M.S.S. Chidambaram Chettiar and Another vs The Commissioner of Income Tax

Alfred Henry Lionel Leach, C.J.—This reference arises out of an assessment of an undivided Hindu family the members of which are

M.S.S. Chidambaram Chettiar and Meyappa Chettiar. The assessees are partners in various money-lending firms in the Federated Malay States

and in Burma, and carry on the same kind of business at Karaikudi where they have their headquarters. One of their foreign firms does business at

Ipoh in the Federated Malay States. Owing to the financial depression which existed there this firm was compelled to take over in satisfaction of

debts due to it immovable properties which had been mortgaged as security for debts. The values of these immovable properties were treated as

representing in part the return of capital and in part profits. The total profits of the firm were calculated and it was found that they amounted to

$1,27,806 of which $74,570 was represented by land. The assessees'' share in the sum of $74,570 was $53,264. During the year of account

(1933-34) the assessees remitted from Ipoh to Rangoon, which was then in British India, sums amounting in the aggregate to Rs. 99,279. These

remittances the Income Tax authorities treated as being remittances of profits. The assessees objected to this, their objection being that the profits

represented by immovable properties were not capable of remittance. The Court directed the Commissioner of Income Tax u/s 66(3) of the Act to

refer the following question for decision:

The total profits of the assessees for the years 1930-31 to 1933-34 having been found to be $1,19,647 of which $74,570 represents immovable

properties taken over by the assessees from their debtors, should the Income Tax Officer in computing the profits available for remittance from the

Ipoh firm have excluded the sum of $74,570?

The Commissioner of Income Tax rightly points out that there is an error in the wording of the question. The sum of $74,570 was the total

interest of the firm in immovable properties, and the assessees'' share, as I have already said, was only $53,264.

In our opinion the question referred must be answered in the negative. The assessees cannot be allowed to withdraw money from the firm and

treat their interest in the immovable properties of the firm as representing their profits. They accumulated profits to the extent of $1,19,647 and out

of the common funds of the firm they made the remittances. The withdrawals from the firm must therefore be treated as withdrawals of profits. The

effect was to turn the immovable properties representing such profits into capital assets. The case comes within the principle stated by the House of

Lords in Scottish Provident Institution v. Allan (1903) 4 Tax Cases 591.

As the answer is against the assessees they must pay the costs of the Commissioner of Income Tax, Rs. 250.