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Issues Involved:
1. Whether the assessment of the share income of the non-resident partner under the second proviso to section 23(5)(a) of the Indian Income-tax Act in the hands of the assessee firm is justified in law. 2. Whether the levy of tax at the maximum rate is correct. Issue-wise Detailed Analysis: 1. Assessment of Share Income of Non-Resident Partner: The primary issue is whether the assessment of the share income of the non-resident partner under the second proviso to section 23(5)(a) of the Indian Income-tax Act, 1922, in the hands of the assessee firm, is justified in law. The assessee argued that under section 23(5)(a), the share income of each partner of a registered firm should be included in the total income of each partner and assessed accordingly. They contended that the total income of the non-resident partner should be determined, which includes income, profits, and gains as per section 4(1). However, section 4(1)(c) excludes income accrued outside the taxable territories unless derived from a business controlled in India or brought into the taxable territories. Therefore, they argued that the non-resident partner's income, which arose outside the taxable territories and was not brought into India, should be excluded, resulting in nil taxable income under the second proviso. Upon close reading, the court found that section 23(5) deals with the assessment of the total income of the firm and its partners. For registered firms, the total income of each partner, including their share of the firm's income, is assessed, and the payable sum is determined. The second proviso specifically addresses non-resident partners, stating that their share of the firm's income is assessed on the firm at the applicable rates as if assessed on them personally. Thus, the court concluded that the proviso does not require the determination of the total income of the non-resident partner but only their share of the firm's income, making it liable for assessment by the firm. 2. Levy of Tax at the Maximum Rate: The second issue is whether the levy of tax at the maximum rate is correct. The assessee claimed that section 17, which deals with the determination of tax payable by non-residents, was incorrectly applied. Section 17(1) states that the tax payable by a non-resident on their total income shall be at the maximum rate unless they opt to be assessed on their total world income. The assessee argued that the non-resident partner's income, arising in Ceylon and not received in the taxable territories, should be excluded from the total income. The court held that section 17 should be construed in conformity with section 23(5). Section 23(5) specifies that the non-resident partner's share of the firm's income is assessable, not their total income. Therefore, for tax purposes, the non-resident partner's share in the firm income is considered the total income. The court reasoned that it is impractical for the department to determine the total income of a non-resident partner without their cooperation. Hence, the rate applicable to the non-resident's share of the firm's income is the maximum rate as per section 17. Conclusion: The court concluded that the assessment of the share income of the non-resident partner under the second proviso to section 23(5)(a) in the hands of the assessee firm is justified in law. Additionally, the levy of tax at the maximum rate is correct. Both questions were answered in the affirmative and against the assessee.
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