Income Tax Appellate Tribunal - Nagpur
Mohan Lal Hira Lal vs Commissioner Of Income-Tax, C.P. & U.P. on 18 January, 1943
Equivalent citations: [1943]11ITR259(NAG)
JUDGMENT
JUDGMENT OF APPELLATE TRIBUNAL Paragraph 3 of the Judgment of the Appellate Tribunal referred to in the Statement of Case is as follos :-
"3. It is contended in the first place that the income from Rajnandgaon branch was divided by the partners at that place and became the income of the partners, and that, therefore, it should not have been included in the income of the firm but in the total income of the individual partners. The learned Advocate for the appellant explained the meaning of this contention saying that no statutory deduction of Rs. 4,500 shou ld have been made from the foreign income because it was divided at Rajnandgaon, and became the income of the partners, who, thereafter brought it in British India. In other words, his contention is that instead of making a statutory deduction from the total foreign income of the firm, suh a deduction should be mde from the share of each partner brought into British India, so that each of the partners may have the benefit of a deduction of Rs. 4,500. This is indeed a startling proposition. In the first place, the firm doing business at Rajnandgaon is not a separate entity but only a branch of the main firm at Kamptee. Next, if we consider the scheme of assessment under Section 23 of the Income-tax Act it will appear that the computation of the income of a firm is to be made just as in the case of an individual assessee up to the stage of working out the total assessable income. It is only after that is done that a direct assessment becomes permissible in the case of a registered firm upon the shares of each partner as provided by Section 23(5)(a) of the Act. That is to say, it is only at the moment of imposing the tax that a direct assessment is made upon the partners. There is nothing in the Income-tax Act to support the view that the stat utory by the third proviso to Section 4 should be made when levying the tax in the manner laid down by Section 23(5)(a). On the contrary, the deduction is to be made from the total foreign income before the net assessable income is ascertained. That was exactly what was done in the present case. Acceptance of the appellants arguments would mean a deduction of Rs. 4,500 in the case of each of the two partners, a course which is certainly not permitted by the Income-tax Act."
The judgment of the Calcutta High Court in In the matter of Babu Raman Lal Kondai, referred to in the Statement of Case of the Appellate Tribunal, runs as follows : The judgment was delivered by the Court consisting of Derbyshire, C.J., and Panckridge, J., on the February 20, 1941.
"DERYSHIRE, C.J. :- The facts of this Reference are set out in the case stated. The question is "whether in the facts and circumstances of this case the Income-tax Officer was correct in law in holding that the petitioners income was 6/16ths of Rs. 25,675."
The Commissioner has given his reasons which simply quote in paraphrase the relevant sections of the Income-tax Act. In my opinion the question asked of us can only be answered as the Commissioner has answered it, that is to say, the Income-tax Officer was correct in holding that the petitioners income was 6/16ths of Rs. 25,675.
PANCKRIDGE, J. - I agree. The assessee has been forced to admit that he cannot claim to exclude the sum of Rs. 4,500 both from the assessment of the firm, and from his own assessment, and he suggests that the Income-tax Officer, should not have excluded that sum from the assessment of the firm, but should have excluded if from the assessment of each individual partner.
In my opionion the Income-tax Officer had no choice but to make the assessment of the firm and ascertain its total income in accordance with Section 4 and had no jurisdiction to abstain from making the deduction of Rs. 4,500 to which the firm was entitled.
That being so, in my opinion, Section 23(5) means that the share of the income, profits and gains of a firm for the previous year should be included in the total income of each partner, such income, profits and gains having been computed in accordance with Section 4 or, in other words, I do not think it is possible to apply the proviso to so much of a partners income as represents the share of profits and gains of a firm whose total income has already been ascertained in accordance with Section 4.
I therefore agree with the order that has been made."
J. M. Thakar, for the assessee.
R. B. D. N. Choudhary, for the Commissioner.
This case arises on a reference made by the Income-tax Appellate Tribunal, Bombay Bench, under Section 66(1) of the Income-tax (Amendment) Act (VII of 1939). The question which has been submitted to this Court is as follows :-
Whether on the facts of the case the applicant was entitled, under proviso 3 to Section 4(1) of the Indian Income-tax Act, to deduct Rs. 4,500 from his share of the income in the firm included in his own total income in conformity with Section 23(5)(a) of the Act.
2. The non-applicant, Mohanlal Hiralal, is a partner of the firm of Nainsukh Kaniram which has its head office at Kamptee in British India. Among its several branches there is one at Ranjnandgaon in an Indian State. It is not disputed that the whole firm is one entity carrying on business at different places. The Income-tax Officer, Nagpur, assessed the firm on a total income of Rs. 51,090 including in it the income of the Rajnandgaon branch as well as the rest of the branches. In computing the income of the foreign branch, he made the statutory deduction of Rs. 4,500 in accordance with the third proviso to Section 4(1) of the Income-tax Act and determined the net assessable income to be Rs. 5,097. The non-applicants contention was that instead of making a statutory deduction from the total foreign income of the firm such a deduction should be made from the share of each partner so that each of the partners may have the benefit of a deduction of Rs. 4,500. The Appellate Tribunal rejected the contention on the ground that the computation of the income of the firm is to be made just as in the case of a an individual assessee up to the stage of working out the total assessable income and that it was only after that was done that a direct assessment becomes permissible in the case of registered firm upon the shares of each partner as provided by Section 23(5)(a) of the Act and consequently that the statutory deduction should be made when the total assessable income of the firm is calculated and not when the tax is levied upon each of the partners.
3. After having heard the parties at some length we have come to the conclusion that the view taken by the Appellate Tribunal is right. Section 23 of the Income-tax Act sets out the mode of assessment. As a general rule applicable to all classes of assesses the Income-tax officer is required to assess the total income of the assessee and to determine the sum payable by him on the basis of such return : see Section 23, sub-sections (1), (3) and (4). That is so when the assessee is the person who is charged with the income-tax. But an exception is made in clause 5(a) of Section 23 in the case of a registered firm. The relevant part of the section runs as follows :-
"Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the firm has been assessed under sub-section (1), sub-section (3) or sub-section (4), as the case may be, -
(a) in the case of a registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined."
That enactment clearly contemplates two kinds of assessment :
(1) The assessment of the total income of the firm, (2) the assessment of the total income of each partner of the firm.
It is clear that the total income of the firm, which has been assessed enters into the calculation of the total income of each partner of the firm. Section 4(1)(b)(ii) of the income-tax Act says that the total income of any person includes all incomes, profits and gains from whatever source derived which inter alia accrue or arise to him without British India during such year and further the third proviso to Section 4(1) says "that if in any year the amount of income accruing of arising without British India exceeds the amount brought into British Indias in that year, there shall not be included in the assessment of the income of that year so much of such excess as does not exceed four thousand five hundred rupees."
4. The crucial question is whose total income has to be assessed, whether the income of the firm or that of the partner ? The total income of a partner, who has other sources of income besides his partnership in the firm, stands on quite a different footing and is independent of the total income of the firm; that income when assessed represents only one of the several sources of the partners income. In fact the income-tax that is levied on the partner is not levied on his share of the total income of the firm assessed but on his total income derived from all sources. Consequently it would be clear that the direct assessment of the partners income does not enter at all into the calculation of total income of the firm. The income accruing or arising out of British India accrues directly to the firm and not the partner. The liability of the partners to pay income-tax arises after the total income of the firm is assessed and Section 4 is concerned with the assessment and not with the levy of the income-tax. It must therefore follow that the statutory deduction of Rs. 4,500 allowed by the third proviso to Section 4(1) must relate to the assessment of the total income of the firm. The income of the Rajnandgaon shop would be primarily or directly the income of the firm and therefore it would enter into the calculation of the total income of the firm.
5. On behalf of the non-applicant reliance is placed on Section 3 of the Income-tax Act and it is argued that inasmuch as the income-tax is charged on the partner his share of the income of the firm could alone form the basis of the assessment. Section 3 refers, no doubt, to the total income of the partners of the firm but it also speaks of the total income of a firm. The ingredients of the total income are specified in Section 4 and the mode of ascertaining it is laid down in Section 23 of the Income-tax Act. It cannot be overlooked that both Sections 3 and 4 say that they have to be read "subject to the provisions of the Act" which includes Section 23 of the Act. Sections 3 and 4, when so read qualified by Section 23, furnish a conclusive answer to the non-applicants argument.
6. We answer the question referred to us in the negative.
7. The non-applicant will pay costs of the applicant. Counsels fee Rs. 50.
Reference answered in the negative.