M/s. Sarupchand Hukamchand & Co. v. Union of India and Others

Case Analysis

M/s. Sarupchand Hukamchand & Co. v. Union of India and Others

May 17, 2025

A) ABSTRACT / HEADNOTE

The case of M/s. Sarupchand Hukamchand & Co. v. Union of India and Others, [1959] Supp. 2 S.C.R. 986 addresses a critical interpretative issue under the Indian Income-tax Act, 1922, involving the interplay of Sections 23(5)(b), 24(2)(d), 11(4), and 31. The judgment pivots on whether an unregistered firm, which was wrongly treated as a registered firm based on an initial profit finding later overturned into a loss by an appellate authority, could still be governed by the original classification by the Income-tax Officer (ITO). The Supreme Court held that such a re-characterization loses legal validity when the foundational basis—i.e., profit—ceases to exist upon appellate correction. The Court reaffirmed that the power under Section 23(5)(b) must be exercised strictly in the interest of revenue and not otherwise. The decision illuminates the inherent jurisdictional checks embedded in tax administration, emphasizing that losses in the hands of an unregistered firm cannot be distributed to partners if the conditions for such treatment are absent. The verdict is a crucial precedent in income-tax adjudication, drawing boundaries on the scope of ITO’s discretion and reinforcing the appellate remedial architecture.

Keywords: Income-tax Assessment, Unregistered Firm, Section 23(5)(b), Carry Forward of Losses, Jurisdictional Error

B) CASE DETAILS

i) Judgment Cause Title
M/s. Sarupchand Hukamchand & Co. v. Union of India and Others

ii) Case Number
Civil Appeal No. 172 of 1955

iii) Judgment Date
May 5, 1959

iv) Court
Supreme Court of India

v) Quorum
S.R. Das (C.J.), N.H. Bhagwati, and M. Hidayatullah (JJ.)

vi) Author
Justice M. Hidayatullah

vii) Citation
[1959] Supp. 2 S.C.R. 986

viii) Legal Provisions Involved

Section 23(5)(b) of the Indian Income-tax Act, 1922
Section 24(2)(d) and Section 11(4) of the same Act
Article 226 of the Constitution of India

ix) Judgments Overruled by the Case
None explicitly overruled

x) Case is Related to which Law Subjects
Taxation Law, Constitutional Law, Administrative Law

C) INTRODUCTION AND BACKGROUND OF JUDGMENT

The controversy germinated from the assessment proceedings for the Assessment Year (AY) 1940–41, wherein an unregistered partnership firm—M/s. Sarupchand Hukamchand & Co.—was treated as a registered firm by the Income-tax Officer (ITO) under Section 23(5)(b), due to an assumed profit of ₹80,358. However, upon appellate scrutiny, this profit was reversed to a loss of ₹1,61,084, resulting in a fundamental shift in the firm’s tax status and liabilities. Despite the change, the ITO failed to rescind his earlier order treating the firm as registered, and instead proceeded to allocate losses to individual partners, creating a contradiction in law. The assessee sought relief under Article 226, but the High Court denied intervention. The Supreme Court allowed the appeal, recognizing that a jurisdictional precondition—i.e., profit—was absent, nullifying the original classification under Section 23(5)(b) and requiring a fresh assessment.

D) FACTS OF THE CASE

The assessee firm operated across major cities including Bombay, Calcutta, Indore, and Ujjain, with two partners—Sir Sarupchand Hukamchand and Hiralal Kalyanmal—taxable respectively as a Hindu Undivided Family (HUF) and an individual. During AY 1940–41, the ITO concluded a profit of ₹80,358 and, applying Section 23(5)(b), treated the firm as registered although it was unregistered. The firm had applied for registration under Section 26A, but was rightly denied due to the absence of a formal partnership instrument. For the subsequent AYs 1941–42 and 1942–43, the firm was assessed as unregistered and as resident and ordinarily resident.

The firm appealed these assessments, and the Appellate Assistant Commissioner (AAC) held that the firm was non-resident, reversed the profit finding for 1940–41 into a loss, and recalculated the incomes for the other years. Still, the ITO allocated the losses to the partners individually under the mistaken assumption that the firm remained registered. The firm filed multiple rectification applications under Section 35, all rejected. After exhausting administrative remedies, the firm moved the High Court under Article 226, which dismissed the petition, leading to the present appeal before the Supreme Court.

E) LEGAL ISSUES RAISED

i) Whether an unregistered firm wrongly treated as registered by the ITO under Section 23(5)(b) could retain that classification after the finding of profit is overturned into a loss?

ii) Whether the AAC’s appellate order annuls the ITO’s jurisdiction under Section 23(5)(b)?

iii) Whether losses of such a firm could lawfully be carried forward to the partners’ accounts under Section 24(2)(d)?

iv) Whether a writ of mandamus was maintainable under Article 226 in these facts?

F) PETITIONER/APPELLANT’S ARGUMENTS

i) The counsels for Petitioner / Appellant submitted that the ITO lacked jurisdiction under Section 23(5)(b) once the finding of profit was set aside. Since the firm had a loss, the condition precedent for treating it as registered had vanished. Therefore, the ITO’s order was not merely irregular, but void ab initio. They further argued that carrying forward of losses into individual accounts caused loss to the revenue, violating the very objective of Section 23(5)(b), which aims to maximize tax realization. The AAC’s direction to modify the assessment necessitated reconsideration under Section 23(5)(b) afresh. The refusal of rectification under Section 35, despite a jurisdictional defect, was thus unreasonable. They invoked Commissioner of Income-tax v. Tribune Trust, Lahore, [1948] 16 ITR 214 to argue that jurisdictional errors could not survive appellate correction[1].

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that the ITO’s decision under Section 23(5)(b) was final, since not appealable directly under Section 30, and hence could not be challenged collaterally in a writ petition. They relied on Commissioner of Income-tax, Bombay v. Khemchand Ramdas, [1938] 6 ITR 414, to argue that the assessment had become final and conclusive, barring review except under Sections 34 and 35[2]. They further contended that Section 24(2)(d) permitted carrying forward of losses as if the firm were registered, and that no provision in the Act mandated rescission of the classification post appellate reversal. Therefore, the relief sought by the appellant could not be granted by a writ.

H) RELATED LEGAL PROVISIONS

i) Section 23(5)(b) of the Indian Income-tax Act, 1922
Read here
Permits an ITO to treat an unregistered firm as registered only if that yields greater tax.

ii) Section 24(2)(d)
Read here
Allows carry forward of losses of an unregistered firm treated as registered “during any year”.

iii) Article 226 of Constitution of India
Read here
Provides for writ jurisdiction of High Courts.

iv) Section 31 of the Act
Read here
Grants powers to AAC to annul or modify assessments.

I) JUDGEMENT

a. RATIO DECIDENDI

i) The Court held that Section 23(5)(b) operates only if a profit exists. Upon reversal into a loss, the ITO loses jurisdiction. The AAC’s direction to modify assessments annuls the earlier treatment. Carrying losses into partner accounts, without satisfying Section 23(5)(b)’s condition, was unauthorized and resulted in loss to revenue, violating the intent of the provision. The phrase “during any year” in Section 24(2)(d) restricts its application to years where valid registration treatment exists[3].

b. OBITER DICTA

i) The Court opined that if the ITO had acted in the interest of revenue, he would not have transferred losses to partners. This underscored the revenue-maximization objective of the statute.

c. GUIDELINES

The ITO must re-evaluate the firm’s classification under Section 23(5)(b) after an appellate reversal.
Losses cannot be carried into partner accounts unless the firm is validly treated as registered in a profit year.
Finality of assessment does not preclude reassessment where jurisdictional preconditions are vitiated.
Appellate orders must be given full effect, including undoing consequential illegality.

J) CONCLUSION & COMMENTS

The judgment serves as a landmark precedent in demarcating the limits of jurisdiction under tax statutes. It strengthens the procedural rigor needed for a lawful assessment and reiterates that tax authorities cannot act beyond statutory competence, even inadvertently. By restoring the legal position of the assessee to its proper classification and requiring reconsideration by the ITO, the Court not only upheld substantive tax law but also protected the integrity of revenue interest. The reasoning reflects judicial commitment to fair tax administration and affirms the role of writ courts in correcting procedural illegality. The Court rightly balanced revenue protection with taxpayer rights.

K) REFERENCES

a. Important Cases Referred

[1] Commissioner of Income-tax v. Tribune Trust, Lahore, [1948] 16 ITR 214
[2] Commissioner of Income-tax, Bombay v. Khemchand Ramdas, [1938] 6 ITR 414
[3] Commissioner of Income-tax v. McMillan & Co., [1958] 33 ITR 182
[4] Commissioner of Income-tax v. Amritlal Bhogilal & Co., [1958] 34 ITR 130

b. Important Statutes Referred