COMMISSIONER OF INCOME TAX Vs. ARUN INDUSTRIES

JUDGEMENT

(1.) THIS reference made at the instance of the Commissioner raises a short but interesting question of law relating to the interpretation of S. 15C of the IT Act, 1922, in its application to a registered firm. It arises out of an assessment made on the assessee, a registered firm, for the asst. yr. 1961 62, the corresponding account year being Samvat year 2016. The assessee at all material times carried on business of extracting oil from oil cakes and the oil mill of the assessee was admittedly an industrial undertaking within the meaning of S. 15C. In the assessment for the asst. yr. 1961 62, the assessee claimed that out of its total income which was determined at Rs. 5,24,081, a sum of Rs. 94,392 was exempt from tax under S. 15C on the ground that it represented profits derived by the assessee from the industrial undertaking to the extent of 6 per cent. of the capital employed in the undertaking. This claim was allowed by the ITO to the extent of Rs. 81,855 but he granted exemption in respect of this amount only in the individual assessments of the partners in proportion to their respective shares and did not grant exemption in respect of this amount in determining the tax payable by the assessee under S. 23(5)(a)(i). The assessee did not dispute the correctness of the amount of profits exempted under S. 15C but was obviously dissatisfied with the order of the ITO in so far as it did not grant exemption in respect of this amount in the determination of the tax payable by the assessee under S. 23(5)(a)(i). The assessee, therefore, preferred an appeal to the AAC. The AAC took the view that the contention of the assessee that no tax was payable by the assessee on the amount of Rs. 81,855 exempted under S. 15C was correct and he accordingly directed the ITO to exempt the said amount from the levy of the tax payable by the assessee as a registered firm though it was liable to be taken into account for the purpose of ascertainment of the rate applicable on the balance of the income. The Department thereupon carried the matter in appeal to the Tribunal, but the Tribunal agreed with the view taken by the AAC and dismissed the appeal. It is this decision of the Tribunal which is challenged before us on behalf of the CIT in the present reference.

(2.) NOW , as we have pointed out above, there is no dispute between the parties in regard to the amount of the profits liable to be exempted under S. 15C. The only point in controversy is whether the assessee is entitled to exemption in respect of this amount in determining the tax payable by it under S. 23(5)(a)(i). The learned Advocate General appearing on behalf of the Revenue pointed out that a firm, whether registered or not, is a unit of assessment and where the assessee is a registered firm, tax on the income of the firm is recovered through two channels, one directly from the firm and the other through its partners ; it is the firm which pays the tax, in the one case by itself and in the other through its partners and tax in both cases is the tax of the firm or, in other words, the tax of the firm consists of two components, one being paid by the firm itself and the other being paid by the partners on behalf of the firm and, founding himself on this premise, the learned Advocate General contended that when S. 15C provides that no tax shall be payable by an assessee on its exempted profits this provision in its application to a case where the assessee is a registered firm can justify an exemption either in respect of one component of the tax or in respect of the other component of the tax but the exemption cannot be given in respect of both the components of the tax, for the effect of doing so would be to give the benefit of S. 15C twice over to the assessee in respect of the tax payable by it. The only question which can, therefore, arise is, argued the learned Advocate General, in respect of which component of the tax the assessee should be granted exemption and to this query the answer can be only one, namely, that exemption should be granted to the assessee in respect of the tax payable through the partners, for otherwise registered firms which did not have income exceeding Rs. 40,000 during the relevant account year and which were, therefore, not liable to pay tax themselves under S. 23(5)(a)(i) would not get the benefit of S. 15C. Mr. H.C. Shah, learned advocate appearing on behalf of the assessee, on the other hand, urged that the scheme of taxation of a registered firm embodied in the provisions of the Act as amended from 1st April, 1956, was that a registered firm was a unit of assessment, the income of which was liable to be computed under S. 23(5)(a)(i) and after the computation was made, the income tax payable by the registered firm itself was liable to be determined under S. 23(5)(a)(i) and, also the share of each partner in the income of the registered firm was liable to be added to his other income and the tax payable by him on the basis of his total income including his share of the firm's income was liable to be determined under S. 23(5)(a)(ii), so that the income of the registered firm as computed under S. 23(5)(a) was liable to be taxed in the hands of the registered firm as also in the hands of the partners and since the registered firm and the partners were all distinct and separate assessees, each of them was entitled to claim the benefit of S. 15C in his or its assessment to tax in respect of the exempted profits comprised in his or its income. Mr. H.C. Shah contended that, when tax payable by the registered firm was sought to be determined, the registered firm could always contend that no tax was payable by it on the exempted profits under S. 15C and equally when tax payable by a partner of the firm was sought to be determined in his individual assessment, he could claim that no tax was payable by him on his share of the exempted profits under the same section. The assessee was, therefore, entitled, argued Mr. H.C. Shah, to the benefit of S. 15C in respect of the exempted profits in determination of the tax payable by it under S. 23(5)(a)(i). These were the rival contentions urged before us and they raised an interesting question of construction of S. 15C.

(3.) NOW in this connection it is necessary to notice not only the position prevailing in the relevant year of account but also the position which prevailed prior to the amendment made in S. 23(5) by the Finance Act, 1956, w.e.f. 1st April, 1956. Prior to the amendment, the position was as follows : Where the firm was unregistered, the tax payable by the firm itself was determined as in the case of any other distinct entity and the demand or levy was also made on the firm itself. On the other hand, where the firm was registered, the firm did not itself pay the tax and, therefore, the tax payable by the firm was not determined ; but each partner's share in the firm's profits was added to his other income, the tax payable by each partner on the basis of his total income (including his share of the firm's profits) was determined, and the demand or levy was also made on the partners individually. In either case, there was no double taxation. If the firm was registered, the tax was collected from the partners individually and no levy was made on the firm itself. If the firm was unregistered and the tax had been paid by the firm itself, no tax was payable by the partners in respect of their respective shares which had already borne tax in the hands of the firm (vide S. 14 (2)(a)). This position obtained not only in respect of income tax but also in respect of super tax. The amendment made by the Finance Act, 1956, did not make any change in this scheme barring one material difference and that was that income tax at specially low rates was, under the amendment, assessable on a registered firm, though no super tax was at all still assessable on it.