COMMISSIONER OF INCOME TAX Vs. DWARKADAS VASSANJI

JUDGEMENT

(1.) THE assessee before us is one Dwarkadas Vassanji. He was a partner in the firm of Purshottam Laxmidas and his share was 12 annas. In 1941 business was commenced by a firm of the name of Vasantsen Dwarkadas and this firm filed a return of its income. The profits on the firm were assessed at Rs. 62,752 by the Income -tax Officer. He, however, came to the conclusion that the business which was carried on in the name of Vasantsen Dwarkadas belonged to Dwarkadas Vassanji and he refused an application for the registration of the firm of Vasantsen Dwarkadas. Vasantsen Dwarkadas preferred an appeal to the Appellate Assistant Commissioner and the Appellate Assistant Commissioner came to the conclusion that the business carried on in the name of Vasantsen Dwarkadas was really the business of Purshottam Laxmidas and that Dwarkadas had a 12 annas share in that business. From the decision of the Appellate Assistant Commissioner an appeal was preferred to the Tribunal. The Tribunal confirmed the opinion and the decision of the Appellate Assistant Commissioner that the business ofi Vasantsen Dwarkadas was the business of Purshottam Laxmidas, but it reduced the profits ascertained by the Income -tax Officer and confirmed by the Appellate Assistant Commissioner of Vasantsen Dwarkadas from Rs. 62,752 to 32,752; and the question that has been submitted to us is whether in the assessment of Dwarkadas it is competent to the Income -tax Department to include his 12 annas share in the sum of Rs. 32,752.

(2.) NOW , in the return of Dwarkadas he had shown an income of Rs. 1,23,299 and in this income was included the sum of Rs. 38,788 as being the profit coming to his share in the firm of Purshottam Laxmidas, and the question is whether Dwarkadas is liable to pay tax over and above the income of Rs. 1,23,299 on the 12 annas share in the profits of Rs. 32,752, which is Rs. 24,564. The contention of the assessee before the Tribunal which was accepted by the Tribunal was that the only partnership income of the firm of Purshottam Laxmidas on which he was liable to pay tax was the income which, had been ascertained as a result of the assessment of Purshottam Laxmidas and which had been allocated to his share, but there was no liability upon him to pay any tax on any additional partnership income ascertained bv the Department. In order to understand this contention it is necessary to look at Section 23(5). That sub -section deals with the assessment of a firm, and Sub -Clause (a) deals with the case of a registered firm and that sub -clause provides that when the assessment is of a registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm, including therein his share of, its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined. Therefore, under Section 23(5)(a), although the income of a registered firm has to be assessed,, the liability to pay tax is not upon the registered firm but is upon each partner to the extent of the profits of that firm which come to his share. The contention of the assessee is that when you are ascertaining the profits earned by a partner of a registered firm, the profits can only be ascertained in the manner laid down in Section 23(5)(a) and the liability to tax upon a partner in a registered firm can only arise provided the procedure laid down in Section 23(5)(a) is followed. It is urged that in this particular case Purshottam Laxmidas, which is a registered firm, was assessed, its total income was ascertained, the shares of the partners were ascertained, and the partners were made liable to pay tax on their respective shares in the profits of the firm of Purshottam Laxmidas. That having been done, it was not competent to the Department to add to the income of the assessee an additional amount which represented according to the Department further profits earned by the firm of Purshottam LaxmidaS.The contention is that the total income of the firm of Purshottam Laxmidas having been ascertained, the Income -tax Department cannot depait from the ascertainment arrived at of that total income and by adding to the income of the assessee in effect increase the total income of Purshottam Laxmidas.

(3.) THE contention put forward by the assessee receives considerable support from a decision of the Privy Council in - 'Badridas Daga v. Commr. I.T.', AIR 1949 PC 159. That was a case of a resident and registered firm which had been assessed to tax. Considerable part of the firm's income arose or accrued outside British India and was not brought into or received in British India, and two of the partners contended that they were not bound to include in the total income the whole of their share of the firm's income because they were not 'ordinarily resident' or 'not resident'; and the question that arose for the determination of the Privy Council was whether the contention of the partners was justified, which contention was put forward under the provisions of Section 4, Income -tax Act. The view taken by the Privy Council was that once the firm was assessed under Section 23(5) and the income of the partners ascertained, if the firm was a registered firm, the partners were liable to pay tax on their share and it was not open to them to claim any exemption under Section 4 on the ground that they were not 'ordinarily resident' or 'not resident'. Their Lordships rejected the argument put forward on behalf of the assessees that the provisions of Section 4 limiting the liability of persons 'not resident' or 'not ordinarily resident' in British India must be applied universally so as to' qualify or even override any subsequent provision in the Act dealing with a particular kind of income which is so framed as to exclude this limitation, and in rejecting this argument their Lordships pointed out that that argument neglected the opening words of Section 4, viz. "subject to the provisions of this Act", and contradicted the principle that the Act must be read as a whole. Then their Lordships go on to say (p.160):