1965 (8) TMI 92 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of Section 15C of the Income-tax Act, 1922, in its application to a registered firm.
2. Determination of tax payable by a registered firm under Section 23(5)(a)(i).
3. Applicability of exemption under Section 15C to both the firm and its partners.

Issue-wise Detailed Analysis:

1. Interpretation of Section 15C of the Income-tax Act, 1922, in its application to a registered firm:
The core issue revolves around whether a registered firm can claim an exemption under Section 15C of the Income-tax Act, 1922, for profits derived from an industrial undertaking. The court noted that Section 15C provides that "no tax shall be payable by an assessee on so much of the profits or gains derived from any industrial undertaking." The term "assessee" includes a registered firm, as defined in Section 2(2) of the Act. The court emphasized that a registered firm is an assessee by whom tax is payable, thus making it eligible for the exemption under Section 15C.

2. Determination of tax payable by a registered firm under Section 23(5)(a)(i):
The court examined the assessment procedure under Section 23, particularly focusing on the distinction between registered and unregistered firms. For registered firms, the income is computed as a unit of assessment, and the tax payable is determined under Section 23(5)(a)(i). The court observed that the amendment made by the Finance Act, 1956, introduced a scheme where registered firms are liable to pay income tax at specially low rates. The court concluded that, in light of this scheme, a registered firm is entitled to claim exemption from tax on the exempted profits under Section 15C during the determination of tax payable by it.

3. Applicability of exemption under Section 15C to both the firm and its partners:
The court addressed the contention that granting exemption to both the firm and its partners would result in a double benefit. The court clarified that the tax assessed on the partners is their personal liability and not on behalf of the firm. Each partner is an assessee in their own right and is entitled to claim exemption on their share of the exempted profits. The court further explained that the legislative intent behind Section 15C is to ensure that no part of the exempted profits suffers tax, whether in the hands of the firm or its partners. The court also referred to Section 15C(4), which exempts dividends paid out of exempted profits from being taxed in the hands of shareholders, reinforcing the intent to avoid double taxation.

Conclusion:
The court concluded that the assessee, a registered firm, was entitled to exemption from tax in respect of Rs. 81,855, being the amount of exempted profits under Section 15C, in the determination of the tax payable by the assessee under Section 23(5)(a)(i). The court's answer to the question referred was in the affirmative, and it directed the Commissioner to pay the costs of the reference to the assessee.