Commissioner of Income Tax vs Srinivas and Co. and Others

Abdul Hadi, J.—All these tax cases preferred by the Revenue under s. 256(1) of the IT Act, 1961 (hereinafter referred to as ''the Act''),

involve inter alia, a common question of law in relation to asst. yrs. 1977-78 and 1978-79. In T.C. Nos. 157 and 158 of 1984, the assessee-

respondent is the registered firm P. L. Rangiah Chetty & Sons, Coimbatore, in T.C. Nos. 159 and 160 of 1984 the assessee-respondent is the

registered firm Vijaya Textiles, Coimbatore and in T.C. Nos. 366 and 367 of 1984, the assessee-respondent is the registered firm Srinivas & Co.,

Coimbatore. While T.C. Nos. 157, 159 and 366 of 1984 relate to asst. yrs. 1977-78, the other tax cases relate to the asst. yr. 1978-79. In all the

abovesaid three firms, one non-resident partner is one P. R. Srinivasan. He has, apart from his share of income from the three different firms, other

incomes also from other sources. The abovesaid common question has arisen in the context of s. 182(3) of the Act. The said section runs as

follows :

When any of the partners of a registered firm is a non-resident, the tax on his share in the income of the firm shall be assessed on the firm at the

rate or rates which would be applicable if it were assessed on him personally, and the tax so assessed shall be paid by the firm.

In the light of the abovesaid provision, the abovesaid firms were assessed to tax in the above referred to two assessment years on the respective

shares of income of the said partner from the three firms; and the abovesaid common question relates only to the rate of tax applicable on the

respective shares of income from the three different firms. In other words, whether the said rate in each case is the rate applicable to the respective

share of income of the said partner, or, the rate applicable to the entire ''total income'' of the said partner, that is, his income from all the three firms

and his other incomes from other sources, computed in accordance with the Act.

In the above context only, the aforesaid common question of law referred to us arises and it runs as follows :

Whether on the facts and in the circumstances of the case and having regard to the provisions of s. 182(3) of the IT Act, 1961, the Tribunal was

right in holding that for purposes of determining the tax payable by the firm in respect of the share income of the non-resident partner the rate of tax

to be adopted is the rate applicable to the share income and not the rate applicable to the total income of the non-resident ?

The above question is actually question No. 1 in T.C. Nos. 157 to 160 of 1984 arid the sole question in T.C. Nos. 366 and 367 of 1984.

There is also another common question of law in T.C. Nos. 157 to 160 of 1984 alone, which is the second common question in the above

referred to tax cases, which runs as follows :

Whether the Tribunal is right in law in holding that the appeal to the AAC was competent under s. 246(c) of the IT Act, 1961 ?

This second common question can be disposed of immediately, since the learned counsel for the Revenue fairly represents that the Tribunal is

right in law in coming to the conclusion it reached and that the said question should be answered in the affirmative and against the Revenue and

accordingly we answer the same.

4A. The abovesaid reaction of learned counsel for the Revenue is also understandable since if the abovesaid appeal to the AAC was not

competent under the abovesaid s. 246(c), this reference itself would become incompetent. Further we are also in agreement with the reasoning of

the Tribunal in this regard, which points out that the assessment is actually under s. 143(3) of the Act, though r/w s. 182(3) of the Act and since s.

246(c) of the Act provides for appeal against the assessment under s. 143(3), the appeal to the AAC would lie.

Then, coming to the above referred to first common question of law, learned counsel for the respondents-assessees submits that the said

question is covered in favour of the assessee by virtue of the judgment dt. 22nd August, 1995, of a Division Bench of this Court in Commissioner

of Income Tax Vs. Srinivas and Co., in relation to the assessment of one of the abovesaid firms itself, viz., Srinivas & Co., regarding the same non-

resident partner''s share of income from the said firm in an earlier assessment year. No doubt in the said decision also, the same common question

of law was involved in relation to s. 182(3) of the Act and the said Division Bench held, on interpreting the crucial words in the said sub-section ""if

it were assessed on him personally"", that for the purpose of ascertaining the rate of tax payable by the firm (Srinivas & Co. in the said case) in

respect of the share of income of the abovesaid non-resident partner from the said firm, his share income alone should be considered and his ""total

income"" should not be considered.

But, with respect, we are unable to agree with the view taken by the said Division Bench in the said decision in interpreting s. 182(3). We are,

therefore, of the view that the matter has to be dealt with by a Full Bench. We give below our reasons.

In our view, a plain reading of the abovesaid provision, S. 182(3), would lead to the conclusion that the abovesaid share of income of the

partner should be subjected to tax, only at the rates applicable to the ""total income"" of the partner and not at the rate applicable to his abovesaid

share only. No doubt, the crucial words ""if it were assessed on him personally"" did not precede with the word ""as"". But the said crucial words

would only mean ""as if it were assessed on him personally"". In Municipal Corporation, Indore Vs. Rai Bahadur Seth Hiralal and Others, also this

view has been taken in relation to a similar expression in s. 79(2) of M. B. Municipalities Act, 1954. The relevant observation therein is that the

word ""if"" appearing in sub-s. (2) of s. 79 is obviously a mistake and must be read ""as if"" because the word ""if"" standing by itself makes no sense at

all. Secondly, we may also point out that in ''Words and Phrases'', Vol. 4 at p. 303, it is also mentioned that the words ""as if,"" mean ""in the same

manner and to the same extent"". Therefore, if the provision contained in s. 182(3) of the Act were not there in the statute, the assessment on the

abovesaid partner''s share of income from each of the said three firms would be only on the partner''s ""total income"", comprising his said shares of

income from the abovesaid three firms and his other sources of income also. When assessment is so made, obviously the rate applicable to his

abovesaid share of income from each of the abovesaid firms would only be the average rate applicable on his abovesaid ""total income"". This

average rate, on the present facts, would be higher than the rate applicable to the respective shares of income from the different firms alone. But, it

must also be pointed out that the said average rate may also be lower if his income from other sources is actually a minus figure and it could be set

off against the respective shares of income from the three different firms and the net resultant income is lower than his share of income from the firm

in each case. Anyway the object of introducing s. 182(3) is mainly to see that the tax due on the non-resident partner in respect of his share of

income from the firm, is recovered from the firm, itself, more easily than seeking to recover from the partner himself. But, in achieving that object,

by introducing s. 182(3), the legislature could not be taken to have intended to effect, a change (increase or decrease) in the quantum of tax

assessable simply because the assessment was partly made on the firm itself in relation to the said share of income of the partner from the firm and

partly on firm in relations to his other incomes. On the other hand, the fact that it should here intended otherwise, viz., not to effect any such

change, is made clear by using the abovesaid expression ""if it were assessed on his personally"".

Now, adverting to the reasoning of the abovesaid Division Bench in (1996) 219 ITR 636 (Mad) (supra), we find that the said Division, Bench,

for coming to the conclusion it reached, relied on GNANAM AND SONS Vs. COMMISSIONER OF Income Tax, MADRAS., . But, with

respect, we state that this reasoning while placing reliance on GNANAM AND SONS Vs. COMMISSIONER OF Income Tax, MADRAS., is

not correct and requires reconsideration for the following reasons :

GNANAM AND SONS Vs. COMMISSIONER OF Income Tax, MADRAS., arose under the IT Act, 1922. Further, it arose in a different

context. There, the ITO assessed to Income Tax a registered firm under the second proviso to s. 23(5)(a) of the IT Act, 1922, in regard to the

share of a non-resident partner for the profits of his firm, calculating the tax payable by applying s. 17 of the said Act at the maximum rate. It was

held in that context by the above referred to Division Bench that the assessment was properly made on the firm and the levy of tax at the maximum

rate under s. 17 was correct.

The second proviso to the abovesaid s. 23(5)(a) of 1922 Act is somewhat similar to the expression used in s. 182(3) of the present Act. The

said second proviso ran as follows :

Provided further that when any of such partners is a person not resident in the taxable territories, his share of the income, profits and gains of the

firm shall be assessed on the firm at the rates which would be applicable if it were assessed on him personally, and the sum so determined as

payable shall be paid by the firm. ""Thus, in using the expression ""if it were assessed on him personally"", the abovesaid second proviso is identically

same as the present s. 182(3). The abovesaid conclusion is reached in GNANAM AND SONS Vs. COMMISSIONER OF Income Tax,

MADRAS., only after reading the said s. 23(5) proviso together with the other relevant provision, viz., s. 17, which provides thus :

(1) Where a person is not resident in the taxable territories and is not a company, the tax, including super tax, payable by him or on his behalf on

his total income shall be an amount equal to :

(a) the Income Tax which would be payable on his total income at the maximum rate, plus

(b) either the super-tax which would be payable on his total income .........

To the abovesaid s. 17(1), there were two provisos, and, the effect of not making a declaration in relation to the option exercisable by the non-

resident partner, stipulated under the first of the abovesaid provisos, is that the non-resident partner would be liable to Income Tax at the maximum

rate on the whole of his total income itself, without the benefit of the slab system on the initial margin of exemption.

9A. The case before the Division Bench in GNANAM AND SONS Vs. COMMISSIONER OF Income Tax, MADRAS., , was only such a

case, where the said declaration was not made. That is why the said decision observes thus :

It is not necessary to examine whether such an option was properly exercised or not, because that matter has not been raised in this reference

....... But the question for consideration in this connection is whether s. 17(1)(a) was properly applied.

The said question was answered by saying that the rate that would be applicable to the non-resident partner if his share were assessed on him

personally, is the rate that was laid down in s. 17 of the Act. Thus, in the above situation, since the rate applicable to the non-resident partner if his

share were assessed on him personally, was the maximum rate that was laid down in the abovesaid s. 17, that itself was adopted in making the

assessment on the firm in respect of the said share. Thus, in the light of the above referred to provisions of the old Act, the above referred to

decision was rendered in GNANAM AND SONS Vs. COMMISSIONER OF Income Tax, MADRAS., .

9B. But, it cannot be said that the said Division Bench which decided GNANAM AND SONS Vs. COMMISSIONER OF Income Tax,

MADRAS., gave any different meaning to the term ""if it were assessed on him personally"" appearing in the second proviso to s. 23(5) of 1922

Act. In fact, it should be stated that GNANAM AND SONS Vs. COMMISSIONER OF Income Tax, MADRAS., actually supports the

abovesaid view taken by us. On the facts in GNANAM AND SONS Vs. COMMISSIONER OF Income Tax, MADRAS., , as already stated,

only the abovesaid maximum rate of tax was applicable to the partner not resident in the taxable territory, on his total income. Accordingly the said

maximum rate alone was applied even on the abovesaid share of income. In the present case also, in the light of the provisions under the 1961 Act,

the average rate of tax applicable on the total income of the non-resident partner (which may be different from the rate applicable to his share of

income from the firm alone), is alone applicable while assessing the firm on his said share. When such is the case, even on the ratio of GNANAM

AND SONS Vs. COMMISSIONER OF Income Tax, MADRAS., , it should be stated that in respect of his share of income from a firm, the tax

on the firm shall be only in the same manner as it would be levied if the assessment were made on the non-resident partner himself.

No doubt, it was also held in GNANAM AND SONS Vs. COMMISSIONER OF Income Tax, MADRAS., that on the language on the

abovesaid proviso to s. 23(5) of 1922 Act, there did not appear to be any ground for computing the share income of such non-resident partner

with reference to s. 4(1) of 1922 Act and for excluding the income derived without the taxable territories by the operation of s. 4(1)(c) of 1922

Act. But, it is to be noted that just as in the abovesaid proviso to s. 23(5) of the old Act, here also, under s. 182(3) of the Act, what is charged to

tax in the hands of the firm is only the share of income of the non-resident partner from the firm, but not his entire ""total income"" computed in

accordance with the provisions of the Act. Even though the old s. 4(1)(c) provides for exclusion of the income which accrues outside the taxable

territories, it was held in GNANAM AND SONS Vs. COMMISSIONER OF Income Tax, MADRAS., that the said exclusion would not come

into the picture at all since what was charged to tax under the said proviso to s. 23(5) was only the partner''s share of income from the firm and not

his total income computed under s. 4(1) of the old Act.

10A. But this does not mean that even for the determination of the rate of tax applicable on the said share, the partner''s share of income itself

should be treated as his total income. On this aspect, both the abovesaid proviso to s. 23(5) of the old Act and the present s. 182(3) of the new

Act have provided the same rule, viz., that the said rate applicable, is as if the tax on the said share income were assessed on the partner

personally. That is why in GNANAM AND SONS Vs. COMMISSIONER OF Income Tax, MADRAS., , the above referred to maximum rate

prescribed under s. 17 of the old Act was applied and in the present case also, the average rate applicable on the said partner''s total income

should necessarily be applied while assessing the firm in respect of the said share of income.

10B. It must also be mentioned that though there are two assessments in relation to the non-resident partner, one, on his firm in relation to his share

of income from the firm, and another, on himself in relation to his other sources of income comprised in his total income, both the assessments must

be done as if there was one assessment on the partner himself directly on his entire ''total income''. Here, it must also be pointed out that the

fundamental principle is that the Income Tax is only one tax levied on the sum total of the income and not a collection of distinct taxes levied

separately on each head or item of income. [Vide United Commercial Bank Ltd. Vs. Commissioner of Income Tax, West Bengal, and B. M.

KAMDAR, IN RE., . The net result is, in our view, in Commissioner of Income Tax Vs. Srinivas and Co., , GNANAM AND SONS Vs.

COMMISSIONER OF Income Tax, MADRAS., has been applied wrongly. 11. Further, one other observation in Commissioner of Income Tax

Vs. Srinivas and Co., is as follows :

The sub-section [s. 182(3)] does not say if it were assessed on him personally on his total income .......

In the absence of the words ''total income'' in s. 182(3), we are not inclined to accept the argument advanced by the learned standing counsel that

the rate applicable to the non-resident partner would be the rate applicable on his total income including other income, if any"".

But, in our view, though the term ""on his total income"" is absent, the said term is implied in the context. In other words, the crucial words ""if it were

assessed on him personally"" means ""if the tax on his share in the income of the firm were assessed on him personally on his total income.

11A. We may also point out that in interpreting s. 161(1) of the Act, which deals with liability of a representative-assessee and which also provides

that the tax as regards the income in respect of which he is a representative-assessee shall be levied upon him in the like manner and to the same

extent as it would be leided upon the person represented by him, the Supreme Court in The Commissioner of Wealth Tax, Andhra Pradesh,

Hyderabad Vs. Trustees of H.E.H. Nizam''s Family Hyderabad, has also held inter alia that the amount of tax payable by the trustee

representative-assessee would the same as that by each beneficiary therein in respect of his beneficial interest if he were assessed directly. No

doubt, the earlier part of s. 161(1) of the Act makes a latter procedural provision that the abovesaid representative-assessee shall be subject to the

same duties, responsibilities and liabilities as if the income, in respect of which he is a representative-assessee, were the income received by or

accruing to or in favour of him (representive-assessee), beneficially.

For all the abovesaid reasons, we are of the view that the above referred to Commissioner of Income Tax Vs. Srinivas and Co., requires

reconsideration by a Full Bench of this Court. Therefore, the registry is directed to place the matter, (only in relation to the first common question in

T.C. Nos. 157 to 160 of 1984, which is also the sole question in T.C. Nos. 366 and 367 of 1984), before the Honourable the Chief Justice for

appropriate orders.

No costs.