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Mrs. A.S. Rosebrook Vs. First Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Bangalore
Decided On
Judge
Reported in(1983)5ITD1(Bang.)
AppellantMrs. A.S. Rosebrook
RespondentFirst Income-tax Officer
Excerpt:
.....provisions of the act. that being so, the department is entitled to consider his share in the firm income as the total income for the purpose of levy of tax. it is obvious that in the case of a non-resident, it is impossible for the department to be aware without information furnished by such non-resident of all his sources of income in the taxable territories or elsewhere so that the total income within the meaning of section 2(15) cannot possibly be worked out. if the total income of such a non-resident person could be assessed in the same manner as the total income of the resident partners of the firm is assessed under the first part of sub-section (5), clause (a), there would be no difficulty in making an assessment of the tax at the rates applicable to that income. but that is.....
Judgment:
1. These appeals relate to the assessment years 1977-78 and 1978-79.

They are being disposed of together as common points are involved.

2. The assessee is a non-resident. The assessee is a partner in two registered firms, namely : (1) Golden Corn Co. and (2) Golden Corn Machinery Co., Bangalore. She also derives income from two Auto Rikshas and also income from other sources. The assessee's minor daughter, Miss Ingrid Nocole Rosebrook, who was also a non-resident, was a partner in a registered firm, namely, Bangalore Co. It was contended before the ITO that the assessee's share income from the two registered firms as well as the minor daughter's share income is not assessable in the total income of the assessee. It has to be assessed in the hands of those registered firms. The minor's income cannot be included under Section 64(1)(iii) of the Income-tax Act, 1961 ('the Act'). The ITO did not accept these contentions. He held that as Section 182(3) of the Act is only a machinery section, the ITO has got the option to assess the non-resident partner directly. Hence, the share income of Rosebrook (the assessee) from the two firms in which she is a partner can also be included in her assessment. He also held that the provisions of Section 64(1)(iii) are mandatory. Hence, the share income of the minor daughter in the firm of Bangalore Co. is includible in the assessment of the assessee under Section 64(1)(iii). The assessee appealed to the AAC. He held that Section 64(1)(iii) is a special provision and it will have to prevail over the general provision. Under Section 182(3) only tax on the share income of a nonresident should be assessed and it should be paid by the firm. But Section 182(3) comes into operation after the total income of the firm is computed under Section 143(3) or Section 144 of the Act. In the case of a nonresident, the tax payable by the non-resident is to be recovered from the firm. Therefore, Section 182 conies into operation after the assessment is completed and the scope of the section is limited to the recovery of the tax due from the non-resident, whereas Section 64(1)(iii) comes into operation while concluding the assessment of any individual. This provision does not make any distinction between a resident and a non-resident. Thus, he held that the ITO was justified in including the income of the non-resident minor in the hands of the assessee by invoking Section 64(1)(iii). In respect of the share income of the assessee in the two firms in which she is a partner, though this ground was raised before the AAC, there is no discussion in his order on this issue. However, he has impliedly upheld the inclusion of the share income from the two firms in the assessment of the assessee as is clear from his finding that Section 182(3) is only a machinery section. Against the said order the assessee has preferred these appeals.

3. The learned counsel for the assessee strongly urged that the share income of the non-resident is assessable in the hands of the registered firm under Section 182(3) and that share income cannot be included in the individual income of the non-resident. Secondly, he contended that the share income of the non-resident minor is not includible in the hands of the assessee under Section 64(1)(iii). It was urged that Section 64(1)(iii) would not be applicable since the share income of the non-resident is not assessable in her hands but is assessable in the hands of the firm. Hence, the minor's income is not includible in the assessee's individual assessment. He particularly stressed that only a direct assessment under Section 182(3) can be made on the firm in respect of the share income of the nonresident, but it cannot be assessed directly in the assessment of the nonresident individual. He relied upon the decisions reported in Gnanam & Sons v. CIT [1961] 43 ITR 485 (Mad.), Lima Leitao & Co. Ltd. v. Union of India [1968] 70 ITR 518 (Goa, Daman & Diu), S. Sankappa v. ITO [1968] 68 ITR 760 (SC) and CIT v. Naraindas Dwarkadas [1976] 102 ITR 767 (Bom.). In respect of the share income of the non-resident from the two firms in which she was a partner, though a ground was taken before the AAC, no finding has been given by him. This ground has been taken up in the grounds of appeal before us. Since the AAC has impliedly upheld the enclosure, we have permitted the assessee's counsel to argue this point also. The learned departmental representative strongly urged that a direct assessment on the non-resident is permissible wherein the share income also apart from the other income of the individual could be included. But in respect of the share income, the recovery of the tax will be made from the registered firm. He pointed out that if a non-resident is a partner in more than one firm, then each firm in which he is a partner cannot know his total income which he derives from other business or other sources apart from share income from them. Hence, for that reason, a direct assessment has to be made first. Then, in respect of the share income, it has to be assessed under Section 182(3) and the tax has to be recovered from the firm. There is no double taxation as it is taxed on different hands. Thus, he justified the assessment made on the non-resident. He further urged that under Section 64(1)(iii) the share income of the minor daughter who is also a non-resident is includible in the assessment of the assessee. This is a special provision and it prevails. Since the assessee has separate individual income from other business and other sources apart from the share income, in computing that income the minor's income is includible under Section 64(1)(iii).

Section 64 is a mandatory provision and so the minor's income is includible even if the share income of the minor is assessed in the hands of the firm in which she was a partner. He relied upon the decisions in CIT v. Smt. P.K. Kochammu Amma [19801 125 ITR 624 (SC), C.R. Nagappa v. CIT [1969] 73 ITR 626 (SC) and R.M. Ratmanathan Chettiar v. CIT [1970] 78 TTR 10 (SC).

4. We have considered the rival submissions. There is no dispute about the facts. The assessee, who is a non-resident, is a partner in two firms. Apart from this, she has income from two Auto Rikshas and also income from other sources. The first question that arises for consideration is whether the share income from those two firms could be included in the individual assessment of the non-resident or that share income has to be assessed only in the hands of the firm under Section 182. The next question is whether the share income of the minor daughter of the assessee, who is also a non-resident, from Bangalore Co., is includible in the hands of the assessee under Section 64(1)(iii).

5. We would first deal with the first question. Section 4 of the Act is the charging section under which income-tax shall be charged for any assessment year in respect of the total income of the previous year of every person at the rate prescribed. Section 5 deals with the scope of the total income. Sub-section (2) of Section 5 of the Act deals with the total income of a person who is a non-resident. Under the said provision, the total income of any previous year of a non-resident includes all income from whatever source derived which is received or is deemed to be received in India or accrues or arises or is deemed to accrue or arise to him in India during such year. Under Explanation 1 income accruing or arising outside India shall not be deemed to be received in India. Under Section 143 total income is assessed and the tax payable is determined. Section 182 deals with the assessment of registered firm. Section 182(3) reads as under : 182. (3) When any of the partners of a registered firm is a non-resident, the tax on his share in the income of the firm shall be assessed on the firm at the rate or rates which would be applicable if it were assessed on him personally and the tax so assessed shall be paid by the firm.

Sub-section (3) of Section 182 provides that if a non-resident is a partner of a registered firm, the tax on his share in the income of the firm shall be assessed on the firm at the rate or rates which would be applicable if it were assessed on him personally and the tax so assessed shall be paid by the firm. Thus, Sub-section (3) of Section 182 is a special provision for assessing the share income of the non-resident in the hands of the firm. When such a special provision is made to make an assessment on the firm in respect of the share income of the non-resident who is partner in that firm, that share income of the non-resident from that firm cannot be included in the individual assessment of the non-resident. The other income of the non-resident excluding the share income from firms in which he or she is a partner can be assessed on the non-resident in his individual assessment. But the share income of the non-resident in a firm in which he or she is a partner cannot be included in the individual assessment of the non-resident, but has to be assessed only on the firm applying the rate applicable if that share income was assessed on the nonresident personally and the tax so assessed shall be paid by the firm. Section 23(5)(a) of the 1922 Act was a similar provision as Section 182(3). it reads as under : (a) in the case of a registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined :** ** ** ** Provided further that when any of such partners, is a person not resident in British India his share of the income, profits and gains of the firm shall be assessed on the firm at the rates which would be applicable if it were assessed on him personally and the sum so determined as payable shall be paid by the firm; The proviso therein is exactly on identical terms with Section 182(3).

That provision came up for consideration before the Madras High Court in the case of Gnanam & Sons (supra). In that case, one of the partners in the firm of Gnanam & Sons was a non-resident. In the reassessment order made on the firm under the second proviso to Section 23(5)(a), tax payable was calculated by application of Section 17 which provides for levy of tax at the maximum rate. The Madras High Court observed as under : ...Sub-section 5(a) falls naturally into two parts. The first part deals with the case where all the partners of the firm are resident in the taxable territories, in which even the total income of the firm as assessed is not brought to tax but the total income of each partner of the firm including therein his share of such assessment is determined. In the latter part of the section covered by the second proviso, the case where any of such partners happens to be a non-resident has been dealt with. While in the case of a partner who is a resident in the taxable territories, the earlier part of the section provides for the assessment of his total income, including therein his share of the firm's income, in the latter part of the section dealing with a non-resident, the total income of the non-resident partner does not come in for assessment at all. It is only his share of the firm's income that is made liable for assessment and the sum so determined as payable is made payable by the firm. The argument that this proviso calls for the determination of the total income of the non-resident partner, therefore, fails.

On the language of this proviso, there does not, therefore, appear to be any ground for computing the income of such non-resident partner with reference to Section 4(1) of the Act and for excluding the income derived without the taxable territories by the operation of Section 4(1)(c). It is obvious that such a course would be called for only when the computation of the total income of the assessee is undertaken. (p. 488) ...Section 17 deals with the special case of a non-resident and provides that the tax payable by such non-resident should be calculated at the maximum rate. It is true that this section uses the expression 'total income', but in the case of a non-resident, who is a partner of a resident registered firm, this expression 'total income' should be construed in conformity with the determination of the taxable income of such nonresident partner under Section 23(5). This section specifies that the nonresident's share of the firm's income is assessable and does not render the determination of the taxable income subject to the other provisions of the Act. That being so, the department is entitled to consider his share in the firm income as the total income for the purpose of levy of tax. It is obvious that in the case of a non-resident, it is impossible for the department to be aware without information furnished by such non-resident of all his sources of income in the taxable territories or elsewhere so that the total income within the meaning of Section 2(15) cannot possibly be worked out. If the total income of such a non-resident person could be assessed in the same manner as the total income of the resident partners of the firm is assessed under the first part of Sub-section (5), Clause (a), there would be no difficulty in making an assessment of the tax at the rates applicable to that income. But that is not the case. Nor is it open to the department to call upon the non-resident to submit a return of his total income. It seems to us, therefore, that in the special case of a non-resident partner of a resident firm, the rate which would be applicable to him if his share of the income were assessed on him personally is the rate that is laid down in Section 17 of the Act. (pp. 489-90) ...It seems to be for that reason that the levy of tax is made on the firm itself in respect of the share income of such non-resident partner at the rate at which such a non-resident would be liable to pay tax. This part of the provision of the proviso clearly brings Section 17 into operation. (p. 490) It is, no doubt, true that under Section 17 the maximum rate applicable is prescribed in the case of non-resident. Such a provision, i.e., Section 113, which was there in the 1961 Act has been deleted with effect from 1-4-1965. Now, under Section 182(3), share income of the non-resident partner will be assessed on the firm at the rate or rates which would be applicable if it were assessed on him personally and the tax so assessed shall be paid by the firm. In the above decision it has been clearly held that the total income of the non-resident partner does not come in for assessment at all and it is only his share of the firm's income that is made payable by the firm.

6. In Naraindas Dwarkadas case (supra) the Bombay High Court had an occasion to consider the provisions of Section 23(5)(a). It was held therein that the second "proviso to Section 23(5)(a) lays down that in the case of a non-resident partner of a firm in the taxable territories, his share of the income, profits and gains of the firm shall be assessed on the firm at the rates which would be applicable if it were assessed on him personally and the sum so determined as payable shall be paid by the firm. It was further held that the effect of the above proviso is that as ordinarily in the case of a registered firm the share of a partner in the income, profits and gains of the firm are to be assessed in his individual return, that provision is not applicable or attracted when such a partner is a nonresident partner in the taxable territories. In the case of such a nonresident partner the share of such a partner in the income, profits or gains of the firm has to be assessed on the firm itself and the rate at which the computation is to be made is on the footing, that assessment is made on such non-resident partner personally.

7. In S. Sankappa's case (supra) it has been observed by the Supreme Court as under : ... In certain cases, after the apportionment of the income of the registered firm, the share of a particular partner, who is not resident in the taxable territories, is to be assessed to tax also as if it is the income of the registered firm.... (p. 767) 8. The ratio laid down in the above decisions clearly applies to the instant case as the provisions of Section 23(5)(a) of the 1922 Act are similar to Section 182(3) of the 1961 Act. Thus, in our view, under Section 182(3) the share income of the non-resident partner in a registered firm in India shall be assessed on the firm at the rate or rates which would be applicable if it were assessed on him personally and the tax so assessed shall be paid by him. Thus, the inclusion of the share income of the non-resident in the individual assessment made on the non-resident is not correct. Hence, we exclude the share income of the assessee non-resident from the two firms, namely (1) the Golden Corn, Co. and (2) the Golden Corn, Machinery Co.

9. Since the share income from the above two firms is not assessable in the individual assessment of the non-resident, we thought that a direction should be given to assess the said share income of the non-resident in the assessments of the above two firms. Hence, we gave notice to the above firms. We heard the learned counsel for the said two firms. He pointed out that in the assessment year 1978-79, an assessment has been made on Golden Corn Co., but in the assessment year 1977-78 no such assessment has been made. So far as the Golden Corn Co.

is concerned, no assessment has been made, but a return has been filed for the assessment year 1978-79. in case of Bangalore Co. notice under Section 148 has been issued. The learned departmental representative submitted that where assessment is not made, a direction should be given to make the assessment on the firm in respect of the share income of the non-resident under Section 182(3).

10. We think it proper to issue the necessary directions to the HO in this regard. Accordingly, we direct that wherever an assessment is not made in respect of the share income of the assessee non-resident on the registered firm, the ITO should make an assessment, whether return was filed or not, on the registered firm in respect of the share income of the assessee non-resident, assessing it on the firm at the rate or rates which would be applicable if it were assessed on him personally and the tax so determined shall be paid by the firm.

11. The next question is with regard to the applicability of Section 64(1)(iii), in respect of the share income from Bangalore Co. of the minor daughter of the assessee who is also a non-resident. We have already held with respect to the share income of the assessee non-resident from the two firms that the share income is assessable only on the firms under Section 182(3) and not in the individual assessment of the nonresident. That finding equally applies in respect of the share income from Bangalore Co. of the minor daughter of the assessee who is also a non-resident, in view of Section 182(3). Since the minor daughter of the assessee who is a partner in Bangalore Co. is a non-resident, her share income from the said firm is assessable only according to Section 182(3) and under that provision, the share income of the non-resident in a registered firm is assessable on the firm at the rate or rates which would be applicable if it were assessed on him or her personally and the tax so determined shall be paid by the firm.

This provision equally applies whether the non-resident is a minor or a major. Thus, the share income of the minor daughter who is a non-resident should be assessed only on the firm. Since the share income of the minor daughter is assessable on the firm in view of Section 182(3), that share income cannot be included in the hands of the assessee-non-resident in her individual assessment under Section 64(1)(iii) as it is assessable only on the firm in which the minor daughter is a partner. Thus, we hold that the inclusion of the share income from Bangalore Co. of the minor daughter who is a non-resident, in the individual assessment of the assessee-non-resident is not correct. Accordingly, we exclude the same from the assessee-non-resident. But we direct the ITO that the share income of the minor daughter who is a nonresident should be assessed on the Bangalore Co. in which the minor is a partner, at the rate or rates which would be applicable as if it was assessed on her personally and tax so assessed shall be paid by the firm. The other decisions cited by both sides have not been discussed as they are not relevant to the point at issue.


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