COMMISSIONER OF INCOME TAX vs SRINIVAS and CO.

N. V. BALASUBRAMANIAN, J.

The above tax cases are posted before the Full Bench as a Division Bench of this Court felt that the earlier decision of this Court in the case of

Commissioner of Income Tax Vs. Srinivas and Co., : requires reconsideration by a Full Bench of this Court.

The facts are not in dispute. In all the tax cases, the assessees are firms and in the three firms, one of the partners in the assessee-firms was a

non-resident and apart from the share income from the three firms the said non-resident partner had other income also from other sources. The

firms were assessed to tax for the two assessment years in question on the share income of the partner in the three firms under the provisions of s.

182(3) of the IT Act, 1961 thereinafter to be referred to as ""the Act, 1961'''' and the said sub-section reads as under :

P.P.S. Janarthana Raja, for the ''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.

The question that arises is whether it is only the respective share income of the non-resident partner in the three firms that should be taken into

account for the purpose of determination of the rate of tax, or whether his share income should be assessed at the rate applicable on the entire total

income of the said partner, i.e., apart from his income from the three firms, to determine the rate of tax. The ITO held that it is on the total income

of the partner and his view was confirmed by the AAC but the Tribunal held otherwise. The Revenue has challenged the order of the Tribunal in

the three tax case references. The Tribunal has referred the following common question of law for our consideration :

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 ?

There is also another common question of law in T.C. Nos. 157 to 160 of 1994 which is the second common question of law in the above

referred to tax cases but that question was already answered against the Revenue by the Division Bench, by judgment dt. 17th Jan., 1997

[reported as CIT vs. Srinivas & Co. & Ors. (1999) 155 CTR (Mad) 234), when it referred the matter to the Fun Bench and hence, it is not

necessary to express any opinion on the same.

2.1. The same question on the interpretation of s. 182(3) of the Act, 1961, with reference to one of the firms (Srinivas & Co.) came up for

consideration before this Court in Commissioner of Income Tax Vs. Srinivas and Co., and this Court held that for the purpose of ascertaining the

tax payable by the firm under the provisions of sub-s. (3) of s. 182 of the Act, 1961, in respect of the share income of a non-resident partner, his

share income alone should be considered and tax determined accordingly and his other income from any other source should not be included for

the purpose of determining tax payable by the firm. As already observed by us, another Bench of this Court found it difficult to agree with the view

expressed by the Division Bench in Skinivas & Co. case (supra), and hence, the references are before us.

Mr. S.V. Subramaniam, learned senior counsel appearing for the Department, submitted that under the provisions of s. 182(3) of the Act 1961,

the entire total income of a non-resident should be taken into account. He laid emphasis on the words found in the s. 182(3) of the Act, 1961, viz.,

if it were assessed on him personally"" and submitted that under relevant provisions of the Indian IT Act, 1922 (hereinafter to be referred to as ""the

Act 19221 and also under the Act, 1961, though initially for some years, the maximum rate of tax was applied on the share income derived by the

non-resident partner from a firm, the system underwent some change and at present, during the relevant assessment years, the rate of tax is

determined on the total income at a progressive rate and if the partner''s share income alone is assessed to tax in the hands of a partnership firm, it

may not result in a proper assessment of the share income as the tax would be assessed at a lower rate than the proper rate that would be

applicable if the partner''s total income is assessed and, therefore, he submitted that in the case of a non-resident partner his entire total income

should be taken into consideration to determine the rate of tax. His submission was that the expression 1f it were assessed on him personally

connotes that his entire total income should be taken into account and the share income from the firm should be subjected to tax at the rate

applicable to the total income derived by the non-resident partner.

Mr. P.P.S. Janarthana Raja, learned counsel for the assessee, on the other hand, submitted that the rate of tax applicable is the rate which

would be applicable to the share income derived by the partner from the firm as if it was his total income and under the scheme of the Act, the

provisions of the Act, 1961, do not indicate that the rate of tax should be determined taking into account the entire total income of the partner.

We have carefully considered the submissions of the learned counsel. Under the scheme of the Act 1961, the assessment of total income of the

firm is first determined under s. 182 of the Act, 1961. When a firm is a registered firm, the share income of each partner is included in his total

income and the firm is also assessed at a lower rate of tax. Sub-s. (3) of s. 182 of the Act, 1961, inter alia, provides that where any of the partners

is a non-resident, the tax on his share income from the firm shall be assessed on the firm itself, and it is required to be assessed at the rate which

would be applicable it it is assessed on him personally and the tax so determined is required to be paid by the firm. We are of the opinion that the

provisions contained in sub-s. (3) of s. 182 of the Act, 1961, provide for levy of tax with regard to the share income of a partner and it also

prescribes rate or rates which would be applicable to the share income. The subsection, in our opinion, does not contemplate that the entire total

income of the partner should be assessed to tax in the hands of the firm. As a matter of fact, a non-resident is separately assessed on his total

income. The IT Act, 1961, in effect provides for two separate assessments in case of a non-resident partner, one on his total income and the other

in respect of his share income derived from the firm on the firm itself at the rate prescribed. The expression, ""if it were assessed on him personally

does not, in our opinion, connote that his share income should be assessed at the rate applicable to his entire total income in the hands of the firm.

If the intention of the legislature was otherwise, then, the legislature would have used a different expression. The object of s. 182(3) of the Act,

1961, is to levy and collect tax on the share income derived by non-resident partner from the firm and it is not expected that the ITO assessing the

firm should wait indefinitely for the completion of the individual assessment of the nonresident partner before he levies tax on the firm and collect

the same from the firm. If the ITO is expected to wait for the completion of the partner''s assessment, it will create another problem for him as the

share income of the non-resident would already have been assessed in his individual assessment and there is no need to resort to the provisions of

s. 182(3) of the Act, 1961, and proceed against the firm. Sec 182(3) of the Act, 1961, empowers the ITO, without waiting for the completion of

the individual assessment of a non-resident partner, to levy tax on the share income derived by the non-resident partner from the firm in the hands

of the firm itself and at the time of completion of assessment of the firm, he will have to focus his attention only to the share income of the non-

resident partner derived from the firm. The section, in our opinion, provides for assessment of a non-resident partner''s share income in a summary

manner in the hands of the firm itself. The non-resident partner may be a partner in several firms and he may derive share income from different

firms and may also have income from other sources throughout the world. If the ITO is expected to wait for collection of all the particulars

regarding his entire income throughout the world, it may lead to a situation that the share income of the non-resident partner in the firm may escape

from the levy of tax. Further, the firm is not expected to furnish the income particulars of the non-resident partner to the officer assessing the firm.

Therefore, the provisions of s. 182(3) of the Act, 1961, in our opinion, do not contemplate an elaborate procedure of demanding from the firm or

from a non-resident partner to submit the requisite particulars regarding his total income from all other sources and then, complete assessment on

the firm with reference to his share income. We are of the view that the provisions of s. 182(3) of the Act, 1961, have been enacted to enable the

Department to complete the assessment of the share income of a non-resident partner in an expeditious manner so that the requisite amount of tax

on the share income from the firm is collected quickly from the firm and it does not escape from the net of taxation. The view taken by this Court in

Shnivas & Co. case (supra) that for the purpose of ascertaining tax payable by the firm in respect of share income of a non-resident partner his

share income alone should be considered and tax determined accordingly, in our opinion, is the correct statement of law and does not suffer from

any infirmity.

A similar question on the interpretation of the provisions found in s. 23(5)(a) of the Act 1922 came up for consideration before this Court in the

case of GNANAM AND SONS Vs. COMMISSIONER OF Income Tax, MADRAS., and a Bench of this Court has held that under the

proviso to s. 23(5)(a) of the Act 1922 which deals with assessment of a non-resident partner''s share in a registered firm, the total income of the

non-resident partner does not come in for assessment at all, and it is only his share income from the firm that is made liable for assessment, and the

sum so determined as payable is made payable by the firm. The above decision of this Court in Gnanam & Sons case (supra) was approved by

the Supreme Court in the case of R.M. Ramanathan Chettiar, etc. Vs. Commissioner of Income Tax, Madras, and the Supreme Court has held

that a non-resident partner of a registered firm is not entitled to exclude from his share income from the firm determined under s. 23(5) of the Act

1922, i.e. income accruing or arising to the firm without the taxable territories by the operation of S. 4(1)(c) of the Act, 1922. In our opinion, the

underlying principle laid down by the Supreme Court in R.M. Ramanathan Chettiar''s case and by this Court in Gnanam & Sons case is that the

share income of a non-resident partner in a registered firm is alone the subject-matter of consideration in making the assessment of his share

income on the firm under the provisions of the Act and it is not open to the partner to exclude from the share income any other income on the

ground that it is exempt or not taxable in view of some other provisions of the Act. We are of the opinion that when there is no scope for exclusion

of any amount from the share income of the partner for assessment of the share income there is also no scope for inclusion or addition to the share

income of the non-resident partner by the Department. There cannot be one view for exclusion and a different view for inclusion of certain amounts

to the share income. In our opinion, the emphasis laid down by the Supreme Court is that it is only the share income of the partner that should be

the subject-matter of consideration under s, 23(5)(a) of the Act, 1922, and neither more nor less.

It is significant to notice that in Gnanam & Sons case (supra), this Court referred to a decision of Privy Council in Beth Badriclas Daga vs. CIT

(1949) 17 ITR 209 and the Privy Council also considered s. 23(5)(c) of the Act 1922 and observed that it is only the share income of a non-

resident partner that should be assessed but the rate has to be determined on the basis of his share income as if it was assessed on him personally

and there is no scope to make any deduction from the share income in respect of any part of the partnership profits having arisen outside British

India. The Privy Council also pointed out the practical difficulties that may be encountered in determining the total income of the partner and their

Lordships felt that the question of determining what part of the income of the firm should be excluded would involve reading into the section things

which are not there, which would complicate its application and would lead to practical difficulties. The decision of the Privy Council was also

noticed with approval by the Supreme Court in R.M. Ramanathan Chettiar''s case (cited supra). Ever since the decision of the Privy Council, the

law laid down therein has been consistently followed and it is the share income of the non-resident partner that is the subject-matter of

consideration for assessment under s. 23(5)(a) of the Act 1922 or under s. 182(3) of the Act, 1961. The submission of the learned senior counsel

for the Department that under the Act, 1922, the share income of a nonresident partner was assessed in the hands of the firm at a maximum rate

and it did not make any difference whether his other income was included or not is bereft of force as the Privy Council as well as this Court held

that on the interpretation of s. 23(5)(a) of the Act, 1922, there is no scope for exclusion from the share income any amount and the said

interpretation of s. 23(5)(a,) of the Act, 1922, was independent of and de hors the applicability of the maximum rate of tax on the share income.

Therefore, the mere fact that the share income of a nonresident partner is now assessed at a progressive rate does not warrant any different

interpretation to be placed on the provisions contained in s. 182(3) of the Act, 1961. Further, the decision of the Privy Council was followed by

this Court in Gnanam & Sons case (supra) and also by the Supreme Court, and the law laid down by the Privy Council has been holding the field

for more than five decades and we are of the opinion, there is no warrant or no need to upset the settled law well settled by the Privy Council, the

Supreme Court and also by this Court. In our opinion, the principles laid down by those decisions would equally apply to the interpretation of the

provisions contained in s. 182(3) of the Act, 1961 as well, and the provisions of s. 182(3) of the Act 1961 are not in any way differently worded

from s. 23(5)(a) of the Act, 1922, and in fact they are in pari materia.

Learned senior counsel for the applicants also referred to the decision of the Supreme Court in the case of Municipal Corpn., Indore vs. R.B.

Seth Hiralal AlR 1968 SC 642. We are, however, of the opinion that the aforesaid decision has no application to the facts of the case as in the

said decision, the Supreme Court was construing the word, ''if'' found in s. 79(2) of the Madhya Bharat Municipalities Act G/1954) and held that

the word, ''if'' must be read as ''as if'', because the word ''if'' by itself makes no sense. In our opinion, the said decision has no application to the

interpretation to be placed on s. 182(3) of the Act, 1961.

We, therefore, hold that on the interpretation of s. 182(3) of the Act 1961 for the purpose of determination of tax payable by the firm in respect

of the share income derived by a non-resident Partner, his share income alone should be considered and tax determined accordingly and his

income from other sources would not come for consideration for the purpose of determination of tax payable by the firm in respect of the share

income derived by a non-resident partner. Accordingly, we approve the decision in CIT vs. Skinivas & Co. (supra).

In the result, we answer the first common question of law referred to us in T.C. Nos. 157 to 160 of 1984 and the sole common question in

T.C. Nos. 366 and 367 of 1984 in the three tax cases in the affirmative and against the Revenue. No costs.

OPEN