The Commissioner of Income Tax vs P.T. Chengalvaroya Chettiar and Another

Two questions have been referred to us by the Commissioner of Income Tax, vis.:

(1) Whether the sum of Rs. 30,450 paid by the assessee to the Government under the instrument of lease dated 2nd July, 1930, is inadmissible as

a revenue expenditure; and

(2) Whether after dissolution of the partnership the Income Tax Officer had jurisdiction to assess the firm as a unit and whether Section 44 of the

Act gives jurisdiction to the officer both to make a joint and several assessment or whether the individual partners alone are liable to be assessed in

respect of their proportionate shares.

With regard to question No. 1, the facts are quite sufficiently, stated by the Commissioner of Income Tax in his letter of reference, but, quite

briefly they are that the assessee by a deed dated the 2nd July, 1930, got the exclusive right to excavate shells lying under Government property

for three years for a payment of Rs. 30,450 payable by certain instalments and described in the instrument as regards Rs. 10,150 (being one-third

of the amount stated) as ""the annual lease amount"". This sum of Rs. 30,450 was originally allowed to be deducted by the Income Tax Officer as

being a payment out of revenue and not a capital expenditure. Subsequently, having regard to this High Court''s decision in U. Chengalvaroya

Mudaliar v. The Commissioner of Income Tax, Madras (1934) 7 I.T.C. 323, that allowance was cancelled and the sum was treated as a capital

expenditure in the hands of the assessee. Hence this reference. In our view, the facts of this case are not distinguishable from the facts in

Chengalvaroya Mudaliar''s case. There it was held that having regard to the instrument, the expenditure was an initial expenditure without which the

assessee could not even have begun winning the shells and it was, therefore, a capital expenditure. We have had addressed to us a strenuous

argument by Mr. Subbaroya Aiyar that there is a very material distinction between the words in the instrument in this case to those in

Chengalvaroya Mudaliar''s case. He contends that as the words ""annual lease amount"" appear in the instrument in question here and do not appear

in the instrument in Chengalvaroya Mudaliar''s case, it renders the agreement in question a rental agreement and that full significance must be given

to the words ""annual lease amount"" and they must be taken as showing that the payment to be made under the instrument was a payment by way

of rent and therefore a revenue expenditure and not a capital expenditure as in Chengalvaroya Mudaliar''s case. We are unable to see that those

words make any material difference. The transaction in question is exactly the same as that in Chengalvaroya Mudaliar''s case and the use of the

words ""annual lease amount"" does not, in our opinion, alter its nature. The answer to the first question must be in the affirmative.

With regard to the second question, the assessment here was made by the Income Tax authorities u/s 44 of the Act which reads as follows:

Where any business, profession or vocation carried on by a firm has Sheen discontinued, every person who was at the time of such discontinuance

a member of such firm shall be jointly and severally liable for the amount of the tax payable in respect of the income, profits and gains of the firm.

The object of that section is perfectly clear. It is to enable the tax on the profits of a firm which has been discontinued to be got by the Income

Tax authorities and to prevent the avoidance of taxation, by the discontinuance of the firm. The words are, in our opinion, perfectly clear but Mr.

Subbaroya Aiyar contends that unless an assessment upon the firm has already been made before its discontinuance, which is not the case here the

partners of it cannot be assessed jointly after its discontinuance, because according to him the words ""tax payable"" in the section mean ""payable as

the result of an assessment already made upon the firm"". If this contention is correct, it leads to a strange result. The object of the section being

perfectly clear, viz., to get at the tax on the profits of the firm made before its discontinuance, and bearing in mind that that is its object, the result of

the contention, if correct, would be that the tax recoverable would be less than that recoverable if the business had not been discontinued. In such

a case the tax would have been upon the profits of the business but if a separate assessment is made upon the partners separately and not jointly

after the discontinuance of the business it is conceded that the tax recoverable would be less. We are unable to see why the fact that an assessment

has not been made upon the firm previous to its discontinuance should bring about such a result. It seems to us that ""tax payable"" means ""tax that is

due to be paid"", ""tax which the firm or partnership would be liable to pay if it had not been discontinued""; ""tax either found to be due already or

that will be found to be due in the future"". That being so, we are clearly of the opinion that the Income Tax authorities were correct in assessing the

partners of the discontinued firm jointly and severally in respect of the profits earned by the firm before it was discontinued.

Question No. 2 is answered accordingly.

The Income Tax Commissioner will get Rs. 250 costs.