O. RM. M. SP. SV. Firm vs Commissioner of Income Tax, Madras

Jagadisan, J.—The questions referred u/s 66 of the Income Tax Act are as follow :

(1) Whether the assessee is entitled to both the parts of relief contemplated u/s 25(3) of the Act in respect of foreign businesses at Penang, Ipoh

and Kambar?

(2) Whether the applicant is also entitled to relief u/s 25(3) of the Act with regard to rental income from house properties owned by the foreign firm

which was discontinued in the year of account?

(3) Whether on the facts and in the circumstances of the case, the amount of $ 32,097 being recovered under the Malayan Debtor and Creditor

Ordinance are not assessable in the year of assessment 1952-53?

The assessee is a firm called O.RM.M.SP.SV. Firm. Prior to the constitution of this firm, the partners were members of Hindu undivided family.

The vilasam of the family was also O.RM.M.SP.SV. The family which consisted of one Meyyappa Chettiar and his two brothers carried on

money-lending business in the India and in the former Federated Malay States and it was assessed under the Indian Income Tax Act, 1918. There

was a disruption of the joint family status on June 2, 1938, and thereafter, the members of the family continued the business in the same places as

partners. In the course of the assessment for the year 1939-40, it was claimed by Meyyappa Chettiar, one of the members of the family, that

having regard to the severance of joint family status, the income of the family from April 13, 1938, to June 2, 1938, was not liable to be taxed by

reason of the provisions of sub-sections (3) and (4) of section 25. The Income Tax Officer accepted the fact of partition amongst the members of

the family, but he, however, rejected the contention that the family was not liable to pay tax of the profits for the said period. Meyyappa Chettiar

appealed to the Appellate Assistant Commissioner without success. This court directed to the Commissioner to refer the following question :

Whether the income of the family from April 13, 1938, to June 2, 1938, is not liable to be taxed by virtue of section 25(3) of the Indian Income

Tax Act?"" One of the contentions raised by the Commissioner by way of opposition to be claim of Meyyappa Chettiar was that there was no

discontinuance of the business as required by section 25(3) of the Act. It was held by this court that there was no discontinuance of the business

within the meaning of section 25(3). The view taken by this court was that when a Hindu undivided family carrying on a business, which was taxed

under the Act of 1918, becomes disrupted and the members continue the business thereafter as partners, there can be no discontinuance (which

means cessation), but only succession by the firm to the business of the family. This decision is reported in O.RM.M.SP.SV. Meyyappa Chettiar v.

Commissioner of Income Tax. It was the assessee firm which took over the business of the erstwhile Hindu undivided family. It may be noted here

that the Commissioner of Income Tax submitted in the statement, which he filed in this court during that case, that relief would be granted later on if

there happened to be any succession to or discontinuance of the firm as such.

The firm was dissolved on March 2, 1952. In the assessment for the year 1952-53, it applied for relief u/s 25(3) of the Act. The assessee

collected the sums of $ 12,545, $ 13,064 and $ 16,788 in the course of its business at Penang, Ipoh and Kambar respectively under the Debtor

and Creditor Ordinance of Malaya. These amounts became due and payable to the assessee on account of the re-valuation of the Japanese

currency under the terms of the said Ordinance. The Income Tax Officer held that the assessee was not entitled to relief u/s 25(3) of the Act, and

that the recoveries of the amounts under the Ordinance were income receipts liable to be taxed. The assessee preferred an appeal to the Appellate

Assistant Commissioner of Income Tax who substantially affirmed the decision of the Income Tax Officer but for a slight modification with which

we are not now concerned. In his opinion the claim for relief under the section 25(3) was not well founded and that the recoveries due to the

operation of the Malayan Ordinance should be deemed to be taxable receipts. The assessee went up on a further appeal to the Income Tax

Appellate Tribunal. With regard to the recoveries under the Ordinance, the Tribunal followed the decision of this court in M.L.M. Muthiah Chettiar

v. Commissioner of Income Tax and held that should be deletion of 32,097 dollars from the assessment.

This sum was arrived at as follow :

Full recoveries Interest Principal recoveries to

assessed recoveries be excluded

$ $ $

Penang 12,545 2,805 9,740

Ipoh 13,064 3,303 9,761

Kambar 16,788 4,192 12,596

42,397 10,300 32,097

On the question whether section 25(3) was applicable as claimed by the assessee the Tribunal held, that except for the income received from

house properties in Malaya, which is separately assessable u/s 9 of the Act, the assessee was entitled to its benefit. Both the assessee and the

department applied to the Tribunal for reference of questions of law to this court and the Tribunal granted the prayer. Questions Nos. 1 and 3 set

out above have been referred at the instance of the Commissioner of Income Tax and question No. 2 at the instance of the assessee.

It will be convenient to refer to the terms of section 25 forthwith. It is in the following term :

(1) Where any business, profession or vocation to which sub-section (3) is not applicable, is discontinued in the year, an assessment may be

made in that year on the basis of the income, profits or gains of the period between the end of the previous year and the date of such

discontinuance in addition to the assessment, if any, made on the basis of the income, profits or gains of the previous year. (Sub-section (2) is

omitted).

(3) Where any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income Tax Act, 1918

(VII of 1918), is discontinued, then, unless there has been a succession by virtue of which the provisions of sub-section (4) have been rendered

applicable, no tax shall be payable in respect of the income, profits and gains of the period between the end of the previous year and the date of

such discontinuance, and the assessee may further claim that the income, profits and gains of the previous year shall be deemed to have been the

income, profits and gains of the said period. Where any such claim is made, an assessment shall be made on the basis of the income, profits and

gains of the said period, and if an amount of tax has already been paid in respect of the payable on the basis of such assessment, a refund shall be

given of the difference...

(5) No claim to the relief afforded under sub-section (3) or sub-section (4) shall be entertained unless it is made before the expiry of one year from

the date on which the business, profession or vocation was discontinued or the succession took place, as the case may be.

Section 25 deals only with income from business, profession or vocation. Sub-section (3) is clearly an exception to sub-section (1). Sub-section

(1) provides that where there is discontinuance of business, profession or vocation, an assessment can be made in the year of discontinuance on

the income between the end of the previous year and the date of discontinuance in addition to the assessment of the income of the previous year.

Though normally it is only the income of the previous year which is taxed under the Act, this is a special rule in cases of discontinuance of business

whereby not merely the income of the previous year but also the income of the assessment year between the end of the previous year and the date

of the discontinuance is assessed to tax. Sub-section (3) provides that if the business, profession or vocation was charged under the provisions of

the Act of 1918, a different rule of computation of income should prevail. The ingredients of this sub-section are: 1. The business, profession or

vocation must have been charged to tax under the provisions of the Indian Income Tax Act, 1918. 2. That business must have discontinued. 3. On

such discontinuance no tax shall be payable in respect of the income, profits and gains of the period between the end of the previous year and the

date of discontinuance. 4. In addition to the privilege of non-payment of tax for that period, the assessee may further claim that the income, profits

and gains of the previous year shall be deemed to have been the income, profits and gains of that period. That is to say, the assessee can ask for

the substitution of the income, profits and gains from the end of the previous year to the date of discontinuance of income of the previous year and

claim a refund of tax difference if the substitution were to lead to such a result. The assessee, therefore, gets a double advantage : (i) non taxability

of the income between the end of the previous year and the date of discontinuance and (ii) the substitution of the income for that period for the

income of the previous year in so far as it may be advantageous to him.

The whole of the controversy in this case, in so far as question No. 1 is concerned, revolves on the question whether the foreign business of the

assessee was at any time charged under the provisions of the Indian Income Tax Act, 1918. It is not now disputed by the department that the

assessee was taxed on remittances received from and out of profits from the foreign business. The finding of the Appellate Assistant Commissioner

in respect of assessment under the 1918 Act is in these term :...... The entire profits of the foreign business came to be assessed in the hands of the

appellant under the 1918 Act, not because it was a business income, but because such income had been remitted into British India. Therefore in

fact also it is not the foreign profits of a business that has been charged to tax but only the remittance which in the particular case was not less than

the profits of the year"".

We have, therefore, to proceed on the footing that the assessee received remittances from foreign parts from and out of its income in the foreign

businesses and those remittances were taxed under the 1918 Act. In fact, before the amendment of the year 1939, even a resident within the

taxable territory cannot be made liable for his foreign income unless it was received or accrued within the taxable territory. The 1939 amendment

however introduced a change whereby a residents total income comprises income accruing or arising in any part of the world. The assessee could,

therefore, have been taxed only on the basis of receipt of foreign income within the taxable territory. We may also assume that the amounts taxed

should have been received by the assessee as remittances of profits of foreign business. It is now settled law that an amount of income, profits or

gains can be received only once as income. If the income had been received a such in the foreign territory and thereafter transmitted to the taxable

territory, it would not be receipt of income. The following observation of Kania J. in Kamdar (B.M.), In re has been approved by the Supreme

Court in Keshav Mills Ltd. v. Commissioner of Income Tax at pages 241, 24 :

It is true that the words used in section 4(1)(a) relate to the first receipt after the accrual of the income. Once it is received by the party entitled to

it, in respect of any subsequent dealing with the said amount it cannot be said to be received as income on that occasion.

Though the facts warrant the conclusion in the present case that the assessee received all the income from his foreign business and suffered tax

on such receipt, the question still remains whether it can be said that its foreign business was charged to tax under the 1918 enactment.

We shall now refer to the origin and necessity of provisions like sub-section (3) and (4) of section 25 of the Act. Under the Indian Income Tax

Act of 1918, Income Tax was charged or the income of the year in which the return was made by the assessee. The income of the year however

could not be computed till the year ended. So the revenue ascertained the income of ""the previous year"" and levied tax on such income

provisionally. After the actual income was ascertained the assessment was completed. Then the assessee would be entitled to refund if he had paid

more tax on the provisional assessment or he would pay the deficiency if he had paid less. This mode of levying and collecting tax involved an

accounting between the revenue and the assessee and difficulties were encountered in the working of the Act. The 1922 Act introduced a change

and tax was exigible on the income of the previous year. This Act came into force on April 1, 1922. The income of the year 1921-22 suffered two

assessments, as the operation of the 1918 Act was kept in force for one year by virtue of section 68, which was subsequently deleted. In respect

of the year 1921-22, both the 1918 and the 1922 Acts applied and the result was a double assessment. Hence, the necessity for a provision like

section 25(3) arose. If the income of a business was assessed to tax under the 1918 Act and no relief was given in respect of the income during the

year of discontinuance the revenue would have collected tax for one year more than the total number of years of duration of the business. Section

25(3) was enacted to remove this inequity.

Turning now to the question in issue, we have first to take note and have regard to the language of the statute. The words of the section are

where any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income Tax Act, 1918, is

discontinued....."" Under the Act of 1918 business income was computed and assessed to tax u/s 9. Section 5 of that Act defined the classes of

income chargeable to Income Tax, analogous to the present section 6, and that included ""income derived from business"". Section 9 of the Act

enumerated the permissible deductions in the computation of the profits of the business. Regarding the scheme of taxation there is not much

difference between the 1918 and the 1922 Acts except for the radical change in regard to the computation of the income for the ""previous year

which was introduced by the 1922 Act in substitution of the income for the assessment year as provided under the 1918 Act. The charge on

business is really the charge on the income from the business. Income Tax is a tax on income, and not tax on property or tax on business etc.,

though for purposes of computation of income specific heads of charge are created. Whatever does not fall within the special heads, falls within

section 12, the residuary provision. Even emphasising the words ""on which"" occurring in section 25(3) it should be noted that the tax on business,

in the context, is a convenient description for tax on business income. The essential incidence of tax is upon the persons conducting the business in

respect of the income from such business. Where as assessee received money prior to 1939 in the taxable territory from foreign business income,

he was taxed only because income, though the business, as such, was beyond the purview of the taxing enactment. While it is true that the receipt

can be described as part or whole of the business income, as the case may be, it is equally true that the basis of taxation was not that it was

income, profits and gains of a business but that the assessee received in the taxable territory income which he earned beyond the territory.

We shall now refer to the decision of this court in Commissioner of Income Tax v. S.V.R.M. Palaniappa Chettiar. This has been very much

relied on by the learned counsel for the department, and indeed his submission is that that decision completely supports him, to contend that the

decision of the Tribunal is wrong. Learned counsel for the assessee has attempted to distinguish that case from the facts of the present case, and

we have to consider whether there is any real distinction. That was a case in which the assessee was a Hindu undivided family. The family was a

partner in a money-lending business carried on at Muor in the Federated Malay States. The family assets were partitioned and the share of the

family in the above said business at Muor was allotted to two of the members of the family. It was claimed that by the partition and the allotment of

the families share of the business to two of its members, there was a succession and on the basis of that succession the Hindu undivided family was

entitled to relief u/s 25(4) of the Act. The Tribunal upheld the assessees contention and the following question was referred to this court: ""Whether,

when a Hindu undivided family on a partition is succeeded to by one or more of its members in respect of the families share in the business of a

foreign firm and the family was assessed in respect of that share under the Act of 1918, the firm not having been assessed, is the family entitled to

relief u/s 25(4) of the Income Tax Act as amended by the Amendment Act of 1939?"" This court held that the family was not entitled to relief u/s

25(4), inasmuch as the business as such was not charged to tax under the 1918 Act. The following observation of Satyanarayana Rao J. at page

173 has been relied upon by learned counsel for the department :

The relief under sub-clause (4) is permissible only if the tax on the business was charged under the provisions of the Indian Income Tax Act, 1918.

If the foreign business at Muor was not and could not have been charged under the Act and the share in the profits of the family from that foreign

business was charged u/s 3 only on the receipt in British India, can it be said that the charge so made was a charge of a tax on the foreign business.

The income received by the joint family could not have been charged under the head income derived from business but only as a receipt u/s 3. The

argument, however, on behalf of the assessee by his learned advocate, Mr. Rajah Iyer, was that the words on which tax was at any time charged

should be construed as meaning with reference to which tax was at any time charged. In other words, the contention is that the income derived by

the assessee was in relation to a business and therefore the assessment of the income must be treated as an assessment of the business. No doubt,

under the provisions of the Income Tax Act, the tax is payable by an assessee but the assessment of the tax is on the basis of the various heads of

income derived by the assessee one of which is business. It cannot, therefore, be said that because tax was payable by the assessee on the profits

received from a business in a foreign territory such assessment is an assessment of the business.

Then again at page 174 bottom :

of course, if the assessee succeeded in establishing that in fact, though wrongly, such profits were taxed on the basis of a business carried on by the

assessee though in foreign territory the fact of such assessment might possibly enable the assessee to claim the benefit of section 25(4). But of this

there is no proof. It is possible to interpret section 25(4) as meaning that if in fact there was an assessment of the business carried on in a foreign

territory, though legally such assessment was not permissible, the requirement of the section is satisfied and it would not be now open to us to

question the legality of such assessment made under the provisions of the Act of 1918. It is unnecessary, however, to express any final opinion on

this aspect though the language of section 25(4) on which tax was at any time charged seems to indicate that such argument is possible.

We have no doubt that the learned judge, Satyanarayana Rao J. held that it would not be enough for an assessee claiming the benefit of section

25(4), which in terms is not different from section 25(3) - section 25(3) relates to discontinuance and section 25(4) relates to succession - to show

that he was assessed to tax on the receipts from a foreign business. The learned judge seems to be emphatically of the opinion that if the business

of the assessee was not or could not have been charged under the 1918 Act, the sub-section would not operate to give relief to the assessee.

There is no possibility of misunderstanding the observation of the learned judge, which, speaking with respect, seems to be quite clear. Learned

counsel for the assessee submits that that case has to be distinguished from the present case because what was received by the assessee family

was only a share of the profits of the foreign business, in which the family was a partner. Reliance is placed on the following passage in the

judgment of Satyanarayana Rao J. at page 17 :

The share in the profits of the joint family which were received in British India were alone subject to the charge and not the business.

But we are unable to understand what difference there could be between the assessee who was merely a partner of a foreign business and in

such capacity received his share and paid tax on that receipt and the assessee who was himself the sole proprietor of that business and paid tax on

the receipt from such business.

The case in Annamalai Chettiar v. Commissioner of Income Tax has been referred to by learned counsel for the assessee. There was a Hindu

undivided family consisting of a father and his son which carried in money-lending business in different vilasams at Penang. On 28th March, 1939,

there was a partition in the family under which some of the vilasams were allotted to the father and the rest were allotted to the son who was the

assessee. During the assessment year 1939-40 the assessee claimed that there was a discontinuance of the business within the meaning of section

25(3) of the Act, and as the business of the joint family was taxed under the Act of 1918, it was not liable to the taxed for the period between

April 13, 1938, and March 23, 1939. It was held that on partition the assets of the joint family were split up, and the joint family business no

longer continued its existence but was terminated, and that therefore there was discontinuance within the meaning of section 25(3) and the family

was taxed under the Act of 1918 was not mooted. The department did not contend in that case that the benefit of section 25(3) would not be

available to the assessee as there was no charge on the business under the 1918 Act. It is true that on the facts of the case the family conducted

business in foreign parts under various vilasams. But we are unable to treat this decision as authority for holding that an assessment on the receipts

from a foreign business would in effect be a charge of tax on the business income as such.

The distinction between tax on receipts derived from a source which being a foreign business was not taxable and tax on the income from

business as such as is real and merely verbal. If only a portion of the foreign business income is received in India, and that is taxed, as it can be, can

it be said that the assessees business which is the source is charged to tax. Obviously not. This is because the foreign business income of the

resident assessee could not be taxed prior to 1939 and what could be taxed was the remittance out of that income. The charge is on the remittance

and not on its sources. In this view of the matter, even if the entire income from the foreign business is remitted and received in taxable territory the

charge would not properly be said to be on the business source. This conclusion seems to follow inevitably from the language of section 25(3), and

cannot be resisted or overcome by equating the charge on business to a charge on the receipt of the income of the business. It may be that the

benefit of section 25(3) would be lost in cases where the assessee had only a business outside the taxable territories. But that is no reason for

putting a stained construction upon the statutory language or to extend it beyond its plain and grammatical meaning. With respect we follow the

decision of Commissioner of Income Tax v. Palaniappa Chettiar and particularly the observations of Satyanarayana Rao J. Learned counsel for the

assessee submitted that the decision requires reconsideration but we do not think so. It has stood the test of time and surely the principle of stare

decisis will apply. Question No. 1 is, therefore, answered in favour of the department and against the assessee.

Question No. 2 is really unnecessary in view of our answer to question No. 1. But in our opinion the conclusion of the Tribunal was right in

regard to the point raised by this question. Income from property, buildings, lands appurtenant thereto, ordinarily described as house property, is

charged u/s 9 of the Act. It is a separate head of charge like section 10 which covers income from business, profession or vocation. The house

property income can be assessed only u/s 9 and not u/s 10, even if the income is treated by the assessee as part of his business profits and even if

the income is derived in the course of the business of letting houses. It is the ownership of the property and the resulting income therefrom qua

owner that attracts assessment. There is no element of business in such ownership; nor can the ownership be submerged or effaced by the conduct

of the assessee dove-tailing it in a business activity. This is now settled law and no useful purpose would be served by referring to the decisions on

the subject. Section 25(3) deals only with business, profession or vocation. Property income cannot, under whatever circumstances derived, be

comprised in the category of business income. The Tribunal was, therefore, right in excluding the property income from the relief u/s 25(3), even if

the assessee is entitled to such a relief.

It is not necessary to discus question No. 3 as the point raised therein is covered by the decision of this court in M.L.M. Muthiah Chettiar v.

Commissioner of Income Tax. The formula adopted by the Tribunal in giving relief to the assessee is in accordance with that decision. Following

that decision the question is answered against the department and in favour of the assessee.

There will be no order as to costs.