The Preamble of our Constitution declares India as a Republic nation, meaning that government exercises its power according to the rule of law. The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the Centre and the State. An important restriction on this power is Article 265 of the Constitution which states that "No tax shall be levied or collected except by the authority of law". Therefore, each tax levied or collected has to be backed by an accompanying law, passed either by the Parliament or the State Legislature.

Dealing specifically with Income-tax law, authority to levy and collect tax on income is vested with the Centre by virtue of Entry 82 of the Seventh Schedule in the Constitution and in consequence thereof, Income-tax Act, 1961 (‘the Act’) has been enacted. Section 4 of the Act is charging section and the same reads as under:

“Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person”

Thus, as per section 4, tax is to be levied on the total income of every person. Further, total income, as defined in section 2(45), is to be computed as per the provisions of the Act.

Generally, income is taxable in the hands of the person to whom it belongs i.e. the owner of the income. However, there are exceptions given in the Act, wherein though the income may not belong to a person, but such income is taxable in the hands of such person. Such exceptions are given, in Chapter V of the Act which reads as ‘Income of other persons, included in assessee’s total income’, consisting of section 60 to 64. Thus, baring for few exceptions as given above, the general principle is that the income is to be taxed in the hands of the person to whom it belongs.

Now, that income is computed in the manner laid down in the Act including the above exceptions, can it so happen that tax on such income is paid by some other person instead of a person rightfully liable to pay tax under the Act? For instance, if total income of person ‘A’, computed as per the provisions of the Act, is Rs. 10 lakh, can person ‘B’ pay tax on the same? Suppose he pays tax on the same, then can Mr. A claim that income is already taxed in the hands of ‘B’, therefore again it should not be taxed in his hands? Such situations generally arises in case of an Association of persons (‘AOP’) or Body of Individuals (‘BOI’), where the right person to be taxed in respect of the income is not certain. Accordingly, the members of AOP/BOI, include their share of income in their total income and pay tax on the same. The AO may not share the same view, and he may want to tax the AOP/BOI as an independent person. There, can the AOP/BOI take the argument, that in any case, the members have paid the tax on the total income and therefore, there is no need to tax them separately.

The answer becomes clear from section 4 as given above read with section 2(31). It, in no uncertain terms, specifies that the tax shall be charged on the total income of every person. Further, the term ‘Person’ has been defined in clause 31 of section 2, to include seven categories of persons, all of which are independent and distinct from each other. A literal interpretation of the above provisions leads to the conclusion that only a right person as per the Act, is liable to pay tax on his income and no option is available to tax income in the hands of the person other than the one in whose hands it is taxable.

The Hon’ble Supreme Court in case of ITO vs. Ch. Atchaiah [TS-5044-SC-1995-O], has held that the AO must tax the right person alone. Merely because a wrong person is taxed with respect to a particular income, the AO is not precluded from taxing the right person with respect to that income. Further, the person lawfully liable to be taxed can claim no immunity because the AO has taxed the said income in the hands of another person contrary to law.

This interpretation also derives support when one compares section 4 as given above with section 3 of the Income-tax Act, 1922. In the 1922 Act, the AO had the option to tax either the AOP/ Firm or its Members/ Partners. However, unlike the same, the present Act, does not give any option to the AO or to the assessee to tax the income either in the hands of the AOP/ Firm or their Members / Partners.

Thus, in praesenti, only a person who is liable to be taxed as per the Act can be made to pay tax and he cannot shift his burden on some other person. It will not be out of context to quote a judgment of the Hon’ble Madras High Court in case of CIT vs Nayan Engineering Works [TS-6018-HC-1998(MADRAS)-O]. In this case, the members of AOP had paid tax on their share of income and after a gap of 34 years, the AO wanted to tax the AOP. In context of such peculiar facts, the Court held that though the AOP is liable to tax but, such proceedings against the AOP is unwarranted especially after a gap of such a long time and that when the amount of tax has already been collected from the members. Unfortunately, the said judgment has not considered the judgment of the Hon’ble Supreme Court in case Ch. Atchaiah and therefore, utility of the said judgment may suffer.

Let us analyse the above proposition from each relevant person perspective. In case of an HUF, income of the HUF is taxable only in the hands of HUF and not in the hands of the members. If the income of HUF has escaped assessment, a notice may be sent to HUF and not to its members [TS-5072-SC-1965-O].  In fact, the amount received by members from HUF is not taxable in view of specific section 10(2).

In so far as a Firm is concerned, although it may not have a juristic entity like a company under the Companies Act, it nevertheless possesses a separate legal personality and existence of its own de hors its partners. There cannot be any doubt that a firm has a separate assessable entity for the purpose of taxation under the IT Act. For the income of the firm, the partners cannot be taxed and it is the firm itself, which is liable to pay tax [TS-5530-HC-1996(PATNA)-O], TS-6268-ITAT-2015(Pune)-O and [TS-5191-HC-2001(RAJASTHAN)-O].

The situation becomes much complicated in respect of Association of Persons (‘AOP’) and Body of Individuals (‘BOI’), other than private trusts, as in their case one has to first ascertain, whether the association of members constitute AOP/ BOI or not, as for its constitution commonness of the purpose assumes significance. Thus, if an association of members is validly held as an AOP or BOI, then such AOP/BOI constitutes a separate person from its members and is liable to be taxed on the income independently. Even if the members have offered their share from such AOP/BOI as income and have been so assessed, still the AO can tax the AOP/BOI on their income [TS-5418-HC-1998(MADRAS)-O], [TS-5478-HC-2002(MADRAS)-O], [TS-5409-HC-1998(MADRAS)-O], [TS-5324-HC-1996(KERALA)-O]. Similarly, the share of loss from AOP/BOI accruing to its members, cannot be set off by the members against their personal income [TS-5625-HC-1998(BOMBAY)-O]. Inclusion of the share of members for rate purposes, in accordance with the provision of section 87 r.w.s. 67A, while calculating tax payable by the members, does not indicate that the income belongs to the members.

In case of private trust, the taxability itself is a vexed issue, although taxability of a non-discretionary trust has attained clarity due to series of judgments including that of the Hon’ble Apex Court. In a non-discretionary trust, income actually belongs to the beneficiaries. However, for convenience purpose, tax is collected from their representative i.e. the trustees. Collection is made from the representative assessee in the like manner and to the same extent as if the tax is collected from the beneficiaries. However, an option is given to AO, in terms of section 166, to make a direct assessment on the beneficiaries rather than on the trustees [TS-12-HC-1990(BOM)-O].

Uncertainty still looms large over the taxability of a discretionary trust as there exists divergent views over its taxability. One of the views prevalent is that a discretionary trust is an AOP [TS-5639-HC-2010(Delhi)-O] while a contrary view is that, trust takes the same status as that of its beneficiaries [TS-5012-SC-1994-O]. Without delving into this issue, we may deal with the right hand to tax in case of both the above views. In case if the trust is treated as an AOP, then the income should be regarded as belonging to the AOP and should be taxed in the hands of the trust. Further, such income should not be again taxed in the hands of the beneficiaries on distribution by the trust. If the trust is not treated as an AOP, then the income should be treated as belonging to the beneficiaries, while the recovery of the same should be effected from the trustees in their representative capacity.

The concept of representative assessee and taxability in right hand should not be mixed with each other. This is because, provisions dealing with representative assessee do not override the provision of section 4, and therefore income always remains taxable in the hands of the right person as per the Act, mere recovery is shifted to the representative’s hand.

From the above discussion, one can discern that, undoubtedly tax is to be paid by the right person. However, the important issue which may bother is what are the remedies available to a wrong tax payer? Assuming income is taxable in the hands of AOP called ‘A’ and tax on the same is already paid by its members B and C, and if the AO wants to tax the income in the hands of AOP, then what are the legal remedies available to the members B & C, as the income is certainly subject to tax in the hands of AOP.

In such cases, the wrong tax payers have the following remedies:

a. Revision u/s 264 – if the assessment of the wrong tax payer has been made u/s 143(3) or 144, then the wrong tax payer can apply to the CIT or Pr. CIT to revise the assessment. However, such application has to be made within one year from the date of the receipt of the order. Power has been conferred upon the CIT or the Pr. CIT, as the case may be, to condone the delay in case if the assessee was prevented by sufficient cause to make an application. Whether a return of income processed u/s 143(1) can be revised under this section is a debatable issue.

b. Rectification u/s 154 –Another recourse available to the wrong tax payer is to make an application u/s 154. However, such rectification can be made only within four years from the end of the financial year in which the order sought to be amended was passed.

c. Rectification u/s 155(2) – this section is applicable only to a member of AOP/BOI. By virtue of this section, if there arises a correction in the share of the member due to assessment in case of AOP/BOI, then the AO can rectify the assessment of the member, within four years from the end of the year in which the order in case of AOP/BOI is passed.

One may also make an application to CBDT u/s 119. The above recourses, should be immediately put into action, once the intention of the AO of the right taxpayer is certain as to the taxability of income in the latter’s hand. However, many a times, such issues are raised for the first time in a proceeding made u/s 148. In such cases, the time available for the above recourses except given in point no. ‘c’, may lapse, rendering the wrong taxpayer helpless. There is a necessity to introduce necessary amendment in the Act, to provide relief to the wrong taxpayer, as in such cases, there may arise a situation of unjust enrichment due to double taxation on the same income. A necessary amendment should be inserted to the effect that from the date of order passed in case of right taxpayer, the wrong tax payer should have the recourse to get his assessment amended and be issued a necessary refund. It will not be out of place to mention that in a reverse scenario, the provision to safeguard the interest of the revenue is already there in the Act in section 150.

Thus, payment of tax by another person may not be a valid defence to avoid taxability in respect of any income, in view of clear wordings of the section as well as the binding precedent of the Hon’ble Apex Court and therefore, one should exercise due caution and apply his mind before offering income to tax, when the same may not be taxable in his hands.