9911796707
TMI Blog1965 (8) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... t ₹ 5,24,081, a sum of ₹ 94,392 was exempt from tax under section 15C on the ground that it represented profits derived by the assessee from the industrial undertaking to the extent of 6 per cent. of the capital employed in the undertaking. This claim was allowed by the Income-tax Officer to the extent of ₹ 81,855 but he granted exemption in respect of this amount only in the individual assessments of the partners in proportion to their respective shares and did not grant exemption in respect of this amount in determining the tax payable by the assessee under section 23(5)(a)(i). The assessee did not dispute the correctness of the amount of profits exempted under section 15C but was obviously dissatisfied with the order of the Income-tax Officer in so far as it did not grant exemption in respect of this amount in the determination of the tax payable by the assessee under section 23(5)(a)(i). The assessee, therefore, preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took the view that the contention of the assessee that no tax was payable by the assessee on the amount of ₹ 81,855 exempted under section 15C was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in respect of the tax payable through the partners, for otherwise registered firms which did not have income exceeding ₹ 40,000 during the relevant account year and which were, therefore, not liable to pay tax themselves under section 23(5)(a)(i) would not get the benefit of section 15C. Mr. H.C. Shah, learned advocate appearing on behalf of the assessee, on the other hand, urged that the scheme of taxation of a registered firm embodied in the provisions of the Act as amended from 1st April, 1956, was that a registered firm was a unit of assessment, the income of which was liable to be computed under section 23(5)(a)(i) and after the computation was made, the income-tax payable by the registered firm itself was liable to be determined under section 23(5)(a)(i) and, also the share of each partner in the income of the registered firm was liable to be added to his other income and the tax payable by him on the basis of his total income including his share of the firm's income was liable to be determined under section 23(5)(a)(ii), so that the income of the registered firm as computed under section 23(5)(a) was liable to be taxed in the hands of the registered firm as also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd then to determine the sum payable as tax. Sub-sections (1) to (4) set out alternative methods of computation or 'assessment'. In the normal case the person whose income is being computed is the person who pays the tax and for that case these sub-sections also provide for the Income-tax Officer taking the second step and determining the sum payable as tax. But the case of a firm is specially dealt with by sub-section (5)". This sub-section consists of two clauses: clause (a) deals with the case of a registered firm and clause (b) deals with the case of an unregistered firm and these clauses make a distinction between the assessment procedure in regard to a registered firm and that in regard to an unregistered firm. To appreciate the difference in regard to the assessment procedure, it is necessary to bear in mind that there are three distinct steps in assessment proceedings, (i) computation of the taxable income, (ii) determination of the tax payable and (iii) demand for the tax so found due. Now registration of the firm makes no difference for the purposes of the first stage, but it does make a difference for the purposes of the second and third stages. A firm being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of their share of the firm's profits. So there was double taxation, in the case of a registered firm, so far as income-tax but not super- tax was concerned, and, therefore, to obviate the resultant hardship, the legislature also introduced section 14(2)(aa) which, broadly stated, provided that no tax shall be payable by a partner of a registered firm, in respect of that portion of his share in the profits or gains of the firm as is equal to the difference between his share in the total income of the firm and his share in such total income excluding the income-tax, if any, payable by the firm. The object of this provision obviously was that, since the registered firm itself was now liable to pay tax, the divisible profits to that extent would stand reduced and, therefore, the partner of the registered firm should not be liable to pay tax in respect of the portion of the tax paid by the firm proportionate to his share which having been paid by the firm would not come to his share on division of the profits. The result, therefore, is that now after the amendment the registered firm itself is liable to pay income-tax at specially low rates and, subject to the partial relief gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. per annum on the capital employed in the undertaking. Now a registered firm is clearly and indisputably an assessee within the ambit of section 15C. A registered firm, as pointed out above, was an assessee within the meaning of the definition contained in section 2(2) even prior to the amendment made by the Finance Act, 1956, since though no income-tax was payable by it, it was certainly an entity in respect of whom section 23(5) authorised a proceeding to be taken for the assessment of its income. After the amendment made by the Finance Act, 1956, a registered firm would also fall within the first part of the definition of "assessee" in section 2(2) since income-tax is now payable by it under section 23(5)(a)(i). There is, therefore, no doubt that section 15C must apply to a registered firm and the effect of that section in its application to a registered firm would be that no tax shall be payable by a registered firm on the exempted profits. Of course, it must be pointed out that the provisions enacted in section 15C postulate an assessee by whom tax is payable and declare in respect of such an assessee that tax shall not be payable by him on exempted profits. The se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax due in respect of his total income and not on behalf of the firm or in discharge of the liability of the firm. This is clear enough on a plain reading of the section itself but it is made abundantly clear by two circumstances which are very eloquent. In the first place, the tax which is determined to be payable by the partner is not on his share of the firm's profits standing by itself but on his total income which may include other profits or losses and it may be that, if there are other losses, the share of the firm's profits to which the partner is entitled may be wiped off by the losses and ultimately no tax or very little tax may be payable by the partner and it would be impossible to say that such tax is payable by the partner on behalf of the firm. Secondly, while including the partner's share of the profits of the firm, the partner would be entitled to a deduction in respect of the expenditure incurred by him wholly and exclusively for the purpose of earning his share of the profits. This circumstance would also show that when the tax payable by the partner is determined under the unamended section 23(5)(a) or the amended section 23(5)(a)(ii), the partner i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view and that difficulty, in his submission, was created by the provision enacted in section 15C, sub-section (6). He pointed out that section 15C, sub-section (6), clearly indicated that the assessee to whom the benefit of section 15C, sub-section (1), is given by the legislature must be a person who manufactures or produces articles in the industrial undertaking and, therefore, in a case where the industrial undertaking is carried on by a registered firm, the assessee entitled to claim the benefit of section 15C, sub-section (1), would be the registered firm and not an individual partner of the registered firm, since it would not be possible to say of an individual partner that he manufactures or produces articles in the industrial undertaking. Now it is undoubtedly true that if sub-sections (1) and (6) of section 15C are read together, the assessee referred to in sub-section (1) must be a person who manufactures or produces articles in the industrial undertaking but it is indisputable that where a firm manufactures or produces articles, every partner of the firm does so. No authority is needed for this proposition, but if any authority were needed, it is to be found in the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not be liable to pay tax under sub-section (1). This in our opinion is the only correct way of looking at sub-section (1) and it is not only supported by the language of the sub-section but also accords with common sense. It is, therefore, clear that when the exemption was granted under section 15C, sub-section (1), in the individual assessments of the partners, it was granted because each partner as an assessee was entitled to claim that no tax was payable by him on the exempted profits in his hands and not because no tax was payable by the registered firm as an assessee on the exempted profits. That was not an exemption granted to the registered firm in the determination of the tax payable by it and, therefore, when the registered firm as an assessee claimed exemption from tax in respect of the exempted profits in the determination of the tax payable by it under section 23(5)(a)(i), there was no question of the benefit of sub-section (1) being given over again to the registered firm. The partners and the registered firm are distinct and separate assessees and each being an assessee within the meaning of section 15C, sub-section (1), can claim, when the tax payable by it is soug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n no double taxation of such income in the hands of two distinct assessable entities. But in the case of a registered firm whose income exceeds ₹ 40,000, there is double taxation of the same income, once in the hands of the registered firm and then in the hands of the partners and that is why in the determination of the tax in each case the benefit of section 15C is made available by the legislature. The object of the legislature clearly is that no tax shall be payable in respect of the exempted profits in whosoever's hands the exempted profits may otherwise be liable to be taxed. This object of the legislature is amply demonstrated by the provision enacted in sub-section (4) of section 15C which provides that no tax shall be payable by a shareholder in respect of so much of any dividend paid or deemed to be paid to him by an industrial undertaking as is attributable to that part of the profits or gains on which the tax is not payable under the section. When a company is carrying on an industrial undertaking and earns exempted profits, the company could of course get the benefit of section 15C in its assessment but when dividend is paid by the company out of the exempted ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
