GNANAM AND SONS vs COMMISSIONER OF Income Tax, MADRAS.

SRINIVASAN J. - This is a reference u/s 66(1) of the Indian Income Tax Act, 1922, and the following two questions have been referred to us by

the Income Tax Appellate Tribunal of Bombay :

Whether the assessment of the share income of the non-resident partner under the second proviso to section 23(5)(a) of the Indian Income Tax

Act in the hands of the assessee firm is justified in law ?

Whether the levy of tax at the maximum rate is correct ?

The facts leading to this reference are briefly these. A firm, consisting of four partners, styled Gnanam and Sons, Colombo, is carrying on business

in Colombo. This firm is an admittedly resident and ordinarily resident firm in the taxable territories. Of the four partners, three are also admitted to

be resident in India. One of the partners, Kumaraswamy, is a non-resident, and his share income was computed at Rs. 3,667 for the assessment

year 1951-52 and Rs. 4,337 for the assessment year 1952-53. The Income Tax Officers took proceeding u/s 34 of the Act after obtaining the

prior sanction of the Commissioner and made orders of assessment on the firm under the second proviso to section 23(5)(a). In making these

assessments, he calculated the tax payable by the application of section 17 of the Act, which provides for the levy of the tax at the maximum rate.

The assessee, the firm, appealed to the Assistant Commissioner of Income Tax and to the Tribunal unsuccessfully. The upon an application for

reference was made with the result that the matter is now before us.

It has been argued on behalf of the assessee that u/s 23(5)(a), in the case of a registered firm, the share income of each partner of the firm is liable

to be included in the total income of each partner and assessed; and the sum payable by such partner on the basis of such assessment. The

argument proceeds that it is the total income of the non-resident partner that has has to be determined for the purpose of the application of the

second proviso to the above section. Turning to the definition of ""total income,"" it is claimed that it is the total amount of income profits and gains

referred to in sub-section (1) of section 4, the computation of which must be made in the manner laid down in the Act. u/s 4(1)(c), however, in the

case of a person not ordinarily resident in the taxable territories, the income, profits and gains which occur or arise to him without the taxable

territories shall not be so included unless they are derived from a business controlled in, or a profession or a vocation set up, in India or unless they

are brought into or received in the taxable territories by him during the year. Pursuing this line of argument, it is contended that what sub-section (5)

(a) of section 23 intends to tax is the total income of each partner of the firm, including therein his share of its income, profits and gains of the

previous year, and this concept of the total income must be carried into the proviso relevant to a non-resident partner. It would accordingly mean

that since this income arose wholly outside the taxable territories and was not brought into the taxable territories, it has to be excluded by the

operation of section 4(1)(c) of the Act, with the result that the income that is liable to be taxed under the second proviso is nil.

This line of argument appears to be simple, but it seems to us that on a close reading of the section, the expected result cannot possibly follow.

Section 23 of the Act, which relates to assessment, provides for the assessment of the total income of the assessee, and for the determination of

the tax payable by him in sub-sections (1), (3) and (4). The special case of a firm is dealt with in sub-section (5). Sub-section (5)(a) deals with

registered firms and (5)(b) deals with unregistered firms. It is admitted that this firm is a registered firm. The relevant part of section 23(5) reads :

(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 to him of the basis of such

assessment shall be determined :.........

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 of determined as

payable shall be paid by the firm.

Section 23(5) commences by saying :

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.

It is clear from the wording of the prefatory part of the sub-section that in the case of a firm, the total income of the firm has first of all to be

determined. Sub-sections (a) and (b) lay down what consequences follow according as the firm is a registered or an unregistered one. Sub-section

(5)(a) falls naturally into two parts. The first part deals with the case where all the partners of the firm are resident in the taxable territories, in which

event the total income of the firm as assessed in not brought to tax but the total income of each partner of the firm including therein his share of such

assessment is determined. In the latter part of the section covered by the second proviso, the case where any of such partners happens to be a

non-resident has been dealt with. While in the case of a partner who is a resident in the taxable territories, the earlier part of the section provides

for the assessment of his total income, including therein his share of the firms income, in the latter part of the section dealing with a non-resident, the

total income of the non-resident partner does not come in for assessment at all. It is only his share of the firms income that is made liable for

assessment, and the sum so determined as payable is made payable by the firm. The argument that this proviso calls for the determination of the

total income of the non-resident partner therefore fails. On the language of this proviso, there does not, therefore, appear to be any ground for

computing the income of non-resident partner with reference to section 4(1) of the Act and for excluding the income derived without the taxable

territories by the operation of section 4(1)(c). It is obvious that such a course would be called for only when the computation of the total income of

the assessee is undertaken.

Nextly, it is claimed that the department and the Tribunal erred in holding that section 17 is applicable to the case, and that the income so assessed

was liable to be taxed at the maximum rate. Section 17 deals with the determination to tax payable in certain special cases. It lays down : ""(1)

When 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 which would be payable on his total income at the maximum rate, plus......"" There is a

proviso to this section which enables the assessee to declare by notice in writing to the Income Tax Officer that the tax including super-tax payable

by him or on his total income shall be determined with reference to his total world income. This proviso indicates that an option is given to a non-

resident called upon to pay tax u/s 17(1)(a) to agree to be assessed with reference to his total world income. He is required to indicate his option

by a notice in writing to the Income Tax Officer. 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, and it has been found by the Tribunal that an application in this regard was made by the firm long after

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

It is true that section 17 refers to the total income of a non-resident, and since total income, according of the definition, would exclude the income

which accrued or was derived from without the taxable territories, the argument is advanced that the incomes covered by this reference having

arisen in Ceylon, and not having been received within the taxable territories, ought to be excluded. It seems to us that his argument must fail on a

proper construction and upon a combined reading of section 23(5) and section 17. Section 17 deals with the special case of a non-resident, and

provides that the tax payable by such non-resident should be calculated at the maximum rate. It is true that this section uses the expression ""total

income"", but in the case of a non-resident, who is a partner of a resident registered firm, this expression ""total income"" should be construed in

conformity with the determination of the taxable income of such non-resident partner u/s 23(5). This section specifics that the non-residents share

of the firms income in assessable and does not render the determination of the taxable income subject to the other provisions of the Act. That being

so, the department is entitled to consider his share in the firm income as the total income for the purpose of levy of tax. It is obvious that in the case

of a non-resident, it is impossible for the department to be aware without information furnished by such resident of all his sources of income in the

income in the non-taxable territories or elsewhere so that the total income within the meaning of section 2(15) cannot possibly be worked out. If

the total income of such a non-resident person could be assessed in the same manner as the total income of the resident partners of the firm is

assessed under the first part of sub-section (5), clause (a), there would be no difficulty in making an assessment of the tax at the rates applicable to

that income. But that is not the case. Nor is it open to department to call upon the non-resident to submit a return of his total income. It seems to

us, therefore, that in the special case of a non-resident partner of a resident firm, the rate which would be applicable to him if his share of the

income were assessed on him personally is the rate that is laid down in section 17 of the Act.

In coming to the above conclusion we are further supported in our view by section 3 of the Act as well. u/s 3 tax is payable in respect of the total

income of the previous year of every individual, Hindu undivided family, company and local authority and of every firm and other association of

persons or the partners of the firm or the members of the association individually. One of the taxable entitles is accordingly a firm and though in the

case of a registered firm, the tax payable by the firm itself is not determined, but the share income of each of these partners is assessed to tax in the

hands of each such partner, including such share income in the total income of such partner, the assessee in undoubtedly the firm itself, and it is only

as a special privilege for registered firms that the levy of tax is made upon the individual partners. This concessions which is given by sub-section

(5)(a) is taken away in a case where any partner of the firm happens to be a non-resident and cannot consequently be reached by the taxing

authorities. It seems to be for that the levy of tax is made on the firm itself in respect of the share income of such non-resident partner at the rate at

which such a non-resident would be liable to pay tax. This part of the provision of the proviso clearly brings section 17 into operation.

It was argued by Sri Srinivasan for the assessee that the decision in Seth Badridas Daga v. Commissioner of Income Tax, relying upon which the

Income Tax authorities have made the assessments and the Tribunal had dismissed the appeals, does not apply to the facts of the present case. A

careful reading of this decision, however, inclines us to the view, that the very point that has been raised by the assessee in this case demanding the

exclusion of that portion of the income which arose outside the taxable territories, viz., the share income of the non-resident partner of the assessee

firm, came in for examination by the Judicial Committee, and it was clearly held that a non-resident partner of the resident firm is 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 u/s 4(1)(c)

of the Act. The facts of that case were that a firm had income which accrued to it both within and without the taxable territories. The firm was a

resident in the taxable territories. Some partners of the firm were not resident in British India. When the whole of their shares of the firm income

was included in the total income for the purpose of Income Tax, they objected and claimed to be enabled to exclude a proportion of those shares

corresponding to the proportion of the firm; s income which arose or accrued outside British India. Their Lordships dealt specifically with the

second proviso to section 23(5)(a) and observed that this section while laying down that the share of such a partner shall be assessed on the firm at

the rates which would be applicable if it were assessed on him personally, makes no provision for any deduction form that share in respect of any

part of the partnership profits having arisen outside British India. They proceeded to point out the difficulties that would be encountered in

determining what part of the income of the firm was such that if it were income of a person not resident of the firm was such that if it were income

of a person not resident or not ordinarily resident in British India would not be part of his total income within the meaning of the Income Tax Act.

Apart from these difficulties, such a contention, in the view of their Lordships, would involve reading into the section things which are not there,

which would complicate its application and would lead to practical difficulties. But they clearly laid down that in the case of a non-resident partner

of a resident firm, his share of the firms of the income is not liable to be reduced in any manner by resort to section 4(1)(c).

The result is that both the question are answered in the affirmative and against the assessee. The assessee will pay the costs of the respondent.

Counsels fee Rs. 250.

Question answered in the affirmative.