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 26, 2025

A) ABSTRACT / HEADNOTE

The Supreme Court in M/s. Sarupchand Hukamchand & Co. v. Union of India & Others, [1959] Supp. (2) SCR 986, engaged in a complex adjudication involving interpretation of Section 23(5)(b) of the Indian Income-tax Act, 1922. The matter concerned an unregistered firm initially assessed by the Income-tax Officer (ITO) as having made profits, leading him to treat the firm as registered under Section 23(5)(b). However, the Appellate Assistant Commissioner (AAC), upon consolidated appeals for assessment years 1940–41, 1941–42, and 1942–43, found that the firm actually incurred a loss in the first year. The firm contended that this reversal nullified the ITO’s jurisdiction under Section 23(5)(b), entitling it to carry forward the loss under Section 24(2). The Revenue refused, citing finality of the original assessment and limitation under Section 35.

The Court examined whether the order passed by the ITO under Section 23(5)(b) could sustain after reversal of the profit finding. It held that the ITO’s jurisdiction was contingent upon a finding of profit; thus, when the AAC reversed the profit to a loss, the foundational jurisdiction disappeared, and so did the order. This judgment emphasizes judicial scrutiny on revenue authority actions, harmonious interpretation of fiscal statutes, and protection of taxpayer rights against technical denials.

Keywords: Income-tax Act, 1922, Section 23(5)(b), Unregistered firm, Assessment reversal, Jurisdiction, Appellate Assistant Commissioner, Loss carry-forward, Section 24(2)

B) CASE DETAILS

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

ii) Case Number: Civil Appeal No. 172 of 1955

iii) Judgement Date: 5 May 1959

iv) Court: Supreme Court of India

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

vi) Author: Justice M. Hidayatullah

vii) Citation: [1959] Supp. (2) SCR 986

viii) Legal Provisions Involved:

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

ix) Judgments Overruled by the Case: None explicitly overruled.

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

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The case emerged during the pre-independence era but was adjudicated after the Constitution came into force. The main point of contention arose from the assessments for the financial years 1940–41, 1941–42, and 1942–43, under the Indian Income-tax Act, 1922. The petitioner firm, an unregistered partnership, was initially assessed as having made a profit for the year 1940–41. The ITO, invoking Section 23(5)(b), treated the firm as if it were registered and apportioned income to the partners, resulting in no tax liability on the firm itself. However, upon appeal, the AAC reversed the finding and recorded a loss for the year in question. This shifted the entire legal matrix, calling into question the foundational basis of the ITO’s assessment.

The firm claimed that the reversal of the income finding nullified the ITO’s jurisdiction to invoke Section 23(5)(b), thereby entitling it to carry forward the loss under Section 24(2). However, tax authorities refused, citing procedural limitations and finality. The case thus raised critical questions about administrative finality, jurisdiction, rectification, and appellate authority under tax law.

D) FACTS OF THE CASE

The appellant firm operated across Bombay, Indore, Ujjain, and Calcutta, with two partners: Sir Sarupchand Hukamchand and Shri Hiralal Kalyanmal. Both partners were individually liable for tax—the former as a Hindu Undivided Family and the latter as an individual. For the assessment year 1940–41, the ITO assessed the firm’s profit at ₹80,358. He then invoked Section 23(5)(b) to treat the firm as registered, resulting in apportioning income to the partners and no tax on the firm.

An application under Section 26A for registration of the firm was also rejected for lack of a valid partnership deed. In the next two assessment years—1941–42 and 1942–43—the firm was assessed as unregistered, with taxable incomes of ₹2,30,798 and ₹7,00,116, respectively.

Upon appeal, the AAC consolidated the matters and reversed the profit determination for 1940–41, holding instead that the firm had incurred a loss of ₹1,61,084 in global income. The Revenue, however, refused to adjust the firm’s status accordingly or allow carry-forward of losses, asserting that the assessment under Section 23(5)(b) was final.

The assessee pursued statutory remedies and finally approached the Bombay High Court under Article 226, seeking a writ of mandamus to enforce the revised assessment. Both the Single Judge and Division Bench refused relief. The firm then appealed to the Supreme Court.

E) LEGAL ISSUES RAISED

i. Whether the Income-tax Officer’s jurisdiction under Section 23(5)(b) remains intact after the Appellate Assistant Commissioner reverses a profit assessment to a loss?

ii. Whether the assessee firm, after being determined to have incurred a loss, is entitled to carry forward such loss under Section 24(2) as an unregistered firm?

iii. Whether the initial treatment of the firm as registered under Section 23(5)(b), based on erroneous income finding, could be said to be final and unalterable?

iv. Whether the appellate order effectively set aside the basis of the ITO’s action, necessitating reconsideration de novo?

F) PETITIONER/APPELLANT’S ARGUMENTS

i. The counsels for the Petitioner/Appellant submitted that the Appellate Assistant Commissioner’s finding of a loss, and not profit, destroyed the foundation upon which the Income-tax Officer exercised jurisdiction under Section 23(5)(b). The section mandates such treatment only when more revenue accrues to the State. Where there is a loss, invoking that provision becomes legally untenable[1].

ii. They further argued that under Section 24(2), the firm, being unregistered and having incurred a loss, was entitled to carry forward the loss in its own assessment and not have it apportioned to partners[2].

iii. The ITO’s refusal to amend the assessment and instead treat the firm as registered even post the loss finding, violated the express statutory language and intent, and represented a misapplication of proviso (d) to Section 24(2)[3].

iv. The refusal to exercise rectification under Section 35, citing time-bar, further impaired the firm’s rights, necessitating the invocation of writ jurisdiction[4].

G) RESPONDENT’S ARGUMENTS

i. The counsels for Respondents contended that the ITO’s action under Section 23(5)(b) had attained finality, being non-appealable and outside the jurisdiction of the AAC to overturn[5].

ii. They insisted that proviso (d) to Section 24(2) justified the carry-forward of losses to partners’ accounts, even when an unregistered firm is treated as registered, and no illegality was involved[6].

iii. They emphasized the limitation period under Section 35 and argued that the petitioner’s request for rectification was time-barred, and no writ should be granted to override procedural constraints[7].

iv. They further objected to the writ remedy, stating that such matters are within the exclusive domain of tax authorities and not fit for judicial intervention under Article 226[8].

H) RELATED LEGAL PROVISIONS

i. Section 23(5)(b) – Allows ITO to treat an unregistered firm as registered if more tax is collectible.

ii. Section 24(2)(d) – Provides conditional carry-forward of losses when an unregistered firm is treated as registered.

iii. Section 11(4) – Relates to computation and inclusion of income.

iv. Section 30 – Lists appealable orders.

v. Section 31(3) and 31(4) – Governs powers of appellate authorities and consequential modifications.

vi. Section 35 – Permits rectification of mistakes within four years.

vii. Article 226, Constitution of India – Grants power to High Courts to issue writs.

I) JUDGEMENT

a. RATIO DECIDENDI

i. The Supreme Court held that the ITO’s power under Section 23(5)(b) is conditional and dependent on a finding of profit. When the AAC reversed the finding to a loss, jurisdiction under Section 23(5)(b) ceased to exist, and the earlier order became untenable[9].

ii. The Court stated that the Appellate Assistant Commissioner’s consolidated order for all three years reset the proceedings, directing the ITO to reassess the firm. This implied reconsideration of firm’s status under Section 23(5)(b)[10].

iii. The Court held that proviso (d) to Section 24(2) could not be invoked unless the primary conditions of Section 23(5)(b) were satisfied—meaning that more revenue would accrue by treating the firm as registered[11].

iv. The ITO was bound to re-examine de novo whether the treatment of the firm as registered was valid post the finding of loss[12].

b. OBITER DICTA

i. The Court observed that technicalities like limitation should not bar substantive justice in taxation when appellate orders reset the foundation of assessments[13].

ii. The Court warned against Revenue authorities misapplying discretion vested in them under fiscal statutes to deny legitimate rights of taxpayers[14].

c. GUIDELINES

On reversal of profit to loss by appellate authority, ITO must reassess jurisdiction under Section 23(5)(b).
Loss carry-forward must be allowed under Section 24(2) to unregistered firm if Section 23(5)(b) becomes inapplicable.
Appellate directions must be followed in spirit, not just form, especially when they imply jurisdictional nullification.
Finality does not immunize erroneous jurisdiction when foundational facts are judicially reversed.

J) CONCLUSION & COMMENTS

The judgment reinforces principles of legal certainty, jurisdictional legitimacy, and statutory harmony. It rightly limits Revenue authority from using procedural technicalities to negate the effect of higher appellate findings. The ruling is a significant precedent in Indian tax jurisprudence, clarifying the interplay between assessment, appellate reversal, and administrative discretion. The judgment also highlights that judicial review under Article 226 can be a vital safeguard against administrative inertia and procedural misuse in tax assessments.

K) REFERENCES

a. Important Cases Referred