1. This is a case stated by the Income-tax Appellate Tribunal, Delhi, on 15-2-1952, where the following question has been referred for determination by this Court:
'Whether in view of the apportionment made by the Income-tax Officer under Section 23(5) (a) of the income of the registered firm of Messrs. Dhanpat Mal Jawala Dass, Amritsar, arriving at Rs. 56,985/- as the applicant's 13 annas share in the firm's net income of Rs. 70,136/-, it was not open to the Income-tax authorities in assessing the applicant as an individual to compute (for the purposes of the Indo-Pakistan Agreement) the applicant's income from the Flour Mills business of Amritsar by taking it separately at Rs. 75,549/- being 13 annas share of Rs. 92,984/-?'
2. The assessee during the relevant period wasa partner of firm Dhanpat Mal Jawala Dass, withits principal place of business at Amritsar, havinga thirteen-anna share and Bodh Raj, the otherpartner. Had a three-anna share. The firm Dhanpat Mal Jawala Dass before the partition of thecountry carried on business both in India as weilas in what is now Pakistan and was a registered firm. For the assessment year 1946-47 theassessment of this firm was completed on 28-8-1948.The total income of the firm was computed atRs. 92,984/- and to this had to be added ExcessProfit Tax refund of Rs. 4,261/-. This firm incurred a loss of Rs. 27,109/- in respect of the business carried on at Vihari (now in Pakistan). Thustheir net income for the purposes of assessmentcomes to Rs. 70,136/-. Acting under Section 23(5)(a), Income-tax Act, the Income-tax Officer apportioned this income as follows:
Name of Partner ProfitSeth Satya Pal -/13/- 56,985/-L. Bodh Raj -/3/- 13,151/-----------70,136/-
3. What the Income-tax Officer did after this was to split up the loss incurred in Pakistan and holding that the share of the loss of the assessee was Rs. 18,564/-, he computed the net income assessable of the assessee on the profits of firm Dhan-pat Mal Jawala Dass to be Rs. 56,985/- plus Rs. 18,564/- making it a total of Rs. 75,549/-. The assessee has complained about this addition of Rs. 18,564/-, which he submits cannot be added and assessed to his other income. The Tribunal has by its order dated 8-1-1951, held against the assessee and on an application being made by the assessee has referred the question which I have given above for the determination of this Court.
4. For the assessee it is submitted that once the amount of income to which a partner is liable to be assessed is determined under Section 23 (5) (a), Income-tax Act nothing further can be added to his assessable income on account of any profit or loss of the registered firm of which he is a partner and which has been assessed in accordance with Section 23 (5) (a) for that particular assessment year.
Section 23 (5) (a) provides-
'23(5) Notwithstanding anything contained in the foregoing sub-sections, when the assesee is firm and the total income of the firm has been assessed under Sub-section (1), Sub-section(3) or subsection (4), as the case may be--
(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 in-come, profits and gains of the previous year shall be assessed and the sum payable by him on the basis of such assessment shall be deter mined:Provided that if such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of Section 24.'
This sub-section deals with the case of a registered firm and provides that when the assessment refers to 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 his share of the income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment snail be determined. Therefore under this section although the income to be assessed is that of a registered firm, the liability to pay is not of that firm but of the individual partners to the extent of their shares and the submission before us was that when the profits earned by a partner of a registered firm are to be ascertained that can only be done in the manner provided in this section and the liability to pay tax by the partner also can only be determined in accordance with the provisions of this Section.
It was further submitted that the total income of firm Dhanpat Mal Jawala Dass was ascertained, the shares of the partners determined and the liability of each of the partners to pay the tax on their respective shares was also fixed by the Income-tax authorities acting under Section 23(5) (a.), Income-tax Act, Once that was done, it was not allowable under the section to the Income-tax Officer to add to the income of the assessee any amount which the Department thinks was earned by the registered firm. Therefore the contention comes to this that what the Income-tax Officer has done is that by adding Rs. 18,564/- to the income of the assessee he has in effect increased the total income of the registered partnership which is not allowed by the law.
5. A similar matter came for determination before a Division Bench of the Bombay High Court in -- 'Commr. of Income-tax Bombay City v. Dwarkadas Vassanji', AIR 1953 Bom 235 (A). It was held that as the registered firm had already been assessed and its total income ascertained it was not open to the Department to separately assess a partner of the firm on his partnership income which did not form part of the total income of the partnership as determined by the Income-tax Department under Section 23 (5) (a). With this statement of law I am in respectful agreement.
6. The registered firm of Dhanpat Mal Jawala Dass has been assessed, profits have been ascertained and the share of the petitioner before us was also ascertained and taken to the individual assessment of each partner under Section 23(5) (a). In my opinion it is not permissible to the Department to make the assessment in one way in the case of one partner and in another way in the case of another.
It was pointed out by Chagla C. J. at p. 237:
'We are dealing with a case of the same assessment, the assessment of the firm for the same accounting year, with regard to the same income, and with regard to the ascertainment of the same profits in our opinion it would be totally contrary to the scheme of Section 23 (5) to permit the Department when it assesses the firm to hold that the total income of the firm was 'X' and subsequently when assessing the individual partner of the firm to hold that the total income of the firm was 'X' plus 'Y'. That is exactly what the Department has done in this case.'
Counsel has also relied on a Judgment of the Privy Council in -- 'Badridas Daga v. Commr. of Income-tax Central and United Provinces', AIR 1949 PC 159 (B). That was a case of a resident and registered firm assessed to income-tax in British India, but a considerable portion of the firm's income arose and accrued outside British India and was not brought into or received in British India. Two or the partners contended that they were not bound to include in their total income the whole of the their share of the income of the firm because they were not 'ordinarily resident or not resident in British India' and the question which was for determination of the Privy Council was whether the partners could successfully raise this contention and it was held by their Lordships that if once the firm was assessed under Section 23 (5) and the income of the partners ascertained, if the firm was a registered one the partners were liable to pay tax on their share and it was not open to claim any exemption under Section 4 on the ground that they were 'not ordinarily resident or not resident' and that the provisions in Section 4 limiting the liability of persons not resident or not ordinarily resident in British India could not be applied so as to qualify or even override any subsequent provision in the Act.
At p. 160 Lord Reid observed:
'In their Lordships' view the question in this case is whether the provisions of the Act which deal with partnership income can be reconciled with an intention to exclude from the total income of partners not resident or not ordinarily resident in British India a part of their share of the firm's income in respect of income accruing to the firm from outside British India.'
Their Lordships thus in effect held that under Section 23 (5) partnership income and the liability to pay tax on that income could not be limited by Section 4. In that case the assessee was claiming exemption and the Privy Council held against it on the ground that the liability to pay tax arises under Section 23(5) (a) and any exemption which is given by Section 4 does not become applicable.
7. On the authority of these cases I am of the opinion that when the total income of the firm is ascertained under Section 23 (5) (a) and from that the share of income is taken into the individual account of each partner, it is not open to the Department to add to that income anything which in effect will increase the income of the partnership and would consequently increase the assessable income of the partner. Looked at from this point of view what it comes to is this that in this particular case the total income of the partnership is Rs. 70,136/- out of which the income of the assessee is Rs. 56,985/- and that of Bodh Raj Rs. 13,151/-. By an addition of Rs. 18,564/- there will be an increase under this head in the income of the assessee to a sum of Rs. 75.549/- and that of Bodh Raj will remain at Rs. 13.151/- and of the whole partnership at Rs. 70.136/- and thus assessable income of the assessee will be greater than the total income as computed of the whole registered partnership, which in my opinion is not allowed by law.
8. For the Income-tax Commissioner reliance was placed on the Indo-Pakistan Agreement, which has been incorporated in notification No. 28, dated 10-12-1947, issued under Section 49-AA. Income-tax Act, the object of which is avoidance of double taxation of income, profits and gains under the Income-tax Act and other Acts. It is headed 'Agreement for the avoidance of double taxation of income between the Government of the Dominion of India and the Government of the Dominion of Pakistan.' Article I gives the taxes which are covered by the Agreement and under Article II the Agreement is to remain in force as long as the basis of residence and the scope of the charging provisions remain unaltered in both the Dominions. Article IV provides;
'Each Dominion shall make assessment in the ordinary way under its own laws; and where either Dominion under the operation of its laws charges any income from the sources for categories of transactions specified in Col. 1 of the schedule to this Agreement (hereinafter referred to as the Schedule) in excess of the amount calculated according to the percentage specified in columns 2 and 3 thereof, that Dominion shall allow an abatement equal to the lower amount of tax payable on such excess in their Dominion as provided for in Article VI.'
By Article V certain amount of abatement is to be allowed where income arising without the teritories of the Dominions is chargeable in both the Dominions. Other Articles are not necessary for the purposes of this case excepting Article VII which also may be quoted in full--
'Article VII.-- (a) Nothing in this Agreement shall be construed as modifying or interpreting in any manner the provisions of relevant Taxation Laws in force in either Dominion.
(b) If any question arises as to whether any income falls within any one of the items specified in the schedule and if so under which item the question shall be decided without any reference to the treatment of such income in the assessment made by the other Dominion.'
9. To this Agreement is attached the Schedule referred to in Article IV. The first column of this Schedule gives the source of income. Columns 2 and 3 give the percentage of income which each Dominion is entitled to charge under the Agreement. The fifth item in this Schedule deals with income from business or other sources and the ninth item is as follows:
1 2 39. Any income derived 100% by the Do- Nil byfrom a source or category of minion in which thetransactions not mentioned the income ac- otherin any of the foregoing items tually accrues orof this Schedule. arises.
10. Now, under this Agreement the object of which, as I have said, is avoidance of double taxation, each Dominion was authorised to make the assessment in the ordinary way under its own laws and where either Dominion under this Agreement charges any income from any source in excess of the amount calculated according to the percentage given in columns 2 and 3, that Dominion is to allow abatement equal to the lower tax payable on such excess in their Dominion and according to Article VII the Agreement was not to be construed in any manner modifying the relevant taxation laws.
Therefore all that this Agreement was meant for was that a person was not to be subjected to double taxation and if he was charged income-tax in one Dominion on certain income he was to be allowed to have abatement to that extent in the other Dominion. If we give effect to the submission of the learned Advocate-General it will amount to this that although the object of the Agreement is to give relief we would really be in the first place amending the provisions in Section 23 (5) (a) and secondly the assessee will be liable to be assessed on a higher amount than if this Agreement had not come into force. I cannot accept the interpretation that the object of this Agreement could have been to put a further burden on the assessee rather than give him relief, and the contention raised by the learned Advocate-General is in my opinion not sustainable and must be repelled.
11. I would therefore answer the question this way that out of the income of the partnership, which was Rs. 70,136/-, the income which would go into the share of Seth Satya Pal Virmani for the purposes of taxation is Rs. 56,985/- and not Rs. 75,549/-. As the assessee has succeeded in this Court, the Commissioner of Income-tax must pay his costs. Counsel's fee Rs. 250/-.
12. I agree.