COLLISTER, J. - This is a reference under Sec. 66(2) of the Indian Income-tax Act. The assessee is a joint Hindu family living in Khurja in the Bulandshahr district, whose head and representative is one Seth Kanhaiya Lal. The assessment year is 1933-34. The assessee is a partner to the extent of a one third share in the firm of Messrs. Sadhoram Tularam at Calcutta. The Income-tax Officer of Calcutta found that this firm had paid Rs. 3,33,279 to its partners and he treated this as income of the firm; that is to say, no allowance was granted in respect to this sum. According to his calculations there was a profit of Rs. 1,33,039, but against this he set off a certain sum on account of depreciation and took into account certain other matters with which we are not concerned and ultimately he worked out a net loss to the firm of Rs. 5,434. He thereafter reported to the Income-tax Officer of Meerut that the assessees one third share amounted to Rs. 50,820, which sum was arrived at in the following way.
Net loss of the Calcutta firm
Interest to partners
Gross loss of the Calcutta firm
One third share of the assessee in the gross Loss under the head of interest
Interest actually paid to the assessee
Net share of the assessee
The assessees income from property at Khurja amounted to Rs. 360 and the Income-tax Officer added this amount to the sum of Rs. 50,820 and levied income-tax upon the assessee in the amount of Rs. 51,180. He over-ruled the assessees objection that the assessees share in the Calcutta firm amounting to Rs. 50,820 was not liable to assessment. The assessee applied to the Assistant Commissioner of Income-tax and in his grounds of appeal he also raised a plea of jurisdiction; but the appeal was dismissed. Thereafter the assessee applied to the Income-tax Commissioner for a reference to be made to this Court under Section 66(2) of the Act. The Income-tax Commissioner has accordingly stated a case and has referred three questions of law to this Court. It may be mentioned here that the Income-tax Officer had omitted to take into account the assessees one third share in the net loss of the Calcutta firm, i.e., in the sum of Rs. 5,434, 1/3rd of that amount being Rs. 1,811. He has now corrected the error and finds that the assessees share in the firm works out at Rs. 49,009.
The three questions of law which have been referred to this Court are as follows :- (a) whether the Income-tax Officer, Meerut, had jurisdiction to make the assessment in question; (b) whether the amount of Rs. 51,180 had been correctly treated as the assessees share in the Calcutta firm for the assessment year in dispute; (c) whether in view of the provisions of Sec. 14(2)(b) the amount was exempt from income-tax.
Question :- (a) This plea has been argued before me on two grounds. The first ground is a pure technicality. In his assessment order the Income-tax Officer signed himself as the Income-tax Officer, Meerut, and it is contended that this was a wrong designation.
A notification was issued under Sec. 5(4) of the Income-tax Act on the May 4, 1934, under which an Additional Income-tax Officer was appointed for the Meerut circle and was to have jurisdiction in the Meerut City and in the district of Bulandshahr.
The appellate order of the Assistant Commissioner of Income-tax dated November 16, 1924, shows that it was conceded before him by the assessee that there was an Additional Income-tax Officer of Meerut at the date of the assessment order, i.e., on the June 28, 1934, and that it was that official who made the said assessment order. Obviously the mere fact that the official in question incorrectly or inadvertently designated himself as the Income-tax Officer of Meerut City and the Bulandshahr district cannot divest him of his jurisdiction.
The second ground is that since the assessee was doing business at Calcutta as a partner in the firm of Sadhoram Tularam, the assessment should have been made at Calcutta and not at Khurja.
Clause (1) of Sec. 64 of the Act reads as follows :-'Where an assessee carries on business at any place, he shall be assessed by the Income tax Officer of the area in which his principal place of business is situate.' Clause (2) reads :- In all other cases an assessee shall be assessed by the Income-tax Officer of the area in which he resides'.
In the view which I take, however, upon this question of jurisdiction it will not be necessary to consider whether the assessee was 'carrying on business' at Calcutta within the meaning of clause (1) of Sec. 64 Clause (3) of that section reads as follows - 'Where any question arises under this section as to the place of assessment, such question shall be determined by the Commissioner or where the question is between places in more provinces than one by the Commissioners concerned, or if they are not in agreement, by the Central Board of Revenue; provided that before any such question is determined the assessee shall have had an opportunity of representing his views.'
The provisions of Sec. 64 are concerned with the assessment which an Income-tax Officer makes and clause (3) appears to me to contemplate a question of jurisdiction arising at the time of such assessment and not at any future stage. If the Income-tax Officer has an doubt as regards his jurisdiction or if is moved by the assessee the question of jurisdiction will 'arise' and it will then be his duty to refer the matter to the Commissioner in order that the latter may proceed in the manner laid down by clause (3). In Messrs. Dina Natu Hem Raj v. Commissioner of Income-tax, United Provinces (2 I.T.C. 304) the Income-tax Officer of Cawnpore had assessed a certain firm to income-tax at Cawnpore in spite of the firms objection that the assessment ought to be made at Calcutta. The firm appealed by its appeal was dismissed, an application was then made to the Commissioner of Income-tax to state a case under Sec. 66 of the Act, but the application was refused. Thereafter an application was made to this Court for a rule directing the Commissioner to state a case, and this was allowed. It was held by a Bench of this Court that if the question as to the place of assessment had been decided in accordance with Sec. 64(3) of the Act, the High Court could not have interfered, but as in the circumstances of that case there had been a total failure of the Income-tax authorities to apply the provisions of Sec. 64(3) and an illegal assumption of authority by the Income-tax Officer of Cawnpore, the assessee had a right to have a case stated. At page 313 the following passage occurs in the judgment : 'Where such a question as we have indicated arises as to the principal place of business and such question has been determined by the Commissioner or where the question is between places in more provinces than one, by the Commissioners concerned or by the Board of Inland Revenue, such decision is final. There is no right of appeal and no power in the High Court to interfere with it, nor do the provisions of Sec. 64, which give the assessee a right to require the Commissioner to refer to the High Court any question of law, or in the event of his refusal to apply to the High Court for a statement of the case, apply to a decision made under Sec. 64. No doubt under Sec. 66(1) the Commissioner may on his own motion refer a case to the High Court on any question of law arising in the determination of the question under Sec. 64 but this seems to be the only way in which the determination of such question can be brought before the High Court.'
It will be observed that in that case an objection as regards the place of assessment was made at the earliest moment, i.e., at the time of the assessment proceedings, in the present case, however, no question of jurisdiction arose at the time of assessment inasmuch as the assessee did not object to being assessed at Khurja and the Income-tax Officer himself had apparently no doubt in his own mind as regards his jurisdiction and he was therefore under no necessity to refer the matter to the Commissioner of Income-tax, in my opinion the provisions of clause (3) of Sec. 64 were not intended to apply to any stage after the making of the assessment order.
If the assessee had no right to object in the matter of jurisdiction after the assessment order had been made, it has to be considered whether this is a 'question of law arising out of' the appellate order within the meaning of clause (2) of Sec. 66. It cannot be denied that the question of jurisdiction was raised in appeal before the Assistant Commissioner inasmuch as one of the grounds of appeal was that the Additional Income-tax Officer had no jurisdiction to make the assessment : and thereafter the assessee moved Commissioner to state a case for the decision of the High Court on the ground that this point-among others-had been decided against him by the Assistant Commissioner. There is, of course, nothing to prevent an assessee from putting any plea he may choose into his memorandum of appeal and in that way it can be said that a decision of any such point will create a 'question arising out of the appeal'; but what is to be seen is whether the question is one that property arises out of the appeal. In other words, was the assessee competent to raise this plea before the Assistant Commissioner Sec. 30 of the Act provides that 'any assessee objecting to the amount or rate at which he is assessed under Sec. 23 or Sec. 27 or denying his liability to be assessed under this Act... may appeal to the Assistant Commissioner against the assessment...' I have omitted such portion of the section as is irrelevant. From the language of the section it is clear that an assessee has a right to appeal only as regards his liability to be assessed under the Act or as regards the amount or rate at which he has been assessed; he is not competent to object in appeal as regards the place of jurisdiction. It appears to be the policy of the Act that if there is to be any question of the Income-tax Officers jurisdiction, it must be done at the time of the assessment proceedings and not at any later stage. It is argued before us that in an ordinary civil litigation a question of jurisdiction can be raised at any time and that by analogy an assessee under the Income-tax Act should have the same right. But Section 21 of the Civil Procedure Code enacts that : 'No objection as to the place of suing shall be allowed by any appellate or revisional Court unless such objection was taken in the court of first instance at the earliest possible opportunity and, in all cases where issues are settled, at or before such settlement and unless there has been a consequent failure of justice'. Thus the analogy does not help the assessee. In my opinion the assessee was not competent to ask the Commissioner of Income-tax to state a case on the question of jurisdiction to the High Court.
It is argued that the Income-tax Commissioner could have stated a case on the question of jurisdiction sua motu under Section 66 (1) at any stage, and we are asked to treat this reference which has been made under 66(2) as though it were a reference under Section 66(1). If we acceded to this request it would follow that the limitations in clause (2) would have no meaning. In any case, it is difficult to see how the High Court of this province could decide a question of jurisdiction affecting the Income-tax authorities of Calcutta unless the two Commissioners had agreed to abide by the decision of this Court. I can quite understand that at the time of assessment, if the Income-tax Officer under him on the question of jurisdiction in respect of two or more districts in the province and if he were himself in doubt, he could state a case under Section 66(1) to the High Court of his province, but I am inclined to doubt whether it would be in accordance with the spirit and scheme of the Act that ever this should be done after the assessment has been made. Be this as it may, I am clearly of opinion that the reference in the present case was incompetent under Section 66(2).
It is contended by learned counsel for the department that in any case, if there was a defect in jurisdiction it was cured by clause (4)(f) of Section 64. That clause reads as follows : 'Notwithstanding anything contained in this section, every Income-tax Officer shall have all the powers conferred by or under this Act on an Income-tax Officer in respect of any income, profits or gains accruing, or arising or received within the area for which he is appointed.' The interest paid to the assessee was certainly not income which 'arose' at Khurja and I do not think that it 'accrued' at Khurja. It is not contended before us on behalf of the Department that it has ever been remitted from Calcutta to Khurja and therefore there is no need to consider whether it was 'received' at Khurja within the meaning of clause (4).
Questions (b) and (c). The interest which became payable to the partners was income of the firm and was rightly treated as such by the Income-tax Officer at Calcutta. No allowance was made under Section 10(2)(iii) and it is conceded by learned counsel for the assessee that no such allowance could be made. As remarked by the Income-tax Commissioner : 'What purports to be interest paid to the assessee was, in fact, allocation of the profits of the Calcutta firm distributed in the form of interest to the assessee, and as, in consequence of losses which exceeded its profits, the firm was not assessed to any income-tax, the amount is not covered by the exemption conferred by Section 14 (2)(b)'. Learned counsel for the assessee contends however that since this money was assessed as income from business of the firm, it cannot be assessed a second time in the hands of a partner and can no longer be regarded as income taxable under the Act. In other words, he pleads that since it has been treated as income of the firm, it cannot, on division, become income of the partners who compose such firm. I am unable to accept the view. The sum of Rs. 51,180 is profits accruing personally to the assessee from money invested by the assessee in the firm in his capacity as an individual partner. As the assessee was not doing business at Calcutta in his individual capacity, the interest which has accrued to him upon his investment is income 'from other sources' as contemplated by Section 6(vi) of the Act. Section 16(1) provides that 'in computing the total income of an assessee sums exempted under..... sub-section (2) of Section 14...... shall be included'. And Section 14(2)(b) provides that the tax shall not be payable by an assessee in respect of 'such an amount of the profits or gains of any firm which have been assessed to income-tax as in proportionate to his share in the firm at the time of assessment'. Thus it is clear that a partners share in the profits of a firm is income and must be computed as such. If the profits of the firm have been assessed to income-tax the partners proportionate share therein will thereafter be exempted. 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'. Since the firm at Calcutta suffered a loss, it was not assessed to income-tax within the meaning of Sec. 14(2)(b) and therefore the assessee is not entitled to exemption under that section. In my opinion the amount of Rs. 51,180 was correctly treated as the assessees share in the Calcutta firm for the assessment year in dispute and it was not exempt from income-tax under Section 14(2)(b).
BAJAJ, J. - I agree. I wish to add a few words generally on the three questions referred to us. The entire scheme of the Indian Income-tax Act and more particularly Section 64 shows that the question of jurisdiction should be raised by the assessee before the Income-tax Officer and not at a later stage.
On the other two questions it is enough to say that the entire income which a firm makes is assessable to tax even if out of it a portion is allocated as profits to the various partners in the firm as interest, and the partners would be entitled to exemption on the amount of the said profits, if it has been assessed to income-tax in the hands of the firm, under Sec. 14(2)(b), but the firm itself is not entitled to say that the amount of profits in its hands should not be treated as income; the firm can claim an allowance on the amount of interest paid only in respect of capital borrowed for the purposes of the business where the payment of interest thereon is not in any way dependent on the earning of profits under Sec. 10(2)(iii) but in the present case the payment of interest to partners is only in the nature of allocation of profits and not because of any borrowed capital. However, 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 assessees 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, one in the hands of the firm and a second time in the hands of the assessee who is a partner of the firm. The answer to this lies in the fact that although the entire profits made by the firm were taken into consideration (without making allowance for the amount of interest paid to the various partners) in order to determine the income of the firm, the firm was not assessed to any income-tax because of certain losses which absorbed the entire income and left the firm with a net loss instead of profit. The income made by the assessee 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 an income-tax and not when calculation only of the profits and losses have been made. There is in the present case, therefore, no double taxation, and the amount of Rs. 51,180 has been correctly treated as the assessees share in the Calcutta firm for the assessment year in dispute, and the amount was not exempt from income-tax in view of the provisions of Section 14(2)(b).
Per Curiam. - The answer to question (a) referred to us is that the assessee was not competent to ask the Commissioner of Income-tax to state a case on the question of jurisdiction.
The answer to question (b) is in the affirmative, and the answer to question (c) is in the negative.
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 which will be certified by Counsel for the Department. We allow a month to Mr. kamla Kant Verma to file a certificate. We record the fact that the cast was heard for over three days and Mr. Verma argued it with ability.