THE INCOME TAX OFFICER versus ARVIND N. MAFATLAL

Citation: [1962] SUPP. 3 S.C.R. 455 · Decided: 27-02-1962 · Supreme Court of India · Bench: T.L. VENKATARAMA AIYYAR · Disposal: Dismissed

Judgment (excerpt)

3 S.C.R. 
SUPREME COURT REPORTS 
455 
THE INCOME TAX OFFICER 
'I! 
ARVIND N. MAFATLAL 
(B. P. SINHA, c. J., K. SUBBA RAO, N. RAJAGOPALA 
AYYANGAR, J. R. MUDHOLKAR and 
T. L. VENKATARAMA AIYAR, JJ.) 
lneome Tax-Partners of registered firm holding shares of 
company as benamidars of the firm-Error in computing tax-
Proceeding to rectify errors-Income tax officer, if could effect 
readju8tment to avoid illogicalities-lncome·tax Act, 1922( 11 of 
1922), 88. 16(2), 18(5), 35. 
The respondents were the four partners of a firm M, 
which was registered under the Indian Income Tax Act. 
Three of these four partners held amongst them forty 
shares in private limited company which was registered in the 
Phaltan State. 
For the account year ending 30-9-1945 the Phaltan 
Company disclosed a net profit, but did not declare any divi· 
<lend out of these profits but paid income-tax and super-tax 
thereon. 
After the merger of Phaltan State 
in the 
Indian Union, the Income-tax Officer issued notice to the 
Phaltan Company under s. 34 of the Act and acting under 
the provisions of s.23A directed that the undistributed assess-
able income of the company should be deemed to have been 
distributed as dividend among the shareholders. Before the 
date of this order, the assessment of the firm Mand the indi-
vidual assessment of its four partners had been completed. 
In order to bring to tax the· undistributed dividend deemed 
to be declared under s.23A among the shareholders of the 
company, notices were issued to the four partners under s.34 
of the Income-tax Act. 
In response to the notice, the part-
ners appeared and contended that the forty shares held by 
the three of the four partners were in fact the property of the 
registered firm M. This contention was accepted by the In-
come-Tax Officer who thereupon treated the dividend attribu-
table to the total of the forty shares as the dividend income of 
the firrn and proceeded to the apportion the said income 
among the four partners in proportion of the ~hares which each 
of them held in the firm and added this to the income already 
assessed. In doing so however, the Income-tax Officer commi-
ted an error. In rrcomputing the total income of each of these 
folJl" ,.ssess~es he included only the net dividend "deemed tq 
196P 
February t'l. 
1962 
Tiu lnumt T .x 
Officer 
v. 
iruiM N. MaftJtJal 
4fi6 SUPREME COURT REPORTS [1962) SUPP. 
be received" by each but as again this addition he allowed 
a deduction of the tax paid by the company attributable to 
such dividend. Subc;cqL1cntly this rnic;takc 
\Ya<> discovered and 
thereupon the [ncon1e-1ax Officer i:-sucd notice pointing out 
the error in including in the inco1nc the net dividend without 
being grossed up, \Yhilc at the same time allowing credit for 
the tax deemed to have br-en paid thereon, and averred 
that this wa.c; a mistake apparent on the record" which he 
proposed to rectify under s.35 of the Act. 
Held, that in vic1,v 
of the dccbion in .M/s. Hou1rah 
Trading 
Co. 
v. 
Co,nniissioner uf Income-.1ax, it is only the 
rcgistere<J shareholder::. \'/h:> arc 
entitled to the benefit of 
the credit for tax paid by the company under s.18(5) as well 
as tl1e cnnesponding grossing 
up under s.16(2). 
On that 
basis the 
only 
p~rsons \vho were entitled to be treated 
as shareholders to whom the provisions of s.16(2) ands. 18(5) 
of the lncomc-1'ax Act \\'ere attracccd were the three part-
ners in whose natne the forty shares stood registered. 
Held. further, that the Income-tax Officer and Juris-
diction under s.3j Eo rectify errors but not to effect merely 
rc-arljustmcn t ~o as to avoid the illogicality in an error which 
is still permitted to contint1c. 
!Jehl, also, that it is not possible to correct the initial 
error in the procee:iings because the notice under s.35 issued 
tu the parties \\·hich is thr foundation of the jurisdiction to 
effect the rcc1ific;1tion 1 sought not the correction of the error 
but the perpetuation of it th'lugh. in an altered and a less 
objectionable frcn11 the point of vic\v of Revenue. 
lJ!t:ssrs. llo1crnh 7'rading Co., Ltd. v. TM Commis1ioner 
of Income-tar, Calr.atlct, ll9:19 Supp. 2. S. C.R. 448 applied. 
CIVIL APPELLATE JuRISllICTION: C. As. Nos. 
502 to 505 of 1960. 
Appeals from the judgment and orders dat~d 
Janunry 14, 19.57 of the Bomhny High Court in 
Special Civil Applicn.tions Xos, 1848 to 1851 of 
1956. 
N. D. Karkhrini8 and P. D. Men.on for the 
l\ppellant (in a.II the four appea

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