1. This is an appeal by special leave from the order of the High Court of judicature at Bombay passed on September 22, 1955, on a reference under section 66(I) of the Indian Income-tax Act (XI of 1922, hereinafter referred to as 'the said Act') made by the Income- tax Appellate Tribunal whereby the High Court answered the question of law referred to it by the Tribunal in the affirmative.
2. The respondent was an employee of Dadajee Dhackjee and Co., Bombay (hereinafter referred to as 'the firm'). The firm used to pay to each of its three employees, including the respondent, a commission of one per cent. On its total annual turnover in its Colour Department in addition to their respective salaries. In connection with the assessment of the firm's income for the assessment year 1945-46, for which the accounting year was Sambat 2000 (covering the period between October 30, 1943, to October 17, 1944), the Income-tax Officer found that the profit and loss account of the Colour Department of the firm had been debited with Rs. 84,540 as and by way of commission pad to three employees of the firm including the respondent, the commission being calculated at three per cent. On the annual turnover of that department, i.e., at one per cent in respect of each of the per cent. to those three employees in the preceding accounting year., Sambat 1999, and in the assessment for the corresponding assessment year 1944-45 the Income Tax Officer had allowed only one per cent. commission on the total annual turnover of the Colour Department as a, reasonable and permissible deduction under Section 10(2) (xv) and disallowed the bal-lance of two per cent. commission actually paid by the firm in that year. As, according to him, the same condition obtained in the assessment year 1945-46, he allowed Rupees 28,180 being commission at one per cent. as reasonable and disallowed the balance amounting to Rs. 56,360. Thus the share of each of the three employees in the amount disallowed in Sambat year 2000 worked out at Rs. 18,787. Besides, this certain other sums on certain other heads were also disallowed. The result was that the profit of the Colour Department shown as Rs. 4,27,139 in the Profit and Loss account of that Department for Sambat 2000 was raised from that figure to Rs. 5,30,900 by adding back Rs. 56,360 which was disallowed out of Rs. 84,540 paid to the employees as and by way of commission and certain other sums which we need not specify or discuss. The reason given for this disallowance was that the amount paid as commission was to the extent of 2/3 thereof, unreasonable and excessive, and not permissible under Section 10(2)(xv). After deducting Rs. 1,19,816 being the loss of the Motor Department from the profit of Rs. 5,30,900 of the Colour Department, so arrived at, the total income of the firm was computed at Rs. 4,11,084. As the firm was registered under Section 26A of the said Act, no demand was made on the firm in view of Section 23(5)(a) and the total income computed as aforesaid was distributed amongst the two partners who were husband and wife. As the wife's share is to be included in the total income of the husband under Section 16(3)(1), the entire income of the firm was taken into consideration in the assessment of the male partner. The Income Tax Officer next considered the claim of the firm for relief under Section 25(4) of the said Act, as the business of the firm had been taken over by a private limited company, Dadajee Dhackjee and Co. Ltd., as a going concern with its assets and liabilities from the Sambat year 2001. As the firm had been assessed under the Income-tax Act, 1918 and as notice was duly given on June 4, 1945 about the discontinuance of the business, the Income Tax Officer held that the firm was entitled to the relief claimed and accordingly allowed the same.
3. On March 19,1949, the respondent submitted returns for the assessment years 1944-45, 1945-46,1946-47, 1947-48 and 1948-49. In connection with the assessment years 1944-45 and 1945-46, the respondent claimed that, as in the assessment of the firm during the years 1944-45 and 1945-46 two-thirds of the commission paid to him for Sambat years 1999 and 2000 had been disallowed and taxed in the hands of the firm, he was entitled to an exemption from income-tax and super-tax on the commission so disallowed to the firm and on which the firm had paid the tax. As already stated the respondent's share of commission disallowed to the firm in respect of the assessment year 1945-46 was Rs. 18,787. This claim was made on the strength of the Finance Department Notification NO. 878-F dated March 21,1922, as amended by Notification No. 8 dated March 24,1928. The said notification was expressed in the terms following :
'The following classes of income shall be exempt from the tax payable under the said Act, but shall be taken into account in determining the total income of an assessee for the purposes of said Act :
(1) Sums received by an assessee on account of salary, bonus, commission or other remuneration for services rendered or in lieu of interest on money advanced to a person for the purposes of his business,
Where such sums have been paid out of, or determined with reference to, the profits of such business and by reason of such moods of payment or determination, have not been allowed as a deduction but have been included in the profits of the business on which income-tax has been assessed and charged under the head 'business.
Provided that such sums shall not be exempt from the payment of super- tax unless they are paid to the assessee by a person other then a company and have already been assessed to super-tax.'
4. The Income-tax Officer rejected this claim and his decision was upheld on appeal by the Appellate Assistant Commissioner. A further appeal to the Tribunal was also rejected, the Tribunal taking the view that the notification could only apply in respect of the profits of a business on which income-tax had been assessed and charged and that as the income of the firm had not been assessed and charged to income-tax in the relevant year, the notification had no application.
5. On application under section 66(I) of the said Act, the Tribunal, on January 14, 1955, submitted a statement of case to the High Court raising the following question of law for the determination of the High Court :
'Whether the assessee is entitled to relief granted by the Notification referred to above ?'
6. The High Court answered the referred question in the affirmative, i.e., in favor of the assessee respondent. In doing so, the High Court repelled both the contentions of the learned Advocate-General appearing for the Department, namely, that the commission had not been paid out of the profits and that income-tax had not been assessed and charged on the income. According to the High Court, the order of assessment clearly showed that the commission had been paid out of the profits and that, as on computation the amount of Income was assessable, it became immediately liable to tax under section 3 and was, therefore, statutorily charged to tax. The High Court having refused to grant a certificate of fitness for appeal to this court, the Commissioner of income-tax, Bombay, applied for and obtained from this court special leave under article 136 of the Constitution to appeal to this court. The short and simple question in this appeal is whether, on a true construction of the notification, the respondent is entitled to the relief.
7. A perusal of the notification clearly indicates that exemption from taxation in respect of the sum received by an assessee from a business on account, inter alia, of commission can be claimed only on three conditions, namely :
'(1) Where such sum has been paid out of or determined with reference to the profits of the business;
(2) Where by reason of such mode of payment or determination the sum paid has not been allowed as a deduction but has been included in the profits of the business; and
(3) Where on the sum so disallowed in the computation of the profits of the business, income-tax has been assessed and charged under the head 'business.'
8. These three conditions are cumulative and all of them have to be fulfilled before the assessee can claim the benefit of exemption. The obvious purpose of this notification is to avoid double taxation by pervading that if the amount in question has been assessed and charged in the hands of the firm, the same should not be assessed and charged over again in the hands of the assessee.
9. As regards the first condition it is clear that the commission had not determined with reference to the profits of the business of the firm, for it was agreed to be calculated at a given percentage of the total turnover of the year. The only question, for the purpose of this condition, is whether the commission had been paid out of the profits, The Department points out that according to the profit and loss account of the Colour Department of the firm the profit was shown as Rs. 4,27,139 and that sum having been arrived at after the payment of salary, commission and other outgoing, it cannot possibly be said that the commission had been paid out of the profits, for profits could only be ascertained after the outgoing had been paid. In support of the order of the High Court, the respondent maintains the profit had been found to have been understated because the net profit, as shown in the order of assessment, was really Rs. 5,30,900. As this real profit has been reduced to Rs. 4,27,139 only by debiting the amounts added back by the Income Tax Officer including the two third share of the commission amounting to Rs. 56,360, it is clear that this commission which had been disallowed had been paid out of the total profit of Rs. 5,30,900. The department replies that there is a distinction between actual profit and the assessable income and points out that the real profit, as a business proposition, was Rs. 4,27,139 while Rs. 5,30,000 was the assessable income arrived at in the manner shown in the order of assessment. In support of this distinction we have been referred to certain decisions of the High Courts and of the Privy Council in connection therewith. Although this point was raised before the High Court, it does not appear to have been mooted before the income-tax authorities and can, therefore, hardly be said to arise out of. the Tribunal's order. Further, in the view we have taken, it is not necessary for us to express any opinion on this question and we shall assume, without deciding, that the commission had been paid out of the profits.
10. The second condition, which appears not to have been noticed by the High Court, is that the sum paid out of profits of determined with reference to the profits of the business had not been allowed as a deduction 'by reason of such mode of payment or determination'. In this case learned counsel for the Department urges, the amount was disallowed not because it had been paid out of profits or had been determined with reference to the profits of the business, but because he held it to be excessive and unnecessary and not a permissible deduction under section 10(2)(xv) of the said Act. There is good deal to be said for view. But here, again, the matte does not appear to have been raised either before the matter does not appear to have been raised either before the Income-tax authorities or the High Court and we cannot, therefore, base our decision on this ground.
11. The third condition for successfully claiming relief under the notification is that income-tax should be shown to have been 'assessed and charged under the head business' on the sum paid as commission but not allowed as a deduction. In ascertaining the meaning of the word 'charged', the High Court has referred to what have been described as the four processes recognized by the Income-tax Act, namely, (i) assessment, meaning the mode of computation, (ii) the levy, which is the procedure laid down for the realization of the tax, and (iv) the actual payment. The High Court has placed reliance on section 55 of the said Act where the words 'charged, levied and paid' have been used in connection with the payment of super-tax. This does not appear to us to be the right approach. What is to be ascertained is the meaning of the word 'charge' as used in the notification under consideration. It is clear that the primary object and purpose of the notification is to prevent double taxation on the same amount, namely, in the assessment of the income of the business and again in the hands of the assessee who receives it from the business as commission etc. The word 'charged' must be construed having regard to the subject and to the context in which it has been used. It is true that Section 3 of the said Act is the charging section and lays down that tax at the rate specified by any Central Act (which is the annual Finance Act) shall be charged, subject to the provisions of the Act, in respect of the total income of the previous year. This section does declare that income is, subject to the provisions of the Act, chargeable to tax. But there is a good deal of difference between income being liable to tax and tax being assessed and charged on income. The Notification talks of income-tax having been assessed and charged under the head 'business'. Having regard to the purpose of the Notification and the context and the sequence in which the words 'assessed' and 'charged' have been used, it is clear that the word 'charged' does not, in the Notification, mean the mere statutory liability to pay tax but goes further and includes the actual charge or levy. Apart from the fact that in view of the claim for relief under Section 25(4) the Income Tax Officer need not have taken the trouble of going through the process of assessment of the firm's income at all, it is not disputed that in fact the firm's income has not been assessed to tax and no tax has been charged in the sense of being levied. In this view of the matter the third condition has not been fulfilled and the assessee cannot, therefore, claim any relief under the Notification.
12. For the reasons stated above the referred question in our option be answered in the negative. The appeal is therefore allowed with costs both here and in the court below.
13. Appeal allowed.