sections are concerned not with the computation of tax, but with the person upon
whom the liability is to be imposed.80 They distribute tax already charged as between old and new members of a firm
or between the predecessor and the successor in a business.81 The section operates irrespective of any agreement
between the partners inter se as regards assumption of the retired partner’s tax liability by continuing partners.82 In
cases falling under this section a single assessment has to be made on the firm as constituted at the time of making
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the assessment.83
2. ‘At the Time of Making an Assessment’.—This section would apply if at the time of making an assessment under
s 143 or 144 (which would include reassessment under s 147 )84 it is found that a change has occurred in the
constitution of a firm. The change might have occurred either in the relevant accounting year or in the assessment
year,85 or even later. The words ‘at the time of making an assessment’ mean in the course of the process of
assessment and do not refer merely to the act of making an assessment order.86 Thus, where a notice calling for a
return has been issued to any person under s 142(1)(i), the process of assessment begins and continues until an
order of assessment is made, and if a change in the partnership personnel occurs at any time before the assessment
is made, this section would apply.87 But the section has no application to a case where the change occurs after the
assessment of the firm is completed.88 [See also s 171(2), under ‘At the time of making an assessment’.]
3. Meaning of Change in Constitution of Firm.—Unlike the old s 26(1), this section clearly indicates what is meant
by a change in the constitution of a firm. First, the words cover the case of a partner ceasing to be a partner or a new
partner coming in,89 but at least one of the partners before the change should continue as a partners after the change.
If all the old partners go out and an entirely new set of partners comes in, it would not amount to a change in the
constitution of a firm but would amount to the succession of one firm by another, and s 188 would apply. But the
converse is not true. To constitute a succession under s 188 it is not necessary that no partner of the old firm should
be a partner in the new firm; and when a dissolved firm is succeeded by another in which some of the partners of the
old firm are members, nothing in s 187(2) converts such a case of succession into a case of change in the constitution
of the firm.90 The proviso added to s 187(2) in 1984 with effect from April 1, 19751st April, 1975, which makes that
sub-section inapplicable to ‘a case where the firm is dissolved on the death of any of its partners’,1 cannot be read as
making the sub-section applicable to cases where the firm is dissolved otherwise than on the death of a partner.2
Secondly, a mere change in the proportion in which the partners divide the profits amounts to a change in the
constitution of the firm, whereas it was not so under the 1922 Act.3 When a minor admitted to the benefits of
partnership attains majority and elects to become a partner, and the redistribution of the shares in losses is
ascertainable from the original instrument, there is no ‘change in the constitution of the firm’ even within the extended
meaning of that expression in this section.4 A case may be held to involve a change in the constitution of the firm even
if the parties erroneously regard it as a case of dissolution.5
Section 42 of the Partnership Act provides that subject to contract between the partners6 a firm is dissolved by the
death of partner.7 In CIT v Empire Estate ,8 the Supreme Court held that where the partnership deed provides that
death shall not result in the dissolution of the firm, such provision is lawful under s 42 of the Partnership Act; on the
death of a partner, the partnership is not dissolved and the business is continued by the reconstituted partnership, and
only one assessment is to be made for the entire year. It further ruled that where there is no such provision, and a
partner dies, the partnership stands dissolved, and if the surviving partners in such a case continue the business in
partnership, there is a succession of one partnership firm by another and s 188 is attracted.9 In such a case, the
course open to the firm is to execute a new deed of partnership and apply for registration of that deed—but the failure
to do this does not invalidate the registration upto the date of death of deceased partner.10 Where on the death of a
partner, the firm is actually dissolved by the partners and a new partnership deed is executed, it is a case of
succession, and hence there should be two separate assessments.11 Moreover, as observed by the Supreme Court in
CIT v Ayyanarappan and Co .,12 in view of the retrospective insertion of the proviso to s 187(2), where the firm is
dissolved on the death of any of the partners, two separate assessments have to be made. In a partnership deed
where a peculiar clause prevailed stating that the on the event of the death of the partners the firm will not be
dissolved instead it will be continued by the legal heir of the deceased, it was held to be case of reconstitution and not
dissolution.13
It was held by the Supreme Court under the 1922 Act that where the firm consists of only two partners, upon the death
of one of them the firm automatically and necessarily comes to an end, even if there is a provision in the partnership
Page 3 of 8
deed that death should not dissolve the partnership but the legal heir of the deceased partner should take his place.14
This proposition requires reconsideration. There is no express provision in s 42 of the Partnership Act to support this
construction— s. 42(c) can be fairly applied to a case where the two partners agree that on the death of one of them
his heir would be admitted as a partner and the contract would operate to prevent dissolution of the firm. Secondly, if
the two partners can agree that one of them will retire and be replaced by another person without the firm being
dissolved, there is no reason why a similar agreement cannot be equally effective upon death. It seems illogical to
make a distinction between death and retirement so far as the continuation of the firm is concerned. The question is
not one of merely legal terminology; if the partnership is held to be dissolved, valuable right—e.g. tenancy, quota or
licence right—may be lost.
The new firm could not come into being unless the old firm ceases to exist. The existence of a common partner would
not mean that there is only a change in constitution. Even a small or minute interregnum would result in extinction of
the old firm before the formation of the new firm.15
Where the partnership is dissolved and one partner takes over and continues the partnership business, it would be a
case of succession covered by s 188 and not of change in the constitution of the firm, for ‘a change in the constitution
of the firm’ presupposes the continued existence of the firm.16 Likewise, if a firm is dissolved and some of the partners
take over the firm’s business or carry on a similar business, with or without new partners, this section would not apply,
although there would be some common partners between the old firm and the new. In such a case the new firm may
be held to succeed to the old firm attracting the application of s 188,17 or the business of the old firm may be held to be
discontinued.18 [For the difference between succession or discontinuance on the one hand and change in the
constitution of a firm on the other hand, see under s 170 (succession) and 176 (discontinuance).]
When five out of fourteen14 partners retired and the remaining nine executed a fresh partnership deed, it was a case
of succession and s 188 would apply.19 In several cases, the facts are extremely important to determine whether s 187
or s 188 will apply.
The Kerala High Court incorrectly held that where two out of three partners retired, it would tantamount to dissolution
of the firm and the subsequent constitution of a new partnership firm by the remaining partner by inducting the two
more partners will result in a new firm coming into existence attracting s 188 . On facts, the partnership deed
specifically provided that retirement of any partner would not result in dissolution. On the very day, two partners
retired. The new partners were inducted and a new partnership deed was executed. The Kerala High Court took the
view that once two out of three partners retired, the firm would stand dissolved as a partnership cannot be carried on
by a single person. In such a case, s 187 (2) will have no application and the assessment must be carried out under s
188 read with s 170 .20 On the other hand, the Allahabad High Court, following its earlier decision, held that even if a
firm is dissolved and a new firm constituted with six of the erstwhile partners continuing the same business with the
same name, it would be a change in constitution and not of succession.21 Recently, the Allahabad High Court went a
step further and held, after extensive discussion of the case law, that even though there was a dissolution of the earlier
firm and part of the business was given to the erstwhile partner and the new firm continued the remaining part was not
a case of succession but only a change in constitution.22 It is submitted that this decision is incorrect and contrary to
two Supreme Court decisions.23
The Allahabad High Court in the Sagar Mal case has given an incorrect interpretation to the scope of ss 187 and 188.
It held that even if a firm is dissolved and is succeeded by the new firm which has one of the partners of the old firm, it
would be a mere change in constitution. It is only when a firm is dissolved and succeeded by another firm and none of
the partners of the old firm are partners of the new firm, that s 188 could apply. It is submitted that such an
interpretation is incorrect. Sections 187 and 188 are procedural sections and do not create such an extreme legal
Page 4 of 8
fiction. These sections also do not override the provisions of the Partnership Act, 1932. A partnership is a matter of
contract and if the deed provide for dissolution on the happening of certain events, then it would not be proper to state
that there would be no dissolution but a change in the constitution for the purposes of income tax. The expression
“change in constitution” necessarily contemplates the change in the constitution of a particular firm that continues to
exist. If that firm is dissolved and if a new firm commences business, it will not be a case covered by s 187 irrespective
of whether some partners are or are not common.
Cases of succession to one firm by another, and of dissolution of a firm or discontinuance of its business, are dealt
with by ss 188 and 189 respectively.
4. Assessment in Case of Change in Partnership Personnel.—This section applies to both registered and
unregistered firms. The difference in assessment procedure in the case of registered firms and of unregistered firms
must be born in mind in construing and applying the provisions of this section. [See ss 182 and 183, under
‘Assessment of registered and unregistered firms’.]
(a) Unregistered Firms.—In assessing an unregistered firm, the revenue is not concerned with changes in the
constitution of the firm, for the unregistered firm is charged as a unit of assessment. The total income of the firm is
computed and the tax payable by the firm is determined as if there had been no change in the constitution of the firm.
The firm as constituted at the time of making the assessment is liable to pay the tax. In other words, the new partners
are liable to pay the tax even in respect of that portion of the previous year’s profits which was received by the old
partners prior to the change. But for purposes other than taxing the unregistered firm, e.g. for the purpose of
determining the rate of tax applicable to the total income of partner,24 cl. (i) of the proviso applies and only that portion
of the firm’s profits of the accounting year to which the partner was entitled is included in his total income.
(b) Registered Firms.—In the case of a registered firm, the total income of the firm as constituted at the time of
making the assessment is computed just as in the case of an unregistered firm. The firm’s profits are apportioned
between the old and the new partners who in the previous year were entitled to receive the same and each partner’s
share of such profits is taxed in his hands. In other words, the tax on the firm’s profits of the year in which the change
occurs is borne by the old and the new partners in proportion to their actual shares in those profits.25 In such a case, if
the tax assessed upon any partner cannot be recovered from him, it should be recovered from the firm as constituted
at the time of making the assessment; but only after an order, though not necessarily an order of assessment,
determining and quantifying such vicarious liability of the firm is passed.26 Thus, in the case of default by any old
partner the reconstituted firm (including new partners) is liable for the amount of the tax in respect of which the default
is committed.27 To the general rule that the tax levied on a partner of a registered firm cannot be recovered from the
firm or ultimately from the other partners,28 this provision and s 182(4) 29 constitute exceptions.
(c) Liability of Partners for Tax Payable by Firm.—[See under s 188A .]
(d) Carry Forward and Set off of Losses.— Section 78 deals with the question of carry forward and set off of losses
in cases of change in the constitution of the firm or succession to one firm by another firm.
Page 5 of 8
78 The proviso to section 187(1) has been omitted by the Finance Act, 1992 (18 of 1992), s 67 (w.e.f. 1-4-1993). Prior to
its omission, the proviso stood as under:—
‘Provided that—
(i) the income of the previous year shall, for the purposes of inclusion in the total incomes of the partners, be apportioned
between the partners who, in such previous year, were entitled to receive the same; and
(ii) when the tax assessed upon a partner cannot be recovered from him, it shall be recovered from the firm as constituted at the
time of making the assessment.’.
79 Ins. by the Taxation Laws (Amendment) Act, 1984 (67 of 1984), s 33 (w.r.e.f. 1-4-1975).
80 Indian Iron v CIT 11 ITR 328, 337 (PC) ; CIT v Maharaja of Darbhanga 12 ITR 116,124.
81 CIT v Polson 13 ITR 384, 387 (PC) .
82 Ameeruddin v ITO 92 ITR 366 .
83 CIT v Ramesh Biscuit 205 ITR 205 ; Wazidali v CIT 169 ITR 761 (SC) ; CIT v Empire Estate 218 ITR 355 (SC) ; CIT
v Basant 172 ITR 662 ; CIT v Indralok 188 ITR 730 . Contrast s 188 ; Kukreja v CIT 202 ITR 257 .
84 Ameeruddin v ITO 92 ITR 366 ; Jayaram v CIT 147 ITR 807 . Contrast Gates v CIT 90 ITR 422 ; CIT v Ramchandra
104 ITR 77 .
85 CIT v Veeraraghavulu 100 ITR 723 . Cf. Maharaja of Darbhanga v CIT 2 ITR 345 (PC) .
86 Maharaja of Darbhanga v CIT 2 ITR 345 (PC) ; CIT v Maharaja of Darbhanga 12 ITR 116 ; Maneklal v CIT 24 ITR
375 .
87 Maharaja of Darbhanga v CIT 2 ITR 345 (PC) ; Re, Paul 6 ITR 395.
88 Re. Chimanlal 12 ITR 199.
89 Badrinarain v CIT 115 ITR 858 (FB), overruled on another point in Vishwanath v CIT 146 ITR 249 (FB), but see
Wazidali v CIT 169 ITR 761, 777 (SC), CIT v Rama 87 ITR 615, Kaithari v CIT 104 ITR 160, Sandersons v ITO 108
ITR 954 ; CIT v Ram Jas 218 ITR 18 ; CIT v Har Nath 224 ITR 713 ; CIT v Gulab Singh 233 ITR 261 and Rambilas v
CIT 156 ITR 344 (death of partner; see also p. 2038, n. 74); Tyresoles v CIT 49 ITR 515 (reconstitution of firm wrongly
described as dissolution); Ghella v CIT 13 ITR 133 ; Shoff v CIT 48 ITR 780 ; Sheoduttrai v CIT 52 ITR 121 ;
Hanumanthappa v CIT 56 ITR 463 ; Lakshmi Nivas v CIT 58 ITR 9 ; CIT v Basu 76 ITR 291 ; Sangam v CIT 122 ITR
479 . Cf. Delight v ITO 79 ITR 749 (mere change in name of firm); CIT v A.D. Qureshi 264 ITR 319 .
90 Wazidali v CIT 169 ITR 761, 778-79 (SC); Dahi Laxmi v ITO 103 ITR 517 (FB), dissenting from Jessaram v CIT 81
ITR 409 ; CIT v Harjivandas 108 ITR 517 ; CIT v Vinayaka 110 ITR 468 (FB), overruling CIT v Visakha 108 ITR 466
(FB) ; Ramakrishnaiah v CIT 111 ITR 296 ; Mavukkarai v CIT 112 ITR 715 ; Mathurdas v CIT 125 ITR 470 ; CIT v
Santlal 136 ITR 379 ; Ganesh v CIT 136 ITR 762, 767, 769; CIT v Moosa 148 ITR 89 ; CIT v Kathawala 151 ITR 348
; CIT v Emery 153 ITR 150 ; CIT v Raj 165 ITR 720 ; Y. Baliah v CIT 244 ITR 870 ; CIT v Sharad Vijaya 181 ITR 266
; CIT v Satya Deo 188 ITR 303 ; United Coir v CIT 195 ITR 463 . CIT v Bharat Steel Rolling Mills 313 ITR 406 ; CIT v
Page 6 of 8
Ram Jas Rai Askaran Das 218 ITR 18 ; CIT v Ratan Lal Garib Das 261 ITR 200 . Decisions to the contrary in Dharam
v CIT 97 ITR 302 ; Jupiter v CIT 109 ITR 92, Nandlal v CIT 110 ITR 170 (FB) (majority view), Vimal v CIT 138 ITR
660 ; CIT v Durga 145 ITR 351 and Girdharilal v CIT 147 ITR 529 (FB) proceed on a misconstruction of s 187(2) and
must be regarded as incorrect after Supreme Court’s decision in Wazidali. See the dissenting judgment of Sandhawalia
J. in Nandlal 110 ITR 170, 201, 209; CIT v Delhi Haryana Dall Mills 267 ITR 478 ; CIT v Ketan Chemicals 281 ITR 244
.
1 Joshi v CIT 162 ITR 268 ; CIT v Kheta 162 ITR 833 .
2 CIT v Raj 165 ITR 720 .
3 Re, Moolji 6 ITR 234; Srinivasa v CIT 63 ITR 102 .
4 Ganesh v CIT 132 ITR 257 ; Vaish v CIT 138 ITR 624 ; Vijoy v CIT 176 ITR 50 ; CIT v Mathuraprasad 115 ITR 372 ;
p. 2393, nn. 80 and 81; p. 2396, n. 14; p. 2396, nn. 15 and 16. Cf. Jagjivandsa v CBDT 132 ITR 769 ; Durgaprasad v
CIT 134 ITR 601 ; CIT v Ghanshyam 147 ITR 110 —cases under s 184(7) ; CIT v Hiralal 218 ITR 21 and CIT v Fazal
Hussain 233 ITR 32 (see also CIT v Durga Prasad 224 ITR 268 ; contra CIT v Kikani 240 ITR 831 ).
5 Bhavnani v CIT 86 ITR 179 ; CIT v Bhoopathi 208 ITR 62 .
6 CIT v Krishna Mills 175 ITR 366 .
7 CIT v Empire Estate 218 ITR 355 (SC) ; CIT v Santal 136 ITR 379 .
8 218 ITR 355. See also Vishwanath v CIT 146 ITR 249 (FB) ; CIT v Basani Behari 172 ITR 662 ; CIT v Indralok 188
ITR 730 ; Noor Mohammad v CIT 191 ITR 550 ; CIT v Gorakpur Shamiana 225 ITR 721 ; CIT v Chuharmal 228 ITR
528 ; CIT v Ganeshi Lal 232 ITR 914 ; CIT v Meerut Gun 245 ITR 254 ; CIT v National Bankatlal 243 ITR 182 (implied
contract not to dissolve the firm in case of death of a partner); CIT v Anup Chand 98 Taxman 289 ; CIT v Hanuman
100 Taxman 83 ; CIT v Mahadeo Prasad 113 Taxman 659 ; CIT v United Tin Factory 263 ITR 78 (change in
constitution of firm two partners remaining, three exiting and five entering); CIT v Paramount Trading Corporation 288
ITR 21 .
9 CIT v Sobha Singh 183 ITR 148 ; CIT v Porwal 189 ITR 681 ; CIT v Sant Lal 205 ITR 392 ; CIT v Sukh Dayal 218
ITR 309 ; CIT v Mahesh Oil 221 ITR 387 ; CIT v S.G. Teja Shah 224 ITR 267 ; CIT v G. Dalabhai 226 ITR 922 ; CIT v
Surya Bhagavan 227 ITR 304 ; ITO v Kalyan Das 230 ITR 191 ; CIT v Gupta Jewellers 235 ITR 336 ; CIT v Shankar
Yarn 241 ITR 589 ; CIT v Sehgal Bros., 93 Taxman 126 ; CIT v Khanna 100 Taxman 485 .
10 Wazidali v CIT 169 ITR 761 -76 (SC); CIT v Santlal 136 ITR 379 ; CIT v Biswas 201 ITR 278 ; S.T. Hatim v CIT 234
ITR 358 .
11 CIT v Paper Mart 219 ITR 421 ; CIT v Ayyanarappan 236 ITR 410 (SC) ; CIT v United Commercial 108 ITR 264 .
12 236 ITR 410.

Page 7 of 8
13 CIT v Prakash Textiles Agents 276 ITR 582 .
14 CIT v Govindram 57 ITR 510 followed in Dungarsidas v CIT 132 ITR 526 and CIT v Thyagasundara 127 ITR 520 ;
CIT v Ram Bilas 200 ITR 461 ; Deorah v CIT 200 ITR 467 ; CIT v Sherally 230 ITR 120 ; CIT v Kohinoor 233 ITR 624
; CIT v Jagjiwan 188 ITR 563 ; CIT v Vindeshwari 189 ITR 438 ; CIT v Prem Singh 222 ITR 187 .
15 CIT v Palakunnathu Traders 269 ITR 322 .
16 See cases cited under s 170, under ‘Succession’.
17 See also Bhausa v CIT 62 ITR 75 ; Jittanram v CIT 23 ITR 288 ; Kaniram v CIT 23 ITR 314 ; Re, Gregory 5 ITR 12;
Sitaram v CIT 79 ITR 575 ; CIT v Amritlal 196 ITR 346 (SC) ; CIT v Sharad Vijaya 181 ITR 266 ; CIT v Ajantha Lodge
186 ITR 346 ; CIT v Shree Shankar 192 ITR 488 ; CIT v Delhi Metal 211 ITR 622 ; Ramsahai v CIT 219 ITR 759 ; CIT
v Rajagopalan Paper 229 ITR 592 ; CIT v Krishnamoorthy 229 ITR 559 ; CIT v Delhi Haryana Dall Mills 267 ITR 478 .
18 Re, Motichand 14 ITR 534; Hariram v CIT 12 ITR 367 ; Kannappa v CIT 5 ITR 49 . Cf. Ghella v CIT 13 ITR 133, 137
.
19 CIT v ketan Chemicals 281 ITR 244 .
20 CIT v Palakunnathu Traders 269 ITR 322 (case law discussed).
21 CIT v Hindustan Motors Finance 276 ITR 382 - following CIT v K.D. Punetha & Sons 218 ITR 114 (All) .
22 CIT v Sugar Mal Shambhoo Nath 296 ITR 447 .
23 Wazid Ali Abid Ali v CIT 169 ITR 761 (SC), AIR 1988 SC 757, (1988) 67 CTR 43 (SC); CIT v Amritlal Nihalchand
196 ITR 346 (SC), (1992) 106 CTR 369 (SC).
24 See ss 66 and 86(iii).
25 Ghella v CIT 13 ITR 133, 138 ; Sarah v CIT 128 ITR 723 .
26 Mahadeo v ITO 61 ITR 384 .
27 See p. 2388, n. 31.
28 ITO v Radhakrishan 66 ITR 590 (SC) ; Kalva v ITO 71 ITR 422 (SC) (principle also applies where registration is
granted to firm after its dissolution).
29 Chulairam v ITO 94 ITR 463 .

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End of Document
S. 188. Succession of one firm by another firm
S. 188. Succession of one firm by another firm
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 .
Section 188 [ Section 26(2) of 1922 Act]: Succession to one Firm by another Firm.—The case of succession to
one firm by another firm is dealt with under s 170 . [See also under s 187 .]
End of Document
S. 188A. Joint and several liability of partners for tax payable by firm
S. 188A. Joint and several liability of partners for tax payable by firm
30[Every person who was, during the previous year, a partner of a firm, and the legal representative of any such person
who is deceased, shall be jointly and severally liable along with the firm for the amount of tax, penalty or other sum payable
by the firm for the assessment year to which such previous year is relevant, and all the provisions of this Act, so far as may
be, shall apply to the assessment of such tax or imposition or levy of such penalty or other sum.]
Section 188A : Liability of Partners for Tax Payable by Firm.—This section, which was inserted by the Direct Tax
Laws (Amendment) Act, 1987 with effect from April 1, 19891st April, 1989, provides that every person who was
partner of a firm during an accounting year, and the legal representative of a partner who died during that year, are
jointly and severally liable along with the firm for any tax penalty or other sum payable by the firm in respect of that
year, whether the firm is registered or unregistered. This section explicitly provides what was implicit hitherto under the
Partnership Act.31 Section 189 makes a similar provision for the case of a dissolved firm. [Cf. ss 171 and 177.]
30 Ins. by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), s 70 (w.e.f. 1-4-1989). Circular No. 549, October 31,
1989; 182 ITR (St.) 1
31 Third ITO v Arunagiri 220 ITR 232 (SC) ; Tity Thomas v TRO 207 ITR 1072 .
End of Document
S. 189. Firm dissolved or business discontinued
(1) Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved,
the32[Assessing Officer] shall make an assessment of the total income of the firm as if no such discontinuance or
dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of a
penalty or any other sum chargeable under any provision of this Act, shall apply, so far as may be, to such
assessment.
(2) Without prejudice to the generality of the foregoing sub-section, if the33[Assessing Officer] or the34[* *
*]35[Commissioner (Appeals)] in the course of any proceeding under this Act in respect of any such firm as is
referred to in that sub-section is satisfied that the firm was guilty of any of the acts specified in Chapter XXI, he
may impose or direct the imposition of a penalty in accordance with the provisions of that Chapter.
(3) Every person who was at the time of such discontinuance or dissolution a partner of the firm, and the legal
representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax,
penalty or other sum payable, and all the provisions of this Act, so far as may be, shall apply to any such
assessment or imposition of penalty or other sum.
36[* * * *]
(4) Where such discontinuance or dissolution takes place after any proceedings in respect of an assessment year
have commenced, the proceedings may be continued against the persons referred to in sub-section (3) from the
stage at which the proceedings stood at the time of such discontinuance or dissolution, and all the provisions of
this Act shall, so far as may be, apply accordingly.
(5) Nothing in this section shall affect the provisions of sub-section (6) of section 159 .
1. Section 189 [ Section 44 of 1922 Act]: Joint and Several Liability of Partners on Dissolution of Firm or
Discontinuance of its Business.—This section provides that where any business or profession carried on by a firm
has been discontinued or where a firm is dissolved, the assessment should be made of the total income of the firm as
if no such discontinuance or dissolution had taken place. Thus the notice under s 147 may be issued and the
Page 2 of 4
assessment may be made in the name of the dissolved firm.37 The notice may be served on any of the erstwhile
partners; it is not necessary to serve it on all38 [ s 283(2) ]. The section is not confined to the profits of only the year of
discontinuance or dissolution but extends also to the profits of the preceding years.39 But it does not extend to income
or profits arising after the discontinuance of such business or dissolution of the firm; as this section is a machinery
section and not a charging section, the substantive levy cannot be effected by charging an entity which is not in
existence.40 The concept of ‘Discontinuance’ has been dealt with under s 176, and ‘Change in the constitution of a
firm’ under s 187 .
The section further provides that every person who was at the time of such discontinuance or dissolution a partner of
the firm41 and the legal representative of a deceased partner are jointly and severally liable for the amount of tax
payable. Thus, the entire tax due by the firm may be recovered from one partner.42 The joint and several liability is not
confined to cases where an assessment has been made after the discontinuance or dissolution; the words
‘tax…payable’ in sub-s (3) mean the tax which the firm would be liable to pay but for the discontinuance or dissolution,
or the tax either found to be due already or which may be found to be due in the future, and so they include the tax
which was assessed on the firm before dissolution but not recovered from it.43 On the question whether the tax
payable by an unregistered firm can be recovered from a partner personally without a notice of demand being served
upon him see under ss 222-223, under ‘Assessee in default’.
However, the tax payable referred to in sub-s (3) means the tax payable by the firm and not the tax assessed on the
partners personally.44 If the dissolved firm is assessed as a registered firm, although all the partners would be jointly
and severally liable under this section to pay the registered firm’s tax, one partner would not be liable to pay the tax
assessed on another partner individually.45 On this point there is no difference between the position under this section
and the position under s 44 of the 1922 Act either before or after its amendment in 1958. However, there is an
exception to this rule. To the extent specified in s 182(4), a registered firm is liable to pay a partner’s tax which cannot
be recovered from him. The effect of s 182(4) is to convert a partner’s liability into the firm’s liability to the limited
extent specified therein, and upon dissolution it becomes the liability of all the partners jointly and severally under s
189(3) .46 This is now made explicit by the explanation to sub-s (3).
The section applies where the business of the firm is discontinued47 or the firm is dissolved. If the business is not
discontinued but there is a succession to the business,48 and the firm is not dissolved but continues to exist, this
section would have no application. However, even if there is succession to the firm’s business but the firm is dissolved,
this section would apply.49
A partnership firm was dissolved and converted into a private limited company, even though all the partners became
directors of the company, notice could not be served on the company which was a separate legal entity and was not in
existence during the relevant assessment year.50
Provision identical with those of this section are contained in s 177 which deals with assessment on an association of
persons which is dissolved or the business of which is discontinued. Joint and several liability of the members of a
dissolved firm or association imposed by these sections may be compared with similar liability imposed by s 171 on
the members of a disrupted Hindu family. The principle underlying ss 171, 177 and 189 is that when a unit of
assessment breaks up, the liability to tax should devolve on the component members.
2. Penalty on Dissolved Firm.—The Supreme Court held in Abraham v ITO 51 that s 44 of the 1922 Act, even prior
to its amendment in 1958, authorised the levy of penalty on a firm after it had ceased to be in existence. It made no
Page 3 of 4
difference whether the firm was registered or unregistered.52 The amended s 44 expressly provided for the levy of
penalty on a dissolved firm; likewise, this section expressly makes its provisions applicable to the levy of a penalty or
any other sum chargeable under any provision of this Act’.
34 The words and brackets “Deputy Commissioner (Appeals) or the” have been omitted by the Finance (No. 2) Act, 1998
(21 of 1998), s 65(a) (w.e.f. 1-10-1998) See Circular No. 772, December 23, 1998; 235 ITR (St.) 35.. Earlier, the words
“Deputy Commissioner (Appeals)” were substituted, for “Appellate Assistant Commissioner”, by the Direct Tax Laws
(Amendment) Act, 1987 (4 of 1988), s 2 (w.e.f. 1-4-1988). See Circular No. 528, December 16, 1988; 176 ITR (St). 154.
35 The words, etc. “or the Commissioner (Appeals)” have been inserted by the Finance (No. 2) Act, 1977 (29 of 1977), s
39, Sch. V, Part I, item 4 (w.e.f. 10-7-1978). Circular No. 229, August 9, 1977; 111 ITR (St.) 9.
36 The Explanation below section 189(3) has been omitted by the Finance Act, 1992 (18 of 1992), s 68 (w.e.f. 1-4-1993)
See Circular No. 636, August 31, 1992, 198 ITR (St.) 1.. Prior to its omission, the Explanation stood as under:—
‘Explanation.—The amount of tax referred to in this sub-section shall also include that part of the share of each partner in the
income of the firm before its discontinuance or dissolution which the firm could have retained under sub-section (4) of section
182 but which has not been so retained.’.
The above Explanation was originally inserted by the Taxation Laws (Amendment) Act, 1975 (41 of 1975), s 52 (w.e.f. 1-10-
1975). See Circular No. 179, Sept 30, 1975; 102 ITR (St.) 9.
37 Nagarmal v CIT 114 ITR 133, affirmed in 201 ITR 538 (SC); CIT v Star Andheri 208 ITR 573 ; Ramniwas v
Venkataraman 43 ITR 152 ; Joint Committee of Action v CIT 48 ITR 427 ; Ram Niranjan v CIT 66 ITR 94 . Cf.
Muthappa v ITO 41 ITR 1 (SC) ; Pandurao v Collector 26 ITR 99 . The following cases were decided under pre-1958 s
44 of 1922 Act which was differently worded: Bose v Manindra 33 ITR 435 ; Sumat v ITO 40 ITR 692 ; CIT v
Chheharta 56 ITR 246 ; Agricultural Co. v CIT 93 ITR 353 .
38 CIT v Reddy 51 ITR 285 (SC) ; CIT v Hyderabad Deccan Liquor Syndicate 50 ITR 6 ; Agricultural Co. v CIT 93 ITR
353 . Cf. ITO v Sattler 92 ITR 576 (SC) ; Ali v TRO 121 ITR 620 .
39 ITO v Satchidanand 58 ITR 128 .
40 CIT v Bhagat 182 ITR 212 ; CIT v United Trading 212 ITR 532 ; Banyan and Berry v CIT 222 ITR 831 ; Dhanamall
Silk v CIT 234 ITR 682 . Contra Paulson Consts v CIT 181 ITR 476 .
41 ITO v Arunagiri 220 ITR 232 (SC) ; V.M. Jameel Ahmed v ITO 268 ITR 239 (if the deceased was not a partner during
the relevant assessment year, his legal representatives could not be made liable under the Section).
42 Omprakash v ITO 29 ITR 495 ; Karam Singh v Mumtaz 92 ITR 35 . Cf. ITO v Khanjanlal 89 ITR 120 where, on facts,
the court prevented recovery of the entire tax from one partner only.
Page 4 of 4
43 Chengalvaroya v CIT 5 ITR 70 ; Iqtida v ITO 41 ITR 165 ; Subba Rao v ITO 48 ITR 808 ; Bajranglal v ITO 37 ITR
522 ; Motilal v ITO 44 ITR 454 ; Satyanarayan v ITO 46 ITR 920 ; ITO v Satchidanand 58 ITR 128 ; Wali v CIT 37
ITR 538 . Cf. Velu v ITO 38 ITR 141 .
44 Contrast proviso (ii) to s 187(1) .
45 ITO v Radhakrishan 66 ITR 590 (SC) ; Kalva v ITO 71 ITR 422 (SC) ; Subramaniam v Tahsildar 47 ITR 759 ; Velu v
ITO 38 ITR 141 ; Killedar v Malpathak 54 ITR 1 ; ITO v Sundararami 58 ITR 821 .
46 Chulairam v ITO 94 ITR 463 . In this case it was wrongly held that upon dissolution penalty and interest payable by a
partner can also be recovered from the other partners: s 182(4) makes the firm vicariously liable only for tax levied on a
partner and not for penalty or interest.
47 Shivram v ITO 51 ITR 823 (SC) .
48 See s 170, under ‘Succession’.
49 CIT v Mangatram 125 ITR 91 . Pre-1958 s 44 of 1922 Act did not apply in such a case: See Shivram v ITO 51 ITR
823 (SC) ; Sharma v CIT 57 ITR 372 ; Desai v Ramamurthy 34 ITR 409 ; Karuppiach v CIT 9 ITR 1 ; CIT v Basu 76
ITR 291 .
50 CIT v Western Agencies Madras Ltd. 305 ITR 301 .
51 41 ITR 425; CIT v Bhikaji 42 ITR 123 (SC) . See the comment on these cases s 271, under ‘Power to levy penalty:
Penalty is not additional tax’.
52 CIT v Angidi 44 ITR 739 (SC), reversing Veerappan v CIT 32 ITR 411 ; Mareddi v ITO 31 ITR 678 ; CIT v Kirkend
74 ITR 67 (SC) .
End of Document
S. 189A. Provisions applicable to past assessments of firms
S. 189A. Provisions applicable to past assessments of firms
53[In relation to the assessment of any firm and its partners for the assessment year commencing on the 1st day of April,
1992, or any earlier assessment year, the provisions of this Chapter as they stood immediately before the 1st day of April,
1993, shall continue to apply.]
53 Ins. by the Finance Act, 1992 (18 of 1992), s 69 (w.e.f. 1-4-1993). See Circular No. 636, August 31, 1992, 198 ITR
(St.) 1.
End of Document

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Kanga & Palkhivala IT Act 10th Ed Vol II CH 14A-16

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Date and Time: 27 November 2020 21:59:00 IST

Job Number: 130974190

THE INCOME-TAX ACT, 1961 (ACT NO. XLIII OF 1961)

CHAPTER XIV-A Special Provision for Avoiding Repetitive Appeals

(4) Where a claim is admitted under sub-section (3),—

Explanation.—In this section,—

9 Titanor Components Ltd. v CIT 323 ITR 266 .

THE INCOME-TAX ACT, 1961 (ACT NO. XLIII OF 1961)

CHAPTER XIV-B Special Procedure for Assessment of Search Cases

1 2In this Chapter, unless the context otherwise requires,—

to show that on evidence found as a result of search there is an undisclosed income.

9 Finance Act, 2001 w.e.f. 1-6-2001.

10 Jai Kumar Jain v ACIT 331 ITR 339 .

11 CIT v Smt. Kamala Devi Jain 330 ITR 153 .

13 CIT v Shambhulal 245 ITR 488 .

14 CIT v Ashok Khetrapal 294 ITR 143 .

16 CIT v Girish Chaudhary 298 ITR 619 .

18 Parag Nivesh Private Limited v DCIT 240 ITR 419 .

THE INCOME-TAX ACT, 1961 (ACT NO. XLIII OF 1961)

CHAPTER XIV-B Special Procedure for Assessment of Search Cases

S. 158BA. Assessment of undisclosed income as a result of search

20[Explanation.—For the removal of doubts, it is hereby declared that—

22 Raghuraj Pratap Singh & Ors v ACIT 307 ITR 450 .

24 Bhagwati Prasad Kedia v CIT 248 ITR 562 .

25 Mukundray K. Shah v CIT 277 ITR 128 .

27 CIT v Nitin Munje 264 ITR 628 .

28 CIT v Arman Sheikh 293 ITR 266 .

32 CIT v AT Infovin India P. Ltd. 335 ITR 370 .

33 CIT v Sivabala Devi 330 ITR 510 .

34 CIT v Vivek Dougall 305 ITR 270 .

THE INCOME-TAX ACT, 1961 (ACT NO. XLIII OF 1961)

CHAPTER XIV-B Special Procedure for Assessment of Search Cases

S. 158BB. Computation of undisclosed income of the block period

Explanation.—For the purposes of determination of undisclosed income,—

pursuant to the block assessment.

This is made clear by the following three examples:

47 CIT v P.K. Ganeshwar 308 ITR 124 .

49 CIT v K.V Sudhakaran 344 ITR 25 .

51 CIT v Mrs. Kulandai Theresa 329 ITR 275 .

53 CIT v M.M. Thomas 265 ITR 327 .

56 Jyoti Kumari v ACIT 344 ITR 60 .

58 Surinder Kumar v CIT 340 ITR 173 .

59 CIT v M. Chinnasamy 350 ITR 694 .

60 Hastalloy India Ltd. v DCIT 350 ITR 52 .

61 Rella Ram Sant Ram v CIT 301 ITR 392 .

63 ACIT v Radhe Developers India Ltd. and Another 329 ITR 1 .

64 G. Pictures (Madras) Ltd. v ACIT 263 ITR 83 .

67 CIT v Ashok Kumar Soni 291 ITR 172 .

68 CIT v Late H.R. Basaavraj 339 ITR 63 .

69 CIT v Ambika Appalam Depot 340 ITR 497 .

71 CIT v Shiv Prakash Agarwal 306 ITR 324 .

72 CIT v Kulwant Rai 291 ITR 36 .

THE INCOME-TAX ACT, 1961 (ACT NO. XLIII OF 1961)

CHAPTER XIV-B Special Procedure for Assessment of Search Cases

S. 158BC. Procedure for block assessment

(a) 75[the Assessing Officer shall—

79 CIT v Pawan Gupta 318 ITR 322 .

80 CIT v Vishnu and CO. P. Ltd. 319 ITR 151 .

81 CIT v Naveen Verma 346 ITR 100 .

83 CIT v Micro Labs Ltd. 348 ITR 75 .

84 Shirish Madhukar Dalvi v ACIT 287 ITR 242 .

85 V Dhivakaran v Deputy CIT 282 ITR 225 .

88 CIT v Hotel Meriya 332 ITR 537 .