1929 (3) TMI 6 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of foreign profits received by the assessee post-partition.
2. Applicability of Section 26 of the Income-tax Act to firms outside British India.
3. Tax liability of a member of a Hindu undivided family post-partition.
4. Interpretation of Sections 4(2), 14, 16, and 26 of the Income-tax Act.
5. Impact of the amendment by Act III of 1928 on tax liability.

Detailed Analysis:

1. Taxability of Foreign Profits Received by the Assessee Post-Partition:
The assessee, prior to November 5, 1925, was part of a joint undivided family engaged in a money-lending business in Taiping, Federated Malay States. Post-partition, the assessee received Rs. 15,037, which the Income-tax Officer deemed taxable under Section 4(2) as foreign profits brought into British India. The court held that the sum of Rs. 15,037 received post-partition was taxable, as the business continued and the profits remained as profits, not capital.

2. Applicability of Section 26 of the Income-tax Act to Firms Outside British India:
The court rejected the contention that Section 26 applies only to firms within British India. Section 4(1) makes foreign profits taxable if brought into British India. Section 26 deals with the persons to be assessed, and there is no limitation restricting its application to firms within British India. Thus, Section 26 applies to foreign firms whose profits are brought into British India.

3. Tax Liability of a Member of a Hindu Undivided Family Post-Partition:
The court examined whether the assessee, as a member of a partitioned family, could be taxed individually. Section 14(1) exempts sums received by a member of a Hindu undivided family from tax. The court held that the assessee was not taxable for the Rs. 29,218 received before the partition by the joint family, as per Sections 14 and 16. The amendment by Act III of 1928, which addresses tax liability post-partition, was not applicable retroactively.

4. Interpretation of Sections 4(2), 14, 16, and 26 of the Income-tax Act:
The court emphasized reading Sections 4(2), 14, 16, and 26 together. Section 14(1) exempts sums received by a member of a Hindu undivided family from tax, while Section 26 specifies the person liable for tax post-change in business constitution. The court concluded that the assessee could claim exemptions under Section 14(1), and the joint family should be taxed under Section 3.

5. Impact of the Amendment by Act III of 1928 on Tax Liability:
The amendment introduced Sections 25-A and recast Section 26 to address tax liabilities post-partition. The court noted that the amendment was not retroactive and thus did not affect the assessee's case for the year in question. The court held that the assessee was not liable for tax on the Rs. 29,218 received before the partition, as the joint family was the taxable entity during that period.

Conclusion:
The court ruled that the assessee was taxable for the Rs. 15,037 received post-partition but not for the Rs. 29,218 received before the partition. The amendment by Act III of 1928 did not apply retroactively, and the assessee could claim exemptions under Section 14(1). The Rs. 100 paid in O.P. No. 127 of 1928 was ordered to be refunded by the Commissioner.