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PETITIONER: O.   RM. M. SP.  SV.  FIRM

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX-MADRAS

DATE OF JUDGMENT: 14/10/1966

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. BHARGAVA, VISHISHTHA

CITATION:  1967 AIR 1061            1967 SCR  (1) 905

ACT: Income  Tax Act, 1922, s. 25(3)-Assessee firm  successor  to joint  family business in India and abroad assessed  to  tax under  Income  Tax  Act,  1918-  Entire  foreign  income  of business abroad remitted to India Whether Tax under s. 3  of 1918  Act, was on income of business Whether  rental  income from  property  of firm abroad was business  income  Whether relief under s. 25(3) can be claimed.

HEADNOTE: Prior to the constitution of the assessee firm, its partners were  members of a Hindu undivided family which  carried  on money--lending business in India and in Malaya and which was assessed to tax under the Income Tax Act, 1918.  There was a partition in the family on June 2, 1938, and thereafter  its members  continued the business as partners in the  assessee firm.   The  firm was dissolved on March 2,  1952.   In  the assessment  for the year 1952-53, the assessee  applied  for relief  under s. 25(3) of the Income Tax Act.,  1922.   This claim  was rejected by the Income Tax Officer and an  appeal to the Appellate Assistant Commissioner was dismissed on the view  that  in the case of business carried  on  in  foreign territory, the business as such was not assessed under s.  3 of  the  1918 Act and only income received in India  was  so assessed; consequently, no relief could be claimed under  s. 25(3) of the 1922 Act. A  further  appeal  to the  Appellate  Tribunal  was  partly allowed  as  the Tribunal considered that the  assessee  was entitled  to relief under s. 25(3) except in respect of  the income  received  by the assessee firm  from  certain  house properties  in  Malaya.  The High Court, upon  a  reference, disagreed  with  the  Tribunal and  held-in  favour  of  the department. On appeal to this Court, HELD  : (1) The High Court was in error in holding that  the foreign  business of the assessee was not charged under  the provisions  of  the 1918 Act.  The  assessee  was  therefore entitled to relief under s. 25(3). When  s. 25(3) refers to tax charged on any business, it  is intended  to  refer  to  tax charged on  the  owner  of  any business.   If tax is shown to have been charged in  respect

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of the income of the business under the 1918 Act, the  owner or  successor-in-interest in relation ’to the business  will be  entitled  to get the benefit of the exemption  under  s. 25(3)  if the business is discontinued.  In the  context  of the  finding by the lower courts that the entire  income  of the  foreign business was remitted to the assessee  and  tax imposed  on  that  income under the 1918  Act,  the  foreign business  of the assessee must be held to have been  charged under  the provisions of the 1918 Act within the meaning  of s. 25(3) of the 1922 Act. [911 F-H] (ii)The assessee was also entitled to relief under s. 25(3) on the rental income from the house properties owned by  the foreign firm which was discontinued in the year of account. M17Sup C.I./66-12 906 Business income is broken up under different heads only  for the  purpose  of computation of the total income.   By  that breaking  up the income does not cease to be the  income  of the business. [912 E-F] Commissioner  of Income-tax, Madras v.  S.V.R.M.  Palaniappa Chettiar A Others. 20 I.T.R. 170, disapproved,  Commissioner of  Income-tax, Bombay city 1 v. Chugandas & Co.,  [1964]  8 S.C.R. 332, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 751 of 1965. Appeal  from the judgment and order dated December 18,  1962 of the Madras High Court in Tax Case No. 143 of 1960. A.K.  Sen,  K. Parasarn, K. Rajender Chaudhuri and  K.  R Chaudhuri, for the appellant. B.Sen,  T.  A.  Ramachandran,  S. P.  Nayyar  for  R.  N. Sachthey, for the respondent. The Judgment of the Court was delivered by Ramaswami,  J.  This  appeal  is  brought,  by  certificate, against the judgment of the Madras High Court dated December 18, 1962 in T.C. No. 143 of 1960. The appellant (hereinafter called the ’assessee’) was a firm called  O.RM.M.SP. SV.  Firm which was registered  under  S. 26(A)  of the Income-tax Act, 1922 (hereinafter  called  the ’1922  Act’).   Prior to the constitution of the  firm,  the partners  were  members of a Hindu  undivided  family.   The family  which  consisted of Meyyappa Chettiar  and  his  two brothers  carried on money-lending business in India and  in the former Federated Malaya States and it was assessed under the  Indian  Income-tax Act, 1918  (hereinafter  called  the ’1918  Act’).   There was a disruption of the  joint  family status  on June 2, 1938, and thereafter the members  of  the family continued the business as partners.  In the course of the  assessment  for  the year 1939-40  it  was  claimed  by Meyyappa  Chettiar,  one of the members of the  family  that having  regard to the severance of joint family status,  the income of the family from April 13, 1938 to June 2, 1938 was not  liable  to be taxed by reason of the provisions  of  s. 25(3)  & (4).  The Income-tax Officer accepted the  fact  of partition  amongst the members of the family,  but  rejected the contention that the family was not liable to pay tax  on the profits for the said period.  The High Court  ultimately called for a reference on the following question:               "Whether  the income of the family  from  13th               April  1938 to 2nd June 1938 is not liable  to               be  taxed  by virtue of Section 25(3)  of  the               Indian Income-tax Act" After  receipt  of the reference the High  Court  held  that

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there  was  no  discontinuance of the  business  within  the meaning  of s. 25(3).  The view taken by the High Court  was that when a Hindu undivided 907 family  carrying  on a business, which was taxed  under  the 1918  Act,  became disrupted and the members  continued  the business  there.  after  as  partners,  there  could  be  no discontinuance  but  only  succession by  the  firm  of  the business  of the family.  It was held in that case  that  it was  the  assesse-firm which took over the business  of  the Hindu undivided family.  The firm was dissolved on March  2, 1952.   In the assessment for the year 1952-53 the  assessee applied  for  relief under s. 25(3) of the  1922  Act.   The claim  was  rejected by the Income-tax Officer on  March  7, 1956.   The  assessee preferred an appeal to  the  Appellate Assistant Commissioner who dismissed the appeal holding that in the case of business carried on in foreign territory  the business as such is not assessed under S. 3 of the 1918  Act but only receipt of the income in British India is  assessed and it cannot therefore be held that the foreign business of the  appellant was charged to tax under the 1918  Act.   The assessee took the matter in further appeal to the  appellate Tribunal which considered that the assessee was entitled  to relief under S. 25 (3) of the 1922 Act except for the income received from the house properties in Malaya.  The appellate Tribunal  accordingly allowed the appeal of the assessee  in part.   Both the assessee and the Department applied to  the appellate Tribunal for reference of the questions of law  to the   High  Court.   The  appellate  Tribunal  allowed   the applications  and  stated a case to the High  Court  on  the following questions of law:               "(i) Whether the assessee is entitled to  both               the  parts  of the relief  contemplated  under               section 25(3) of the Act in respect of foreign               business at Penang, Ipoh and Kambar ?               (ii)Whether  the applicant is also  entitled               to relief under section 25 (3) of the Act with               regard to rental income from house  properties               owned   by   the  foreign   firm   which   was               discontinued in the year of assessment." The  appellate Tribunal also referred another  question  for the  opinion  of the High Court but it is not  the  subject- matter of the present appeal. The  High Court held that the assessee was not  entitled  to relief  under  s.  25(3) of the  1922  Act  and  accordingly answered  both  the questions in favour of  the  Department. The  view  taken  by the High Court  was  that  the  foreign business  of  the  assessee cannot be deemed  to  have  been charged  under  the provisions of the 1918 Act  because  the assessee  was  only taxed on remittances received  from  the profits of the foreign business and there was no tax on  the foreign business itself under the 1918 Act.  The High  Court accordingly reached the conclusion that the assessee was not entitled to relief under S. 25 (3) of the 1922 Act. 908 Section 25 (3) of the 1922 Act is to the following effect:               "25.  (3)  Where any business,  profession  or               vocation on which tax was at any time  charged               under the provisions of the Indian  Income-tax               Act,  1918  (VII of  1918),  is  discontinued,               then,  unless there has been a  succession  by               virtue of which the provisions of  sub-section               (4) have been rendered applicable no tax shall               be  payable in respect of the income,  profits               and gains of the period between the end of the

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             previous   year   and   the   date   of   such               discontinuance,  and the assessee may  further               claim  that the income, profits and  gains  of               the previous year shall be deemed to have been               the  income,  profits and gains  of  the  said               period.   Where  any such claim  is  made,  an               assessment  shall be made on the basis of  the               income, profits and gains of the said  period,               and if an amount of tax has already been  paid               in respect of the income, profits and gains of               the previous year exceeding the amount payable               on  the  basis of such  assessment,  a  refund               shall be given of the difference." Under  this section exemption from liability to pay  tax  in respect  of the income, profits and gains may be claimed  by an  assessee if the business is one in respect of which  tax was charged at any time under the 1918 Act, and the business is discontinued there being no succession by virtue of which the provisions of subsection (4) of s. 25 have been rendered applicable.   Section  25(3) however, applies  even  if  the person  assessed under the 1918 Act was different  from  the person  who  claims relief under that section  provided  the former  was  the predecessor-in-interest of such  person  in relation to the business.  The reason for enacting s.  25(3) was that under the 1918 Act, income-tax was levied by virtue of s. 14(2) of the 1918.  Act, on the income of the year  of assessment.   Tax  was, therefore, levied in  the  financial year  1921-22 on the income of that year.  By the  1922  Act the  basis of taxation was altered and by s. 3 of that  Act, charge  for tax was imposed upon the income of the  previous year.  When the 1922 Act was brought into force on April  1, 1922, two assessments in respect of the same income for  the year  1921-22  had to be made.  The income for  1921-22  was accordingly  charged to tax twice; it was charged under  the 1918  Act and it was also charged to tax under s. 3  of  the 1922 Act read with the appropriate Finance Act, resulting in double taxation in respect of the income for that year.  But -with a view to make the number of assessments equal, to the number  of years during which the business was  carried  on, the  legislature  enacted  the exemption  prescribed  by  s. 25(3).   This  benefit was however restricted  only  to  the income,  profits  and  gains  of  business,  profession   or vocation on which tax had been charged under the  provisions of the 1918 Act.  By enacting s.   25(3)   the   legislature intended to exempt the income, profits and 909 gains   resulting   from  the  activity   styled   business, profession   or  vocation  from  tax  when   the   business, profession or vocation is discontinued if tax was charged in respect thereof under the 1918 Act. The  first  question  to be considered  in  this  appeal  is whether  the  assessee is entitled to both parts  of  relief contemplated  under s. 25(3) of the 1922 Act in  respect  of the  foreign  business  at Penang,  lpoh  and  Kambar.   The controversy  between  the  parties  turns  on  the  question whether the foreign business of the assessee was at any time charged  under the provisions of the 1918 Act.  It has  been found by the appellate Tribunal that the assessee was  taxed on  remittances received from and out of the profits of  the foreign  business.  The finding of the  Appellate  Assistant Commissioner is stated in these terms:               "The  entire profits of the  foreign  business               came  to  be  assessed in  the  hands  of  the               appellant  under the 1918 Act, not because  it               was a business income but because such  income

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             had   been   remitted  into   British   India.               Therefore, in fact also it is not the  foreign               profits of a business that has been charged to               tax  but  only  the remittance  which  in  the               particular case was not less than the  profits               of the year." We  have  therefore  to  proceed on  the  footing  that  the assessee received the entire profits of the foreign business in  British  India and the entire profits were  assessed  to income-tax in the hands of the assessee under the 1918  Act. It  is  necessary, at this stage, to set  out  the  relevant provisions of the 1918 Act.               Section  3,  the charging  section  stated  as               follows:               "3. (1) Save as hereinafter provided, this Act               shall apply to all income from whatever source               it  is derived, if it accrues or arises or  is               received  in British India, or is,  under  the               provisions  of this Act, deemed to  accrue  or               arise or to be received in British India.               Section  5  mentioned the  classes  of  income               chargeable to income-tax and reads as follows:      "5. Save as   otherwise  provided  by  this  Act,   the               following   classes   of   income   shall   be               chargeable to income-tax in the     manner               hereinafter appearing, namely-               (i) Salaries.               (ii)  Interest on securities.               (iii)Income derived from house property.               (iv)  Income derived from business.               910               (v)   Professional earnings.               (vi)  Income derived from other sources." Section  9  of  the  1918  Act  enumerated  the  permissible deductions  in  the  computation  of  the  profits  of   the business.   The  question for determination is  whether  the foreign  business  of the assessee was at any  time  charged under  the provisions of s. 3 of the 1918 Act.  It has  been found  in  this case that the entire income of  the  foreign business  was  remitted to the assessee and tax  imposed  on that income under the 1918 Act.  We are of the opinion  that in  the context of these facts the foreign business  of  the assessee must be held to be charged under the provisions  of the 1918 Act within the meaning of s. 25(3) of the 1922 Act. It  is manifest that by s. 3 of the 1918 Act the charge  was made  on the receipt of income in British India and  as  the income received by the assessee was derived from the foreign business and was in relation to the foreign business it must be taken that there was an assessment to tax on the  foreign business within the meaning of s. 25(3) of the 1922 Act.  In other words, the tax under the 1918 Act was charged upon the assessee   in  respect  of  his  activity  styled   ,foreign business’ and in relation to it and it must hence be  taken, upon the facts found by the appellate Tribunal in this case, that the foreign business of the assessee was charged  under the 1918 Act within the meaning of S. 25(3) of the 1922 Act. The High Court has taken the view that the foreign  business of  the assessee was not charged under the 1918 Act  because what was taxed was the remittances received by the  assessee from  the  foreign  business and not  the  foreign  business itself.   In taking this view, the High Court  has  followed its previous decision in Commissioner of Income-tax,  Madras v.  S. V.R.M. Palaniappa Chettiar and Others(1) in which  it was  held that the words "on which" in S. 25(4) of the  1922 Act  cannot  be interpreted as meaning  "with  reference  to

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which"  and  that in order to claim and  avail  the  benefit under  S.  25(4) the tax clearly should be  charged  on  the business  as  such under the 1918 Act.  At page 173  of  the Report Satyanarayana Rao, J. stated as follows:               "The   relief   under   sub-clause   (4)    is               permissible  only if the tax on  the  business               was charged under the provisions of the Indian               Income-tax Act, 1918.  If the foreign business               at  Muor  was  not and  could  not  have  been               charged  under  the Act and the share  in  the               profits  of  the  family  from  that   foreign               business  was charged under section 3 only  on               the  receipt in British India, can it be  said               that the charge so made was a charge of a  tax               on the foreign business.  The income  received               by  the-  joint  family could  not  have  been               charged  under the head ’income  derived  from               business’ but only as a receipt under  section               3. The argument, however, on behalf               1 20 I.T.R. 170.               911               of  the assessee by his learned  Advocate  Mr.               Rajah  Iyer was that the words "on  which  tax               was  at any time charged" should be  construed               as meaning "with reference to which tax was at               any time charged." In other words, the conten-               tion  is  that  the  income  derived  by   the               assessee  was  in relation to a  business  and               therefore the assessment of the income must be               treated as an assessment of the business.   No               doubt, under the provisions of the  Income-tax               Act, the tax is payable by an assessee but the               assessment  of  the  tax is on  the  basis  of               various   heads  of  income  derived  by   the               assessee one of which is business.  It cannot,               therefore,  be  said  that  because  tax   was               payable  by the assessee on the  profits  rec-               eived  from a business in a foreign  territory               such  assessment  is  an  assessment  of   the               business." In  our  opinion,  the view adopted by  the  High  Court  in Commissioner  of Income-tax, Madras v. S. V.R.M.  Palaniappa Chettiar  and Others( ) must be taken to be impliedly  over- ruled  by the recent decision of this Court in  Commissioner of Income-tax.  Bombay City-1 v. Chugandas & Co.(2) in which the  question was whether the interest on securities  formed part  of the assessee’s business income for the  purpose  of the  exemption from tax under s. 25(3) of the 1922 Act.   It was  held  by this Court that the assessee was  entitled  to exemption   under  S.  25(3)  in  respect  of  interest   on securities as well, and there was no reason to restrict  the condition  of  the applicability of the exemption  under  S. 25(3) only to income on which the tax was payable under  the head   "Profits  and  gains  of  business,   profession   or vocation".  It was further observed in that case that tax is charged  under the Income-tax Acts on specific  units,  such as, individuals, Hindu undivided families, companies,  local authorities,  firms  and associations of  persons  etc.  and business,   profession  or  vocation  is  not  a   unit   of assessment.   When, therefore, S. 25(3) enacts that tax  was charged at any time on any business, it is intended that the tax  was at any time charged on the owner of  any  business. If  that condition be fulfilled in respect of the income  of the business under the 1918 Act, the owner or his successor- in-interest in relation to the business, will be entitled to

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get the benefit of the exemption under it if the business is discontinued.  We  are accordingly of the opinion  that  the High Court was in error in holding that the foreign business of the assessee was not charged under the provisions of  the 1918 Act.  The first question must therefore be answered  in favour of the assessee and it must be held that the assessee is  entitled to both parts of relief contemplated  under  s. 25(3) of the 1922 Act in respect of the foreign business  at Penang, lpoh and Kambar. (1) 20 I.T.R. 170.  (2) [1964] 8 C.S.R. 332. 912 The second question of law arising in this appeal is whether the  assessee was entitled to relief under S. 25(3)  of  the 1922  Act  with  regard  to the  rental  income  from  house properties owned by the foreign firm which was  discontinued in the year of account.  A similar question was the subject- matter  of  consideration  in  Commissioner  of  Income-tax, Bombay City-, v. Chugandas and Company(1) which has  already been referred to.  In that case, the assessee firm, a dealer in securities holding securities as its stock-in-trade,  had been  charged  to  tax under the 1918  Act,  in  respect  of business.   It  received Rs. 4,13,992 and  Rs.  1,01,229  as interest   on  securities  in  the  years  1946   and   1947 respectively.   The firm discontinued its business  on  June 30, 1947.  The question at issue was whether the interest on securities formed part of the assessee’s business income for the purpose of the exemption from tax under s. 25(3) of  the 1922  Act.  It was held by this Court that the assessee  was entitled to exemption under S. 25(3) in respect of  interest on securities as well.  It was pointed out that there was no reason to restrict the condition of the applicability of the exemption under s. 25(3) only to income on which the tax was payable  under  the  head "Profits and  gains  of  business, profession  or volcation".  The exemption under s. 25(3)  is general.   It was explained by this Court that the heads  of income  described  in  S. 6 of the  1922  Act,  and  further elaborated  for the purposes of computation in ss. 7  to  IO and  12, 12A, 12AA and 12B, are intended merely to  indicate the  classes  of  income.  The  heads  do  not  exhaustively delimit  sources from which income arises.  Business  income is  broken up under different heads only for the purpose  of computation  of the total income.  By that breaking  up  the income does not cease to be the income of the business,  the different  heads  of income being  only  the  classification prescribed by the Incometax Act for computation.  The  ratio of  this  decision applies to the present case and  it  must accordingly be held that the assessee is entitled to  relief under  S.  25(3) of the 1922 Act with regard to  the  rental income  from the house properties owned by the foreign  firm which was discontinued in the year of account. For  these reasons the judgment of the Madras High Court  is set aside and this appeal must be allowed with costs. R.K.P.S. (1) [1964] 8 S.C.R.  332. Appeal allowed. 913