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PETITIONER: RM.  RAMANATHAN CHETTIAR ETC.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, MADRAS

DATE OF JUDGMENT: 30/04/1970

BENCH: GROVER, A.N. BENCH: GROVER, A.N. SHAH, J.C. HEGDE, K.S.

CITATION:  1970 AIR 1624            1971 SCR  (1) 465  1970 SCC  (2) 189

ACT: Income-tax  Act  (1922)  ss.  4(1)(c)  and  23(5)(a)  second proviso--Share of income derived outside taxable territories by firm included in income of non-resident partner-If can be excluded under s. 4(1)(c).

HEADNOTE: The  appellant  was  a non-resident individual.   He  was  a partner  of  a  registered resident firm  which  carried  on money-lending  business  in India and  Malaya.   The  entire income  of the firm for the assessment year  195657  accrued outside India.  Since before the Finance Act, 1956, under s. 23  (5)  (a) of the Income-tax Act, 1922, the firm  did  not itself  pay the tax on its income, but each partner’s  share in the firm’s profits was added to his other income and  the tax  was payable by each partner on the basis of  his  total income,  the assessee’s share of the foreign income  of  the firm  was  included  in his  total  income.   ’The  assessee claimed that it could not be so included under s. 4(1) (c). HELD:Under s. 4(1) (c) when a person was not resident in the taxable territory income derived by him outside the  taxable territories  was not to be included in his  taxable  income. But  under s. 4(1) (c) a nonresident partner of  a  resident firm was not entitled to exclude from his total income  such proportionate  share of the profits of the said  firm  which accrued or arose to it outside the taxable territories,  and which was in eluded in the total income of the partner under s.  23(5) for the purpose of assessing the firm, since s.  4 is "subject to the provisions of this Act" that is,  subject to s. 23(5) (a). [466 F-H; 467 C-E] Seth  Badri Das Daga & Anr. v. Commissioner  of  Income-tax, Central and United Provinces, 17 I.T.R. 209, applied. Gnanam  &  Sons v. Commissioner of  Income-tax,  Madras,  43 I.T.R. 485, approved.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 710 of 1967. Appeal  by special leave from the judgment and  order  dated

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June  30, 1965 of the Madras High Court in Tax Case No.  114 of 1962. K. Srinivasan and T. A. Ramachandran, for the appellant. Jagadish  Swarup, Solicitor-General, G. C. Sharma and B.  D. Sharma, for the respondent. The Judgment of the Court was delivered by Grover,  J.  This is an appeal by special  leave  against  a judgement of the Madras High Court rendered in its  advisory jurisdic- 466 tion in a case stated unders s. 66(1) of the Income-tax Act, 1922,  hereinafter referred to as the "Act".  The  appellant was  a  nonresident individual.  During  the  previous  year ending April 12, 1956 relevant to the assessment year  1956- 57,  he  was a partner of a registered resident  firm  which carried on money lending business in India and Malaya.   The entire  income  of  that firm for  the  assessment  year  in question  accrued outside India.  The appellant’s  share  in the  income  of the firm came to Rs. 62,612/- the  whole  of which was foreign income.  The appellant had also incurred a loss  of Rs. 8,484/- in his own business at  Madras.   While assessing  the appellant the Income-tax Officer set off  the loss in the appellant’s Madras business against the  foreign income and assessed him at the maximum rate as the appellant had  not filed a declaration in terms of the proviso  to  s. 17(1).   The Appellate Assistant Commissioner confirmed  the assessment.   An appeal was taken to the Appellate  Tribunal but  it failed.  Two questions of law were referred  by  the Tribunal :               (1)   "Whether  the  assessment  made  on  the               assessee, a non-resident, by including in  his               total  income his share of foreign  income  of               the  resident firm of Messrs.  K. V. Al.   Rm.               Rm.  Ramanathan Chettiar, is valid in law ?               (2)   Whether  the  levy  of the  tax  at  the               maximum rate is correct ?" The  High Court answered the questions referred against  the assessee  on the ground that the points were covered by  its previous  decision  in  Gnanam &  Sons  v.  Commissioner  of Income-tax, Madras(1). The  argument which was raised before the Madras High  Court in  the  above case (Gnanam & Sons) was based largely  on  a reading  of two provisions of the Act.  Under s. 4  (1)  (c) when  a person was not resident in the  taxable  territories the income, profits and gains which accrued or arose to  him without  the taxable territories were not to be included  in his  "taxable  income"  unless they  were  brought  into  or received by him in the taxable territories.  Sub-section (5) (a)  of s. 23 was intended to tax the total income  of  each partner  of  the  firm including therein his  share  of  its income profits and gains of the previous year.  The argument raised  was  that this concept of the total income  must  be carried  into the second proviso to s. 23(5) (a) to  a  non- resident  partner.   It  would, therefore,  mean  that  this income arose wholly outside the taxable territories and  had to  be excluded by virtue of the operation of s. 4 (1 )  (c) of the Act. (1)43 I.T.R. 846.                             467 Under  s. 23(5) when the assessee is a registered  firm  and its  income  has  been assessed the income  tax  payable  by itself  shall be:; determined and the total income  of  each partner  of  the  firm including therein his  share  of  its profits and gains of the previous year shall be assessed and the sum payable by him on the basis of such assessment shall

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be determined.  The provisions relating to payment of income tax  by the firm itself were introduced by the ,Finance  Act 1956.  The position before 1956 was that where the firm  was registered the firm did not itself pay the tax and therefore each partner’s share in the firm’s profits was added to  his other.income  and  the tax payable by each  partner  on  the basis of his total income was determined and the demand  was also  made on the partners individually.  After 1956  income tax at low rates. became chargeable on the registered  firms but  the partners continued to be assessed  individually  in the  same  way as before.  There can be no manner  of  doubt that the unit of assessment was the registered firm and when it was assessed and its total income computed the individual partners were taxed under s. 23 (5) (a) on their  respective shares of the firm’s income. The  Privy  Council  in Seth Badri Das  Daga  &  Another  V. Commissioner of Income-tax, Central and United  Provinces(1) took the view that a non-resident partner of a resident firm was  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, under s.  4(1) (c)  of the Act.  In Gnanam & Sons’(2) case the Madras  High Court  relied  on this decision and  repelled  the  argument raised on behalf of the assessee that the second proviso, to s.  23  (5) (a) called for the determination  of  the  total income of the non-resident partner.  It was held that on the language  of the proviso there was no ground  for  computing the income of the non-resident partner with reference to  s. 4  (1 ) of The Act and for excluding income derived  without the taxable territories by the operation of s. 4(1) (c). A  faint attempt was made to assail the correctness  of  the decision  of the Privy Council in Seth Badri  Das’s  case(1) but  the discussion of all the relevant provisions by  their Lordships is, with respect, so clear and cogent that we  are unable  to  find any infirmity or flaw therein.  It  is  not disputed  that if that decision lays down the law  correctly this appeal must fail. It is therefore dismissed with costs. V.P.S.                                                Appeal dismissed.. (1)17 I.T.R. 209. (2)43 I.T.R. 485. 468