1923 (7) TMI 2 - HC - Income Tax

Summary

Issues Involved:
1. Admissibility of interest paid to partners as an allowance under Section 10(2)(iii) of the Indian Income Tax Act.
2. The status of the firm as a "registered firm" for the financial year 1922-23 and its liability to super-tax.

Detailed Analysis:

1. Admissibility of Interest Paid to Partners as an Allowance:
The objectors claimed that the interest amounting to Rs. 42,882, paid to partners for money advanced during the year, should be treated as an "allowance" under Section 10(2)(iii) of the Indian Income Tax Act, and thus deductible from the net profits before assessment. The Assistant Commissioner, upon examining the firm's books, concluded that this money was not "capital borrowed for the purposes of the business" but was merely an advance of capital by the partners. This is essentially a factual determination, and the court found it challenging to frame a legal question from it. The court answered the question as follows: "No: such interest represents merely an assignment of a part of the net profits for the year in favour of partners who are regarded as entitled to such assignment by reason of special advances of capital made by them in the course of the year." The court emphasized that determining whether there has been an advance of capital by particular partners or a bona fide borrowing of money by the firm is a factual question in each case.

2. Status as a "Registered Firm" and Liability to Super-tax:
The objectors were required to pay Rs. 81,641-9-0 as super-tax for the year under assessment. They argued that they were a "registered firm" during the financial year 1922-23, as defined in Section 2(14) of the Indian Income Tax Act. The Commissioner and Assistant Commissioner held otherwise, and the question was referred to the court: "Whether, when the firm did not apply for registration as prescribed by statutory rules prior to the last day by which its return of income for the year was due, it can be held to be a registered firm for the year in question by filing the application prior to the assessment."

The court answered this question in the negative. The definition of a "registered firm" requires that the prescribed particulars be registered with the Income Tax Officer in the prescribed manner. The rules stipulate that the application must be made "on or before the date on which a return is due under Sub-section (2) of Section 22 of the Indian Income Tax Act." In this case, the return was due by the 5th of July, 1922, but the instrument of partnership was only executed on the 20th of July, 1922. Therefore, the objectors did not meet the criteria for a "registered firm."

The objectors contended that the Income Tax Officer had condoned the delay by accepting an application on the 2nd and 5th of January, 1923, and issuing a registration certificate effective from the 30th of January, 1923. The court dismissed this argument, stating that a mistake by the Income Tax Officer could not make the objectors a "registered firm" for the purposes of assessment for the financial year 1922-23. The certificate of registration could only take effect from the date of registration, and it was never intended to affect the liability for super-tax for the earnings of the calendar year 1921.

The objectors also argued that they were entitled to a generous interpretation of the fiscal enactment and claimed to be victims of chicanery by the Income Tax department. The court found no merits in these arguments, noting that the objectors failed to submit their income return and delayed producing their books of account. The court concluded that the objectors had lost their right to be dealt with as a "registered firm" for the financial year 1922-23 due to their failure to execute an instrument of partnership within the extended period allowed.

Conclusion:
The court answered the principal question in the negative, affirming that the objectors were not a "registered firm" for the financial year 1922-23 and were liable for the super-tax. The court ordered the assessees to bear the costs of the reference, including the fee certified by the Government Advocate.