1. This is a reference under Section 66(2), Income-tax Act, and a case has been stated before us on the application of the assessee by the learned Commissioner of Income-tax, Central and United Provinces. Although the assessee in his application to the Commissioner formulated three questions of law, it is manifest that those questions were not happily worded in the application of the assessee and can be summarised, as the learned Commissioner has done, in one question. The question is:
Whether in the circumstances of the case the assessee was entitled under Section 14(2)(b), Income-tax Act, to claim an exemption in respect of the amount of Rs. 59,011 received by him from the registered firm of Sadhuram Tularam at Calcutta when the firm itself was assessed to income-tax on a smaller sum, viz. Rs. 12,829 only.
2. This question arises before us in connexion with the assessment year 1934-35 when Seth Kanhaiya Lal was being assessed to income-tax by the Additional Income-tax Officer of Meerut. He was assessed on a total income of Rs. 59,371 and that income was made UD as follows:
(1) Income from property ... Rs. 360(2) One-third share income in theregistered firm of SadhuramTularam, Calcutta, alreadyAssessed ... ... Rs. 4276(3) Interest income from Calcuttafirm of Sadhuram Tularam ... Rs. 54,735_____________Total Rs. 59,371.
3. It appears that the assessee is a partner in the registered firm of Sadhuram Tularam of Calcutta and the other two partners of the said firm are Gouri Shanker and Munna Lal. These three partners have invested large sums of money in the said firm and under the terms of partnership (this is what we gather from the record) they are entitled to certain interest on their investments. Kanhaiya Lal, the assessee, got a sum of Rs. 54,375 as interest from the Calcutta firm of Sadhuram Tularam, and this amount was taken into consideration by the Income-tax Officer of Meerut when he was assessing Kanhaiya Lal at Meerut. The firm itself was assessed to income-tax at Calcutta for the assessment year 1934-35 on an income of Rs. 12,829. This income was made up of the following items:
1. Interest on securities ... Rs. 11,5732. Property ... ... Rs. 12,606___________Total Rs. 24,179
4. There was a business loss of Rs. 11,350 and thus the profit was reduced to Rs. 12,829 and the firm was assessed on this income. Prom what is stated above, it is clear that the firm had to pay large sums of interest to its three partners, and before the Income-tax Officer of Calcutta a submission was advanced on behalf of the firm that the profits or gains of the firm should be computed after making allowance for the amount of interest paid in respect of the advances made by the partners to the firm. The submission obviously was repelled by the Income-tax Officer of Calcutta, presumably on the view that the sums advanced or invested by the partners did not represent the capital borrowed by the firm for the purposes of the business. The question whether the Income-tax Officer of Calcutta was right in his method of assessment is not before us, and all that we have got to see for the purposes of the present reference is whether the income which Kanhaiya Lal has received from the Calcutta firm of Sadhuram Tularam, namely the sum of Rs. 54,735, is liable to tax or is exempt from taxation under Section 14(2)(b) of the Act, and the question has been correctly formulated by the learned Commissioner. Learned Counsel for the department and learned Counsel for the assessee have relied upon the case in Kanhaiya Lal v. Commissioner of Income-tax ('36) 5 I.T.R. 739, where we, by means of separate judgments, overruled a similar contention advanced on behalf of this very assessee. As both parties rely upon our judgments, it might be necessary for us once again to explain separately what we meant by our observations. At p. 747 I said:.the question of the liability of the firm to income-tax is not before us, and the only question is whether the amount of Rs. 51,180 had been correctly treated as the assessee's share in the Calcutta firm for the assessment year in dispute, and learned Counsel for the assessee has not been able to show any mistake of the department in the calculations made except to argue generally that there has been double taxation of the same income, once in the hands of the firm and a second time in the hands of the assessee who is a partner of the firm.... The 'income made by the assesse on the head of interest received from the firm can be exempted under Section 14(2)(b) only if the firm had made certain profits and those profits had been assessed to income-tax. Profits can be said to be assessed to income-tax only when an order has been made by the department determining the sum payable by an assessee as income-tax and not when calculation only of the profits and losses have been made.
5. The last sentence is tersely put and I take this opportunity of amplifying its meaning. Section 14 gives exemptions of a general nature and provides for relief in certain cases where but for that section there might have been double taxation. I am concerned at the present moment with section 14(2)(b) which says that a tax shall not be payable by an aasessee in respect of such an amount of the profits or gains of any firm which have been assessed to income-tax as is proportionate to his share in the firm at the time of such assessment. It postulates that the firm made certain profits and those profits were assessed to income-tax and if they had been so assessed, a particular partner when he was being assessed in his individual capacity would not be liable to pay any income-tax on any sum which he might have received; from the firm as his proportionate share of the profits in the firm. In the former case before us-1 held that the question of exemption could arise only when profits of the firm had been assessed to income-tax and not when during the course of the assessment the revenue authorities might have made certain calculations in respect to a particular item by ignoring it or by paying some regard to it. What is contended by the assessee in the present case is that the Income-tax Officer of Calcutta did not pay any regard to the amount of interest which the firm had to pay to its partners and therefore it should be deemed (how I do not understand) that the interest paid by the firm suffered a tax. The best that can be said is that no allowance was made under Section 10 of the Act so far as this interest paid by the firm was concerned, but that is quite a different thing from saying that this sum suffered tax at Calcutta.
6. It was then argued by learned Counsel for the assessee that the moment the Calcutta firm was assessed to income-tax the present assessee, who is a partner in that firm, was not liable to be taxed in respect of any interest which he might have received from the Calcutta firm. The phraseology of Section 14(2)(b) does not lend support to this contention. If the Calcutta firm made any profits and if those profits were taxed then the proportionate share of the profits in the hands of the assessee could not be re-taxed when the assessee's assessment was being made, and this is all that the section says and this relief has been given to the assessee in the present case. The Calcutta firm made a profit of Rs. 12,829; the assessee's one-third share in this profit is Rs. 4276, and this amount of profit or income has not been re-taxed in the hands of the assessee. Beyond this the assessee is not entitled to any relief in respect to the sum of Rs. 54,735. This represents the interest which the Calcutta firm paid to the assessee and this sum or any multiple of this sum was never treated as the income of the Calcutta firm and was never assessed to any tax there. I emphasised in the earlier case that if in the course of any calculation made by the Income-tax Officer any sum was somewhere entered, that was not sufficient for bringing into play Section 14(2)(b), but it must be shown by the assessee that any income in his hands had already been assessed to income-tax in the hands of the firm of which he happened to be a partner. My answer to the question formulated by the Commissioner is in the negative.
7. I agree. I should like to add a few words in order to clarify an obscurity in my judgment in Kanhaiya Lal v. Commissioner of Income-tax ('36) 5 I.T.R. 739 to which my learned brother has referred. At p. 746 I said:
Learned Counsel for the assessee argues that 'to assess to income-tax' means 'to calculate the income-tax payable by the assessee.' I am unable to accept this contention. It seems to me that the only meaning which the words can bear is 'to ascertain or calculate the income-tax payable.'
8. These observations are, I fear, somewhat cryptic and call for elucidation. What I meant was this : An argument was advanced by counsel for the assessee that it was the intention of the Legislature in enacting Section 14(2)(b) that it should apply to any particular amount which may have been taken into consideration by the income-tax authorities in calculating the tax payable by the assessee firm-whether in fact income-tax was or was not found to be payable in respect to such amount. I did not accept that argument and the view which I intended to express was that the sub-section will only apply to such amount if it has actually been assessed to tax.
9. The answer to the question referred to us is in the negative and, in our opinion, in the circumstances of the case the assessee is not entitled under Section 14(2)(b), Income-tax Act, to claim exemption in respect to the whole amount of Rs. 59,011 received by him from the registered firm of Sadhoram Tularam at Calcutta. Let a copy of our judgment be sent to the Commissioner of Income-tax under the seal of the Court and the signature of the Registrar. The assessee will have to pay the costs of this reference. The counsel for the department is entitled to a fee of Rs. 200.