Commissioner of Income Tax vs Smt. Lalita M. Bhat

Dr. B.P. Saraf, J.—By this reference under s. 256(1) of the IT Act, 1961 ("Act") made at the instance of the Revenue, the Tribunal, Bombay, has referred the following question of law to this Court for opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the share income from the AOP includible in the assessee''s hands as a member thereof is to be determined only after deducting from the AOP''s Income Tax payable by it ?"

The material facts are few and uncontroverted. The assessee Smt. Lalita M. Bhat is an individual. She is also a member of an AOP carrying on business in the name and style of Nova Co. Her share in the profits of the said AOP was two-third. The AOP was assessed separately. In her assessment for the asst. yr. 1975-76, the assessee claimed that her share in the profits of the AOP was not includible in her individual assessment. In the alternative, it was claimed that if at all the assessee''s share was includible in her income for the rate purpose, it would be her share in profits of AOP arrived at after deduction of the Income Tax payable thereon. The ITO did not accept either of these contentions of the assessee. He rejected the first contention relying on the provisions of s. 66 of the IT Act, 1961 which provides for inclusion of the share of the assessee in the income of the AOP on which no tax is payable, in the total income of the assessee for rate purposes. The second contention of the assessee was rejected by the ITO on the ground that there was no provision in the Act to take the share after deduction of the tax paid by the AOP from the share of the assessee in the income thereof and, in that view of the matter, added her entire share of income from the AOP to her other income for computing her total income for the purpose of her individual assessment. The assessee appealed to the CIT(A). The CIT(A) allowed the appeal of the assessee and directed the ITO to delete her share in the profits of the AOP altogether from her total income and not to add the same even for rate purposes. Aggrieved by the above order of the CIT(A), Revenue appealed to the Tribunal. Two contentions were raised by the Revenue before the Tribunal. First, that the share of the assessee in the profits of the AOP was includible in her total income. Second, that what was includible was the share of the assessee in the income of the AOP without deduction of the tax paid thereon by the AOP. The Tribunal accepted the first contention of the Revenue in view of the provisions of s. 66 r/w s. 86(v) and s. 110 of the Act and held that the share of the assessee in the income of the AOP on which Income Tax has already been paid by the AOP was includible in the income of the assessee for the rate purposes. The Tribunal, however, did not accept the second contention of the Revenue that it was the share of the assessee in the profits of the AOP without making deduction of the Income Tax paid by the AOP thereon, which was includible in the income of the assessee in her total income. The Tribunal held that the expression "any portion of the amount which he is entitled to receive from the association" in s. 86(v) of the Act would mean the share of the net income left after payment of Income Tax thereon by the AOP. Aggrieved by this finding of the Tribunal, the Revenue is before us by way of this reference.

We have heard Dr. Balasubramaniam, the learned counsel for the Revenue, as well Mr. Soli Dastur, the learned counsel for the assessee. The submission of Dr. Balasubramaniam, on behalf the Revenue is that though no Income Tax is payable by an assessee on the amount which he or she is entitled to receive from the AOP on which Income Tax has already been paid by the AOP, such amount is includible in the total income of the assessee and the assessee is allowed a deduction at the average rate in respect of such exempted income. It was contended that the Income Tax paid by the AOP cannot be deducted in computing such amount. Our attention was drawn in this connection to s. 67 of the Act which provides for deduction of the share of the amount of tax paid by registered firm from the share of income received by the assessee from such firm. It was contended that it is abundantly clear from the above provision that wherever the legislature intended to exclude the share of Income Tax paid on the income, it has specifically provided for the same. According to the learned counsel for the Revenue, in the absence of any such provision, "amount receivable from the AOP" would mean the amount receivable out of the income of the AOP arrived at before payment of tax. According to the counsel, the expression "on which tax has already been paid" is in fact intended to restrict the exemption to only such portion of the amount on which "income tax has already been paid" and for no other purpose.

Mr. Soli Dastur, learned counsel for the assessee, on the other hand, submits that share of income or the amount receivable by the assessee from the AOP which can be included in the income of the assessee by virtue of s. 66 r/w s. 86(v) of the Act would mean the amount which the assessee is entitled to receive from the AOP and such amount, according to Mr. Dastur, can be obtained only by deducting the amount of Income Tax paid by the AOP on such income.

We have carefully considered the rival submissions. We have also perused the scheme of the Act and the relevant provisions thereof. Chapter VII of the Act specifies income forming part of the total income on which no Income Tax is payable. Sec. 86(v) of the Act, which forms part of the said chapter, which is relevant for the purpose of present case, reads :

"86. Other incomes. - Income Tax shall not be payable by an assessee in respect of the following :...........

(v) if the assessee is a member of an AOP or a BOI other than an HUF, a company or a firm, any portion of the amount which he is entitled to receive from the association or body on which Income Tax has already been paid by the association or body."

In Chapter VI of the Act, which deals with aggregation of income, etc., s. 66 provides that -

"In computing the total income of an assessee, there shall be included all income on which no Income Tax is payable under Chapter VII."

Sec. 110 lays down the mode of calculating Income Tax in case where exempted income is included in the total income. It provides :

"110. Determination of tax where total income includes income on which no tax is payable. - Where there is included in the total income of an assessee any income on which no Income Tax is payable under the provisions of this Act, the assessee shall be entitled to a deduction, from the amount of Income Tax with which he is chargeable on his total income of an amount equal to the Income Tax calculated at the average rate of Income Tax on the amount on which no Income Tax is payable."

On a conjoint reading of the above provisions it is clear that the portion of the amount which a member is entitled to receive from the AOP is exempted from Income Tax if Income Tax has already been paid thereon by the AOP. Obviously, what is exempt from Income Tax is the portion of the amount which the assessee is entitled to receive from the AOP as its member. It is not the amount reduced by the amount of Income Tax paid thereon by the AOP. Payment of Income Tax on such amount by the AOP, in fact, is a condition precedent on fulfilment of which the amount received by the member would be exempt from Income Tax.

It is pertinent in this connection to note that under s. 86(v) of the Act, exemption of the amount receivable by a member from the AOP is dependent on the actual payment of Income Tax by the AOP unlike s. 86(iii) of the Act where the exemption has been made available to a partner of an unregistered firm in respect of the portion of his share in the profits and gains of the firm "on which Income Tax is payable by the firm". The distinction in the language of the two clauses is significant. Obviously, the legislature intended to extend the benefit to partners of unregistered firms in respect of the portion of their share in the profits thereof even in cases where Income Tax was payable by the firm even though it had not already been paid, whereas, the exemption has been granted to the member of the AOP only if "income tax had already been paid by the AOP". In case of unregistered firm, it is the assessee''s share in the profits of the unregistered firm under cl. (iii) that is exempt, whereas in case of AOP it is the amount which the assessee is entitled to receive from the AOP. The amount of share in the unregistered firm or the amount the member of the AOP is entitled to receive from the AOP, is not the amount receivable without deduction of the tax paid thereon. This view also gets support from s. 67 of the Act which lays down the method of computing the partner''s share in the income of the firm. Clause (c) of sub-s. (1) thereof specifically provides for deduction of Income Tax payable by the firm from its total income before ascertaining or apportioning the same amongst the partners. No such provision has been made for computation of the amount receivable by a member of the AOP. The legislative intent is thus clear. Income Tax paid by the AOP is, therefore, not to be deducted from its income for determining the amount receivable by a member of the AOP. Condition of payment of Income Tax by the AOP in s. 86(v) is intended merely to restrict the exemption to the amounts receivable by the members of AOPs from such of the AOPs only who have already paid Income Tax on such income. The language is clear and unambiguous. The condition is "actual payment of income tax" and not that "income tax is payable".

The construction of s. 86(v) and the true meaning of the expression "any portion of the amount which a member of the AOP is entitled to receive from the AOP" assume importance despite the fact that no Income Tax is payable on such income inasmuch as, it is to be included in the total income of the member of the AOP by virtue of s. 66 of the Act. As a result, Income Tax payable by the assessee has to be determined with reference to the total income (including such exempted income) which has the effect of enhancing the average rate of Income Tax applicable to the taxable income. In this process the Income Tax computed on the total income at the specified rates would also include Income Tax on the exempted income. It is for this reason that s. 110 of the Act provides for grant of deduction from the amount of Income Tax so calculated, of an amount equal to the Income Tax calculated at the average rate of Income Tax on the amount on which no Income Tax is payable.

The contention of Mr. Dastur, for the assessee, which also found support from the Tribunal, is that the amount which the assessee is entitled to receive from the AOP means the amount which he is entitled to receive reduced by the amount of tax paid by the AOP in respect thereof. In other words, according to the learned counsel, in determining the amount receivable by the assessee from the AOP as his share, the Income Tax paid by the AOP on such amount has to be deducted from the total income of the AOP. Dr. Balasubramaniam, learned counsel appearing for the Revenue, vehemently opposes the above interpretation suggested by the learned counsel for the assessee. According to him, such an interpretation is wholly erroneous and runs counter to the scheme of the Act and clear language of s. 86(v) of the Act. Accepting such an interpretation will tantamount to applying the method laid down in s. 67 of the Act for computing a partner''s income from a firm to the computation of the amount receivable by a member of the AOP also, which is not only impermissible but contrary to all well known principles of interpretation of statutes.

We have carefully considered the rival submissions. However, on perusal of the provisions of ss. 86(v), 66 and 110 of the Act, we find it difficult to accept the interpretation suggested by Mr. Dastur, the learned counsel for the assessee. In our view, the expression "any portion of the amount which the assessee is entitled to receive from the association" means the amount of share of the assessee in the income of the association to which he is entitled and this amount has to be determined without deduction of any Income Tax payable or paid thereon by the AOP. The share of income or amount receivable by the assessee is not dependent on the amount of tax payable by the AOP because Income Tax itself is payable on the "income". The share of the income of the members of the AOP or the amount receivable by them is not dependent on payment of Income Tax, though they might be liable to pay the share of Income Tax payable or paid by the AOP. The tax paid by the AOP, therefore, does not have the effect of reducing the profits or income of the AOP. Payment of tax is a phenomenon which takes place on accrual of income. The Income Tax paid by the AOP, therefore, does not have the effect of reducing the income of the AOP or the amount receivable by its members. If the legislature had intended to provide for deduction of Income Tax paid by the AOP from its income in computing the amount receivable by its members, it would have said so, as has been done in case of share of income from a firm in s. 86(iii) r/w s. 67 of the Act.

It is thus clear that under s. 86(v), no Income Tax is payable by an assessee who is a member of an AOP on the portion of the amount which he is entitled to receive from the AOP. This exemption is conditional on payment of Income Tax by the AOP on such income. If no Income Tax has already been paid by the AOP thereon, s. 86(v) will not apply and the member of such AOP would not be entitled to any exemption in respect of the amount receivable by him as a member thereof. We are, however, of the firm opinion that the "amount" referred to in s. 86(v), in any event, would be the amount receivable by the member of the AOP out of its income without deduction of the Income Tax paid by the AOP thereon.

In the light of the above discussion, we are of the clear opinion that the Tribunal was not correct in law in holding that the share of income from the AOP includible in the assessee''s hand as a member thereof has to be determined after deducting from the AOP''s income the amount of Income Tax already paid thereon. Accordingly, we answer the question referred to us in the negative and in favour of the Revenue.

In the facts and circumstances of the case, there shall be no order as to costs.