1. Claim for tax relief under Section 25(3) of the Income-tax Act, 1922, following the discontinuance of a business previously taxed under the 1918 Act. (Para 2 )
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1966 Supreme(SC) 278
SUPREME COURT OF INDIA
J.C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.
O. RM. M. SP. SV. Firm, Appellant
Versus
Commissioner of Income-tax, Madras, Respondent.
Civil Appeal No. 751 of 1965, D/- 14-10-1966. 1062
Advocates appeared
Mr. A. K. Sen, Senior Advocate, (M/s. K. Parasarn, K. Rajinder Chaudhuri and K. R. Chaudhuri, Advocates, with him), for Appellant; Mr. B. Sen, Senior Advocate (Mr. T. A. Ramachandran, Advocate and Mr. S. P. Nayyar, Advocate, for Mr. R. N. Sachthey, Advocate, with him), for Respondent.
Important Points
Relief under Section 25(3) of the 1922 Act is available if the owner of a business was taxed on its profits under the 1918 Act, including via remittances. Such relief extends to all business income, including rental income, regardless of the head of income used for computation.
Subject
Tax Law - Income Tax
Act Referred
Headnote
(A) Income-tax Act, 1922 - Section 25(3) - Indian Income-tax Act, 1918 - Sections 3 and 5 - Discontinuance of business - Relief from tax - Foreign business - Remittances taxed - Whether business is deemed to be charged under the 1918 Act - Relief applicable to rental income from house properties owned by the firm.
(B) Interpretation of "charged under the provisions of the Indian Income-tax Act, 1918" - Where the entire profits of a foreign business are remitted to and taxed in India, the business is held to be charged under the 1918 Act for the purpose of relief under Section 25(3) of the 1922 Act - Business, profession or vocation is not a unit of assessment; the tax is charged on the owner of the business. (Para 5)
(C) Scope of exemption under Section 25(3) - Exemption is general and not restricted to income taxable under the head "Profits and gains of business, profession or vocation" - Rental income from house properties owned by a firm is considered part of the business income for the purpose of this exemption, as heads of income are merely for computation. (Para 6)
Facts of the case:
An assessee firm, which had previously been a joint family business, carried on business in foreign territories. Upon dissolution of the firm, the assessee sought tax relief under Section 25(3) of the 1922 Act. The claim was contested on the ground that the foreign business was not charged to tax under the 1918 Act, as only the remittances of profits into India were taxed, rather than the business itself.
Findings of Court:
The court found that since the entire profits of the foreign business were remitted and taxed, the business was effectively charged under the 1918 Act. Furthermore, rental income from properties owned by the firm constitutes business income for the purpose of the exemption.
Issues: (i) Whether a foreign business is deemed to be charged under the 1918 Act if tax was levied on remittances received from its profits; (ii) Whether relief under Section 25(3) of the 1922 Act extends to rental income from house properties owned by the discontinued foreign firm.
Ratio Decidendi: The court ruled that tax is charged on the owner of a business, not the business as a unit; thus, taxing the owner on business profits (even via remittances) satisfies the condition of the business being "charged" under the 1918 Act. Additionally, the classification of income under different heads is for computation purposes and does not exclude such income from being "business income" for the purpose of the general exemption under Section 25(3).
Result: Appeal allowed.
(B) Interpretation of "charged under the provisions of the Indian Income-tax Act, 1918" - Where the entire profits of a foreign business are remitted to and taxed in India, the business is held to be charged under the 1918 Act for the purpose of relief under Section 25(3) of the 1922 Act - Business, profession or vocation is not a unit of assessment; the tax is charged on the owner of the business. (Para 5)
(C) Scope of exemption under Section 25(3) - Exemption is general and not restricted to income taxable under the head "Profits and gains of business, profession or vocation" - Rental income from house properties owned by a firm is considered part of the business income for the purpose of this exemption, as heads of income are merely for computation. (Para 6)
Facts of the case:
An assessee firm, which had previously been a joint family business, carried on business in foreign territories. Upon dissolution of the firm, the assessee sought tax relief under Section 25(3) of the 1922 Act. The claim was contested on the ground that the foreign business was not charged to tax under the 1918 Act, as only the remittances of profits into India were taxed, rather than the business itself.
Findings of Court:
The court found that since the entire profits of the foreign business were remitted and taxed, the business was effectively charged under the 1918 Act. Furthermore, rental income from properties owned by the firm constitutes business income for the purpose of the exemption.
Issues: (i) Whether a foreign business is deemed to be charged under the 1918 Act if tax was levied on remittances received from its profits; (ii) Whether relief under Section 25(3) of the 1922 Act extends to rental income from house properties owned by the discontinued foreign firm.
Ratio Decidendi: The court ruled that tax is charged on the owner of a business, not the business as a unit; thus, taxing the owner on business profits (even via remittances) satisfies the condition of the business being "charged" under the 1918 Act. Additionally, the classification of income under different heads is for computation purposes and does not exclude such income from being "business income" for the purpose of the general exemption under Section 25(3).
Result: Appeal allowed.
Legal Category Hierarchy
Advocates:
A.K.SEN GUPTA, B.SEN, K.PARASARAN ATTORNEY, K.R.CHAUDHARY, K.RAJENDRA CHAUDHARY, R.N.SACH, S.P.NAIR, T.A.Ramachandran
A.K.SEN GUPTA, B.SEN, K.PARASARAN ATTORNEY, K.R.CHAUDHARY, K.RAJENDRA CHAUDHARY, R.N.SACH, S.P.NAIR, T.A.Ramachandran
Table of Contents
2. Whether tax on remittances from foreign business constitutes the business being charged under the 1918 Act and whether rental income qualifies for relief under Section 25(3). (Para 2 , 3 )
3. Tax is charged on the owner of a business rather than the business as a unit; heads of income are for computation, not source delimitation. (Para 4 , 5 , 6 )
4. Relief under Section 25(3) applies if the owner was taxed on business income under the 1918 Act, regardless of the specific head of income. (Para 5 , 6 )
5. Appeal allowed and judgment of the High Court set aside. (Para 7 )
6. Does taxation on remittances from a foreign business satisfy the condition that the business was charged under the 1918 Act for relief under Section 25(3) of the 1922 Act?
Yes. Because tax is charged on the owner of a business and not the business as a unit, if the owner was taxed on income derived from the business, the business is deemed to have been charged under the 1918 Act. (Para 5 )
7. Does the exemption under Section 25(3) of the 1922 Act apply only to income taxed under the head Profits and gains of business, profession or vocation?
No. The exemption is general. The heads of income are intended merely to indicate classes of income for computation purposes and do not exhaustively delimit the sources from which business income arises. (Para 6 )
8. Can rental income from house properties owned by a discontinued business be eligible for relief under Section 25(3) of the 1922 Act?
Yes. Rental income from properties owned by a business is considered part of the business income for the purpose of claiming exemption upon the discontinuance of that business. (Para 6 )
Judgement
RAMASWAMI, J. : This appeal is brought, by certificate, against the judgment of the Madras High Court, dated December 18, l962 in T. C. No. 143 of 1960.
2. 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) and (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 S. 25 (3) of the Indian Income-tax Act".
After receipt of the reference the High Court held that there was no discontinuance of the business within the meaning of Section 25 (3). The view taken by the High Court was that when a Hindu undivided family carrying on a business, which was taxed under the 1918 Act, became disrupted and the members continued the business thereafter 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 assessee-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 S. 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 S. 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.
3. 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 Depa
