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Judgment
Kumaraswami Sastri, J.—The assesset prior to the 5th November, 1925, was a member of a joint undivided family consisting of his father
and brothers. The joint family so constituted was entitled to 50|/6ths share in a money-lending business carried on at Taiping in the Federated
Malay States. On the 5th of November there was a partition amongst members of the joint family and in that partition the interest of the family in
the Taiping"" business as a going concern fell to the share of the assessee. Prior to the date of the partition there had been a remittance to the joint
family of Rs. 29,218 in the year Krodhana (13th April, 1925 to 12th April, 1926). Subsequent to the partition there was a further remittance of
Rs. 15,037. These sums were remitted not in one lump sum, but that makes no difference.
The year of account in the present case is Krodhana (13th April, 1925 to 12th April, 1926), and the year of assessment 1926-27. The accounts
were kept on cash basis.
The Income Tax Officer overruled the objections of the assessee and assessed the assessee on these sums as being foreign profits brought into
British India and taxable u/s 4(2). Hence this reference.
The contention for the assessee is that, as he got the Taiping business for his share of the joint family, what he got was capital and that he could
not be taxed as having received any profits. It is also contended that as the moneys were received by him as a member of the joint family, he could
not be taxed, and it is the joint family that should be taxed and not the assessee individually, that u/s 14 of the Income Tax Act he is not liable to
assessment, that the fact that the joint family ceased to exist during the year of assessment does not make any difference so far as he is concerned,
that there was no provision in the Act for taxing the joint family dissolved during the year of assessment or account, and that this defect has only
been removed by Sections 25 (a) and 26 inserted by an amendment of the Act (III of 1928). It is also contended that Section 26 can have no
application as the firm is situate outside British India and it is only the income that is brought into British India that is taxable.
There is no dispute about the facts as set out. Section 4(2) eng
profits isiness accruing or arising without British India Jritish India shall, it they are received in or be deemed to have accrued or arisen in British
gains of the year in which they are so received g the fact that they did not so accrue or arise in they are so received or brought in within three year
in which they accrued or arose.
It is therefore clear that had the joint family of which the assessee was a member continued without partition during the year of assessment, the
joint family would have been taxable in respect of the sums of Rs. 29,218 and Rs. 15,037 received in British India, as it is not disputed that the
members of the joint family were residents in British India and that the sums remitted were profits.
Section 26 as it stood in 1925-26 ran as follows:
Where any change occurs in the constitution of a firm or where any person has succeeded to any business, profession or vocation, the assessment
shall be made on the firm as constituted, or on the person engaged in the business, profession or vocation, as the case may be, at the time of the
making of the assessment.
I do not think that the contention that Section 26 has application only to firms in British India and has no application to firms outside British India
can be accepted.
Section 4(1) makes the profits of a company outside British India taxable if brought into British India. There is nothing in Section 26 which limits
the scope of the section to firms in British India. Section 4 declares that the income of a foreign firm is taxable. In dealing with the income which is
so taxable and determining who is the person to pay the tax, there is no reason why the provisions of Section 26 should not be applicable. Section
26 only deals with the persons who are to be assessed. Where there is a change, I am of opinion that Section 4 enacts when the profits of a foreign
firm are taxable and Section 26 states whom you have to reach to collect the tax. The mere fact that the firm if it brought no profits into British
India would not be taxable does not affect the question. Any enquiry for the purpose of ascertaining whether the sum is taxable or not and whether
it is profits or capital got back and who is to pay the tax is within the scope and jurisdiction of the Income Tax officers, and for that purpose the
accounts of the foreign firm may be scrutinised. It is not therefore correct to say that in the case of foreign firms whose profits are brought into
British India and taxable u/s 4(2), thae other provisions of the Income Tax Act are inapplicable.
The next question is whether in the case of partition of an undivided family, the members of which are carrying on business, Section 26 applies,
where during the year in question the business falls to the share of one or more of the members. Having regard to the wording of Section 26, I do
not see anything to prevent its application. Prior to the partition, all the members of the joint family constituted the firm. By reason of the partition
certain members who constituted the firm ceased to have any interest in the firm and their interest by reason of the partition devolved on the person
or persons to whom their shares in the business have been allotted. It is difficult to distinguish this case from the case of an ordinary partnership
where, there are say, four parties and three of them retire from the business assigning their interest to the fourth partner and the fourth partner
continues the business. I am of opinion that in cases where there has been a partition of an undivided Hindu trading family, Section 26 applies and
the person who becomes entitled to the business during the year in question cannot escape liability unless he can bring himself within any other
section exempting him from liability.
The next question is whether in the case of a partition amongst the members of a joint family where a person becomes entitled on partition to a
foreign business as his share, the profits earned in the year in which the partition takes place lose the character of profits as being merged in the
capital and should be treated as the capital of the person who gets the business on partition.
The argument of Mr. Krishnaswami Aiyangar for the assessee is that where a partition takes place between the members of an undivided
family, a person in consideration of his share in all the joint family properties gets a particular item which presumably is equivalent to his share in the
properties which were clubbed together for ascertaining his share and therefore it should be taken that what he gets is not profits or capital in the
business but the value of the whole of the business as representing his share and so far as he is concerned it is his capital.
It is argued that the position is similar to that where a limited company is wound up and the assets distributed, where there is no question of
taxable profits as regards the shareholders to whom the assets are distributed.
Reference has been made to Inland Revenue Commissioners v. Burrell (1870) 13 W.R. 209 where it was held that on the winding up of a
limited company, the undivided profits of past years and the year in which the winding up occurred, were assets and not profits for the purpose of
taxation and to Inland Revenue Commissioners v. Blott. Inland Revenue Commissioners v. Groenwood (1870) 13 W.R. 209 where it was held
that where a limited company passed a resolution that out of its undivided profits a bonus should be paid to the shareholders and that such payment
should take the form of certain shares being allotted to them, the shares so allotted could not be treated as part of the total income for the purpose
of super-tax.
I do not think the principle of these cases has any application to cases where on a partition between the members of a joint family a business as
a going concern is allotted to a share of one member. It is not suggested in the present case that, when the business was allotted, the accounts of
the business were closed, profits ascertained and such ascertained profits added to the capital and a new business in which this capital was
invested was carried on. Nor is it suggested that the business was wound up. The profits remained as profits, the business went on as before and
the only change was that instead of all the members of the joint family being interested in the business, one of them acquired the interests of the
others and became the sole proprietor. So far therefore as the sum of Rs. 15,037 received by the assessee after the partition is concerned, I am of
opinion that it is taxable.
As regards the sum of Rs. 20,218 received before the partition, it is not disputed that this sum was received by the joint family of which the
petitioner was a member, and it seems to me that having regard to the provisions of Sections 14 and 16 the assessee is not taxable.
In a case like the present we should read Sections 4 (2), 14, 16 and 26 together. No doubt Section 26 says that, when there is a change, the
person liable is the person engaged in the business at the time of making the assessment. But the section does not prevent him from claiming any of
the exemptions conferred by the other Sections of the Act.
Section 14(1) runs as follows:
The tax shall not he payable by an assessee in respect of any sum which he receives as a member of a Hindu undivided family.
(2) The tax shall not be payable by an assessee in respect of--
(a) any sum which he receives by way of dividend as a shareholder in a company where the profits or gains of the company have been assessed to
Income Tax; or
(b) such an amount of the profits or gains of any firm which have been assessed to Income Tax as is proportionate to his share in the firm.
It will be noted here that, while Sub-clause (2) only exempts cases where a company or a firm has already been assessed, Sub-clause (1) puts no
such limitation but states generally that the tax shall not be payable by an assessee in respect of any sum which he receives as a member of an
undivided Hindu family.
Provision is made in Section 3 for the taxation of undivided Hindu families, and it says that Income Tax can be charged on the income, profits
and gains of the previous year of every individual, company, firm and Hindu undivided family.
Section 16(1) runs as follows:
In computing the total income of an assessee sums exempted under the proviso to Sub-section (1) of Section 7 the provisos to Section 8, Sub-
section (2) of Section 14 and Section 15 shall be included.
Here again it will be noted that Section 14(1) is not to be included, i.e., any sum received by a member of an undivided Hindu family.
There was no provision in the Act until the recent amendment by which undivided families which became divided during the course of the year
could be reached. To remedy this defect the legislature amended the Act by enacting Section 25-A and by recasting Section 26 of the old Act.
Clause 1 of Section 25-A provides for an enquiry by the Income Tax Officer when a partition is alleged, and an order by him as to whether he
finds the partition proved. Clause 2 runs as follows:
Where such an order has been passed the Income Tax Officer shall make an assessment of the total income received by or on behalf of the joint
family as such, as if no separation or partition had taken place, and each member or group of members shall in addition to any Income Tax for
which he or it may be separately liable and notwithstanding anything contained in Sub-section (1) of Section 14, be liable for a share of the tax on
the income so assessed according to the portion of the joint family property allotted to him or it; *********Provided that all the separated
members and groups of members shall be liable jointly and severally for the tax assessed on the total income received by or on behalf of the joint
family as such.
In my view the provisions of Sections 14 and 16 being clear and the amendment introduced by Act III of 1928 being much later than the
period for which the income has been assessed, no consideration as to the inconvenience or as to any person escaping from taxation can arise.
There is no ambiguity in the Sections and the clear meaning of Section 14(1) is that where a member of an undivided Hindu family during the
period when the family is joint receives any portion of the income of the joint family, he is not liable to taxation but it is the joint family which u/s 3
should be charged. This is not a case where we have to construe a doubtful section.
In Parting v. Attorney-General (1869) L.R. 4 H.L. 100 Lord Cairns observed as follows:
I am not at all sure that, in a case of this kind--a fiscal case--form is not amply sufficient; as I understand the principle of all fiscal legislation, it is
this: if the person sought to he taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial
mind to be. On the other hand, if the Crown seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free,
however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute, what is
called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the
statute.
As observed by Lord Halsbury in Lord Advocate v. Flcmimg (1897) A.C. 145 in construing such Acts we have no governing principle of the
Act to look at; we have simply to go on the Act itself to see whether the duty claimed is that which the legislature has enacted.
Reference has been made by Mr. Patanjali Sastri to Section 5(1)(f) of the Act of 1886 and Section 12(1) of the Act of 1918 and it is argued
that all that was done by Section 14(1) of the present Act was to prevent double taxation and that if the undivided family ceased to exist, there is
no reason for the individual member who receives the sum not being taxed.
In the present case I fail to see any reason why one member of an undivided Hindu family should be taxed for a sum received by all the
members of the undivided family. The new amendment which I have referred to shows that the legislature intended that the member should only
pay a tax proportionate to his share. There is no question of any equitable consideration in cases where one member of an undivided family after
partition is sought to be made liable to pay tax on the whole sum which he and the other members of the family received before partition
irrespective of his share. However this may be, it seems to me having regard to the decisions I have referred to we cannot in a fiscal enactment
where the language is clear go beyond the plain meaning of the section. It is very probable that in the Income Tax Act of 1922 the legislature by
oversight or owing to bad draftsmanship omitted to prescribe for cases where there has been a partition in an undivided family, but it has now been
remedied by Act III of 1928. I do not think I can by any rule of construction practically make Section 25-A retrospective by enacting that the
same principle is to be applied to cases coming under the Act of 1922.
I am of opinion that the assessee is not taxable as regards the sum of Rs. 29,218 received before the partition by the joint family. Rs. 100 paid
in O.P. No. 127 of 1928 will be refunded by the Commissioner.
Odgers, J.
I agree.
Wallace, J.
I agree.