Full Judgment Text
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PETITIONER:
RM. RAMANATHAN CHETTIAR ETC.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, MADRAS
DATE OF JUDGMENT:
30/04/1970
BENCH:
GROVER, A.N.
BENCH:
GROVER, A.N.
SHAH, J.C.
HEGDE, K.S.
CITATION:
1970 AIR 1624 1971 SCR (1) 465
1970 SCC (2) 189
ACT:
Income-tax Act (1922) ss. 4(1)(c) and 23(5)(a) second
proviso--Share of income derived outside taxable territories
by firm included in income of non-resident partner-If can be
excluded under s. 4(1)(c).
HEADNOTE:
The appellant was a non-resident individual. He was a
partner of a registered resident firm which carried on
money-lending business in India and Malaya. The entire
income of the firm for the assessment year 195657 accrued
outside India. Since before the Finance Act, 1956, under s.
23 (5) (a) of the Income-tax Act, 1922, the firm did not
itself pay the tax on its income, but each partner’s share
in the firm’s profits was added to his other income and the
tax was payable by each partner on the basis of his total
income, the assessee’s share of the foreign income of the
firm was included in his total income. ’The assessee
claimed that it could not be so included under s. 4(1) (c).
HELD:Under s. 4(1) (c) when a person was not resident in the
taxable territory income derived by him outside the taxable
territories was not to be included in his taxable income.
But under s. 4(1) (c) a nonresident partner of a resident
firm was not entitled to exclude from his total income such
proportionate share of the profits of the said firm which
accrued or arose to it outside the taxable territories, and
which was in eluded in the total income of the partner under
s. 23(5) for the purpose of assessing the firm, since s. 4
is "subject to the provisions of this Act" that is, subject
to s. 23(5) (a). [466 F-H; 467 C-E]
Seth Badri Das Daga & Anr. v. Commissioner of Income-tax,
Central and United Provinces, 17 I.T.R. 209, applied.
Gnanam & Sons v. Commissioner of Income-tax, Madras, 43
I.T.R. 485, approved.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 710 of 1967.
Appeal by special leave from the judgment and order dated
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June 30, 1965 of the Madras High Court in Tax Case No. 114
of 1962.
K. Srinivasan and T. A. Ramachandran, for the appellant.
Jagadish Swarup, Solicitor-General, G. C. Sharma and B. D.
Sharma, for the respondent.
The Judgment of the Court was delivered by
Grover, J. This is an appeal by special leave against a
judgement of the Madras High Court rendered in its advisory
jurisdic-
466
tion in a case stated unders s. 66(1) of the Income-tax Act,
1922, hereinafter referred to as the "Act". The appellant
was a nonresident individual. During the previous year
ending April 12, 1956 relevant to the assessment year 1956-
57, he was a partner of a registered resident firm which
carried on money lending business in India and Malaya. The
entire income of that firm for the assessment year in
question accrued outside India. The appellant’s share in
the income of the firm came to Rs. 62,612/- the whole of
which was foreign income. The appellant had also incurred a
loss of Rs. 8,484/- in his own business at Madras. While
assessing the appellant the Income-tax Officer set off the
loss in the appellant’s Madras business against the foreign
income and assessed him at the maximum rate as the appellant
had not filed a declaration in terms of the proviso to s.
17(1). The Appellate Assistant Commissioner confirmed the
assessment. An appeal was taken to the Appellate Tribunal
but it failed. Two questions of law were referred by the
Tribunal :
(1) "Whether the assessment made on the
assessee, a non-resident, by including in his
total income his share of foreign income of
the resident firm of Messrs. K. V. Al. Rm.
Rm. Ramanathan Chettiar, is valid in law ?
(2) Whether the levy of the tax at the
maximum rate is correct ?"
The High Court answered the questions referred against the
assessee on the ground that the points were covered by its
previous decision in Gnanam & Sons v. Commissioner of
Income-tax, Madras(1).
The argument which was raised before the Madras High Court
in the above case (Gnanam & Sons) was based largely on a
reading of two provisions of the Act. Under s. 4 (1) (c)
when a person was not resident in the taxable territories
the income, profits and gains which accrued or arose to him
without the taxable territories were not to be included in
his "taxable income" unless they were brought into or
received by him in the taxable territories. Sub-section (5)
(a) of s. 23 was intended to tax the total income of each
partner of the firm including therein his share of its
income profits and gains of the previous year. The argument
raised was that this concept of the total income must be
carried into the second proviso to s. 23(5) (a) to a non-
resident partner. It would, therefore, mean that this
income arose wholly outside the taxable territories and had
to be excluded by virtue of the operation of s. 4 (1 ) (c)
of the Act.
(1)43 I.T.R. 846.
467
Under s. 23(5) when the assessee is a registered firm and
its income has been assessed the income tax payable by
itself shall be:; determined and the total income of each
partner of the firm including therein his share of its
profits and gains of the previous year shall be assessed and
the sum payable by him on the basis of such assessment shall
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be determined. The provisions relating to payment of income
tax by the firm itself were introduced by the ,Finance Act
1956. The position before 1956 was that where the firm was
registered the firm did not itself pay the tax and therefore
each partner’s share in the firm’s profits was added to his
other.income and the tax payable by each partner on the
basis of his total income was determined and the demand was
also made on the partners individually. After 1956 income
tax at low rates. became chargeable on the registered firms
but the partners continued to be assessed individually in
the same way as before. There can be no manner of doubt
that the unit of assessment was the registered firm and when
it was assessed and its total income computed the individual
partners were taxed under s. 23 (5) (a) on their respective
shares of the firm’s income.
The Privy Council in Seth Badri Das Daga & Another V.
Commissioner of Income-tax, Central and United Provinces(1)
took the view that a non-resident partner of a resident firm
was not entitled to exclude from his total income such
proportionate share of the profits of the said firm which
accrued or arose to it without British India, under s. 4(1)
(c) of the Act. In Gnanam & Sons’(2) case the Madras High
Court relied on this decision and repelled the argument
raised on behalf of the assessee that the second proviso, to
s. 23 (5) (a) called for the determination of the total
income of the non-resident partner. It was held that on the
language of the proviso there was no ground for computing
the income of the non-resident partner with reference to s.
4 (1 ) of The Act and for excluding income derived without
the taxable territories by the operation of s. 4(1) (c).
A faint attempt was made to assail the correctness of the
decision of the Privy Council in Seth Badri Das’s case(1)
but the discussion of all the relevant provisions by their
Lordships is, with respect, so clear and cogent that we are
unable to find any infirmity or flaw therein. It is not
disputed that if that decision lays down the law correctly
this appeal must fail.
It is therefore dismissed with costs.
V.P.S. Appeal
dismissed..
(1)17 I.T.R. 209.
(2)43 I.T.R. 485.
468