Norman Macleod, Kt., C.J.
1. This is a reference by the Commissioner of Income Tax under a, 66 (2) of Act XI of 1922. The Commissioner says that the Western India Turf Club was, in the past, being assessed to super-tax on its total income at the scale rates of one to six annsin in the rupee as an unregistered firm
2. From April 1,1925, the Turf Club converted itself into a limited company by being registered under the Indian Companies Act VII of 1913, as a company limited by guarantee. The object of the company thus formed was inter alia to take over the assets, effects and liabilities of the unincorporated Club previously known as the Western India Turf Club and to continue its activities, Thus, from the above date, viz , April 1 last, the Club became a limited company. For the current financial year 1925-26, it was called upon, under Section 22 (1) read with Section 26 of the Act, to put in a return of income for the previous year, namely, 1924-25. It, accordingly, put in a return of income showing the income earned by the Club as an unregistered firm during the previous year 1924-25 when the company was not in existence. For the purposes of assessment, the Senior Income Tax Officer determined the total income to be Rs. 15,03,522 under Section 23 (1)of the Act and calculatedsuper tax thereon at Rs. 4,59,153 by applying to it the scale rates applicable to an unregistered firm,
3. The Club contended that as it was converted into a limited Company from April 1, 1925, the rate of super-tax applicable to it was that prescribed for a company, viz., the flat rate of one anna per rupee on the balance of the above income after deducting Es. 50.000, The Ineome Tax Officer, following the decision of the Allahabad High Court in In the matter of Begg Sutherland & Co., Ltd. I.L.R. (1925) All. 715 decided to levy super-tax at the scale rates of one to six annas per rupee.
4. The Club not being satisfied with the decision called for a reference to the High Court. The questions on which the opinion of the High Court is required are as follows:-
(i) When an unregistered firm converts itself into a limited company while assessing the latter under Section 26 read with Section 58 on the income earned by the unregistered firm prior to the conversion, is super-tax to be levied at the scale rates of one to six annas applicable to the income of unregistered firms or at the flat rate of one anna applicable to the income of a company ?
(ii) Is Section 26 of the Act to be regarded as requiring that the income earned by the unregistered firm be treated as the income of a company and taxed at the flat rate of one anna or is the section to be taken as merely requiring the company to step into the shoes of the defunet firm for the sole purpose of payment of the super-tax due from it as an unregistered firm ?
(iii) Whether the assessment to super-tax levied on the Club for the year 1925-26 at scale rates between one anna and six armas is in order and
(iv) Whether the Club as a limited company should not be assessed to super-tax for the above year at the flat rate of one anna in the rupee ?
5. The Commissioner of Income Tax was of opinion that the profits made by the Club in the year 1924-25 when it was not a limited company have been rightly charged to super-tax at the scale rates of one to six annas, and that the flat rate of one anna cannot be applied to these profits which are not those of a company, having beenmade prior to the conversion of the Club into a limited concern. It is unfortunate that the Commissioner has used throughout the expression 'unregistered firm,' as the Western India Turf Club was not a firm, but would come within the definition of ' person ' in Section 8 of the Indian Income Tax Act, 1922, taken with Section 3 (39) of the General Clauses Act X of 1897.
6. It seems to us the questions propounded admit of a very simple answer.
7. By Section 55 of the Act :-
In addition to the income-tax charged for any year, there shall be charged, levied and paid for that year in respect of the total income of the previous year of any individual, Hindu undivided family, company, unregistered firm or other association of individuals, not being a registered firm, an additional duty of income-tax (in this Act referred to as super-tax) at the rate or rates laid down for that year byAct of the Indian Legislature
8. Under Section 7 of the Finance Act, 1925, the rates of super-tax for the year beginning on the first day of April 1925, shall, for the purposes of Section 55 of the Indian Income Tax Act, 1922, be those specified in Part II of the Third Schedule, and the rate of super-tax in respect of the excess over fifty thousand rupees of total income in the ease of every company is fixed therein at one anna in the rupee.
9. It is difficult then to see how the company can be assessed at any higher rate for super-tax than one anna in the rupee. The total income on which that rate is levied for super-tax is the total income of the previous year, and as the company has succeeded to the business of the Indian Turf Club, it is conceded, that the total income of the previous year of the Turf Club, i, e., for the year 1924-25, is the total income on which the company is liable to be assessed for super-tax. It does not seem to us that; the decision relied upon by the Commissioner in In the matter of Begg Sutherland & Co. Lid.,I. L.R. (1925) All. 715 has any relevance to the facts of this case, The head-note is as follows :-
Where a registered firm, is converted in to a, company, the profits of any period anterior to the conversion on which income-tax has not been paid are liable to assessment as profits of a firm, but the new company is liable for the payment of the tax. But the new company is not liable to pay super-tax in respect of any period for which the firm which it succeeded was not liable to pay super-tax.
10. The firm of Begg Sutherland & Co., which was registered under Section 2 (14) of the Indian Income Tax Act, 1922, was converted into a private company with effect from May 1, 1922. The accounting period of the firm ran from May 1, to April 30, but, on the formation of the company, it was decided that the accounting period should coincide with the Government financial year, the first of Such periods consisting of eleven months only from May 1, 1922, to March 81, 1923. The assessment for the year 1922-23 was made on the profits of the year ending April 80, 1921, and the firm was assessed to income tax at the maximum rate, and the individual partners were assessed to super-tax on the shares of their profits in the firm at the rates appropriate to those shares made by the firm during the period from May 1, 1920, to April 30, 1921. When the assessment of the company was made in the year 1928-24, it was dealt with in two portions,-
(1) As regards the profits which arose to the firm in the accounting period of May 1, 1921, to April 30, 1922 ; and
(2) As regards the profits of the company in the period from May 1,1922, to March 3J, 1923.
11. In the financial year 1923-24, the profits of the firm were assessed to income tax at the maximum rate, and the individual partners were assessed to super-tax on their shares of the profits made by the firm during the period May 1, 1921, to April 30, 1922, and in the same year the profits of the company were assessed to income tax at 0-1-6 in the rupee and were also charged to super-tax at the rate payable by the Company for the eleven months ending March 31, 1923. The company was also held responsible, under the provisions of Section 26 of the Income Tax Act 1922, for the payment of the demand for income tax assessed on the profits of the firm for the period May 1, l921, to April 30, 1922, and this amount, together with the demand for income tax and super-tax charged on the profits for the eleven months ending March 31, 1923, was duly paid. TheCommissioner thought that the company should have been assessed for super-tax at one anna in the rupee on the profits which arose for the period May 1, 1921, to April 30, 1922, in addition to the super-tax which had been levied from the partners of the firm on the income they had actually received from the firm,
12. The first question propounded for the opinion of the Court appearing at p. 718 of the report is worded in exceedingly involved language, but the issue seems to have been whether the profits for the period May 1, 1921, to April 30, 1922, were to be assessed as profits of a firm, and the company was to be called upon to pay the amount due? Or, whether because aft the time oil the assessment the asseseee was a company, the companywas to be assessed on the profits made by the firm during its last year and such profits were to be treated as the profits of the previous year of a company ?
13. The answer of the Court was that the profits for the period May 1, 1921, to April 30, 1922, were to be treated as the profits of a firm, but the company was to be calledupon to pay the amount due. Consequently, as the firm had not to pay super-tax, the company was not liable.
14. It will be seen, as the Court remarked, that, for reasons best known to themselves, by mutual consent the income tax authorities and the new company dealt with the profits in respect of which income tax was payable from May 1, 1921, to April 80, 1922, and from May 1, 1922, to March 31, 1923, in the year of assessment, namely, April 1, 1928, to March 81, 1924, But the question was whether the company which was to be assessed in respect of the last year of existence ofthe firm for what was undoubtedly payable by law by the company on the profits which the firm had made, and on which it would have been assessed if it had continued to exist as a firm, was also liable to be treated as a super-tax paying person, because, although its predecessor was not a super-tax paying person, the company was by the express language of the Act such a person and had to be treated as what it was even in respect of profits made anterior to its existence,
15. Their Lordships were of opinion that there was nothing in the Act which could justify the income tax authorities in imposing on a successor during the first year of assessment after the conversion a liability in respect of its predecessor which its predecessor could not have been liable to pay if it had continued in existence without any conversion. There is an initial difficulty in applying this decision to the present case, namely, that the company was assessed in 1923-24 in respect of two different periods, but it has been contended that the ratiodecided is applicable, and that, just as in that cage the company was not liable for super-tax on the profits of the last year of the existence of the firm, because the firm as a registered firm was not liable, so, in this-case, the company is liable to pay super-tax on the profits earned by its predecessor for the year previous to its conversion onthe same scale as its predecessor would have paid, if there had been no conversion. If the accounting period of the firm of Begg Sutherland and Co. had coincided with the Government, financial year, we doubt whether any such question would have arisen, for there would have been no double taxation of the same income, although even now we do not see clearly how there was any occasion for double taxation. The company, if incorporated on April 1, 1922,. would have been assessed for the year 1923-24 on its profits for the year 1922-23, and for the year 1922-23 would have been assessed on the profits made by its predecessor during the previous year. In our opinion, the case on which the Commissioner has relied must be considered in the light of its own very peculiar facts, and as the question at what rate super-tax was to be charged did not arise we can find nothing in the judgment which would justify us in holding that on the facts of this case the company can be assessed for super-tax on the profits of the previous year at any other rate than that which is provided by the Finance Act for 1925. If, as a matter of fact, the Turf Club, before it became a company, could have come within the definition of 'Registered firm,' we think the company would have been liable to pay super-tax at one anna in the rupee on theprofit of the firm for the previous year.
16. The answer, therefore, to the question propounded is, that the company is liable to be assessed at the rate of one anna in the rupee for super-tax in respect of the excess over fifty thousand rupees of total income of the Turf Club for the previous year.
17. The company is entitled to the costs of this Reference to be taxed as on the Original Side scale.