JAGADISAN J. - The questions referred under section 66 of the Income-tax Act are as follow :
'(1) Whether the assessee is entitled to both the parts of relief contemplated under section 25(3) of the Act in respect of foreign businesses at Penang, Ipoh and Kambar?
(2) Whether the applicant is also entitled to relief under section 25(3) of the Act with regard to rental income from house properties owned by the foreign firm which was discontinued in the year of account?
(3) Whether on the facts and in the circumstances of the case, the amount of $ 32,097 being recovered under the Malayan Debtor and Creditor Ordinance are not assessable in the year of assessment 1952-53?'
The assessee is a firm called O.RM.M.SP.SV. Firm. Prior to the constitution of this firm, the partners were members of Hindu undivided family. The vilasam of the family was also O.RM.M.SP.SV. The family which consisted of one Meyyappa Chettiar and his two brothers carried on money-lending business in the India and in the former Federated Malay States and it was assessed under the Indian Income-tax Act, 1918. There was a disruption of the joint family status on June 2, 1938, and thereafter, the members of the family continued the business in the same places as partners. In the course of the assessment for the year 1939-40, it was claimed by Meyyappa Chettiar, one of the members of the family, that having regard to the severance of joint family status, the income of the family from April 13, 1938, to June 2, 1938, was not liable to be taxed by reason of the provisions of sub-sections (3) and (4) of section 25. The Income-tax Officer accepted the fact of partition amongst the members of the family, but he, however, rejected the contention that the family was not liable to pay tax of the profits for the said period. Meyyappa Chettiar appealed to the Appellate Assistant Commissioner without success. This court directed to the Commissioner to refer the following questio : 'Whether the income of the family from April 13, 1938, to June 2, 1938, is not liable to be taxed by virtue of section 25(3) of the Indian Income-tax Act?' One of the contentions raised by the Commissioner by way of opposition to be claim of Meyyappa Chettiar was that there was no discontinuance of the business as required by section 25(3) of the Act. It was held by this court that there was no discontinuance of the business within the meaning of section 25(3). The view taken by this court was that when a Hindu undivided family carrying on a business, which was taxed under the Act of 1918, becomes disrupted and the members continue the business thereafter as partners, there can be no discontinuance (which means cessation), but only succession by the firm to the business of the family. This decision is reported in O.RM.M.SP.SV. Meyyappa Chettiar v. Commissioner of Income-tax. It was the assessee firm which took over the business of the erstwhile Hindu undivided family. It may be noted here that the Commissioner of Income-tax submitted in the statement, which he filed in this court during that case, that relief would be granted later on if there happened to be any succession to or discontinuance of the firm as such.
The firm was dissolved on March 2, 1952. In the assessment for the year 1952-53, it applied for relief under section 25(3) of the Act. The assessee collected the sums of $ 12,545, $ 13,064 and $ 16,788 in the course of its business at Penang, Ipoh and Kambar respectively under the Debtor and Creditor Ordinance of Malaya. These amounts became due and payable to the assessee on account of the re-valuation of the Japanese currency under the terms of the said Ordinance. The Income-tax Officer held that the assessee was not entitled to relief under section 25(3) of the Act, and that the recoveries of the amounts under the Ordinance were income receipts liable to be taxed. The assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax who substantially affirmed the decision of the Income-tax Officer but for a slight modification with which we are not now concerned. In his opinion the claim for relief under the section 25(3) was not well founded and that the recoveries due to the operation of the Malayan Ordinance should be deemed to be taxable receipts. The assessee went up on a further appeal to the Income-tax Appellate Tribunal. With regard to the recoveries under the Ordinance, the Tribunal followed the decision of this court in M.L.M. Muthiah Chettiar v. Commissioner of Income-tax and held that should be deletion of 32,097 dollars from the assessment.
This sum was arrived at as follow :
Full recoveries assesseed
Principal recoveries to be excluded
On the question whether section 25(3) was applicable as claimed by the assessee the Tribunal held, that except for the income received from house properties in Malaya, which is separately assessable under section 9 of the Act, the assessee was entitled to its benefit. Both the assessee and the department applied to the Tribunal for reference of questions of law to this court and the Tribunal granted the prayer. Questions Nos. 1 and 3 set out above have been referred at the instance of the Commissioner of Income-tax and question No. 2 at the instance of the assessee.
It will be convenient to refer to the terms of section 25 forthwith. It is in the following term :
'25. (1) Where any business, profession or vocation to which sub-section (3) is not applicable, is discontinued in the year, an assessment may be made in that year on the basis of the income, profits or gains of the period between the end of the previous year and the date of such discontinuance in addition to the assessment, if any, made on the basis of the income, profits or gains of the previous year. (Sub-section (2) is omitted).
(3) Where any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income-tax Act, 1918 (VII of 1918), is discontinued, then, unless there has been a succession by virtue of which the provisions of sub-section (4) have been rendered applicable, no tax shall be payable in respect of the income, profits and gains of the period between the end of the previous year and the date of such discontinuance, and the assessee may further claim that the income, profits and gains of the previous year shall be deemed to have been the income, profits and gains of the said period. Where any such claim is made, an assessment shall be made on the basis of the income, profits and gains of the said period, and if an amount of tax has already been paid in respect of the payable on the basis of such assessment, a refund shall be given of the difference...
(5) No claim to the relief afforded under sub-section (3) or sub-section (4) shall be entertained unless it is made before the expiry of one year from the date on which the business, profession or vocation was discontinued or the succession took place, as the case may be.'
Section 25 deals only with income from business, profession or vocation. Sub-section (3) is clearly an exception to sub-section (1). Sub-section (1) provides that where there is discontinuance of business, profession or vocation, an assessment can be made in the year of discontinuance on the income between the end of the previous year and the date of discontinuance in addition to the assessment of the income of the previous year. Though normally it is only the income of the previous year which is taxed under the Act, this is a special rule in cases of discontinuance of business whereby not merely the income of the previous year but also the income of the assessment year between the end of the previous year and the date of the discontinuance is assessed to tax. Sub-section (3) provides that if the business, profession or vocation was charged under the provisons of the Act of 1918, a different rule of computation of income should prevail. The ingredients of this sub-section ar : 1. The business, profession or vocation must have been charged to tax under the provisions of the Indian Income-tax Act, 1918. 2. That business must have discontinued. 3. On such discontinuance no tax shall be payable in respect of the income, profits and gains of the period between the end of the previous year and the date of discontinuance. 4. In addition to the privilege of non-payment of tax for that period, the assessee may further claim that the income, profits and gains of the previous year shall be deemed to have been the income, profits and gains of that period. That is to say, the assessee can ask for the substitution of the income, profits and gains from the end of the previous year to the date of discontinuance of income of the previous year and claim a refund of tax difference if the substitution were to lead to such a result. The assessee, therefore, gets a double advantag : (i) nontaxability of the income between the end of the previous year and the date of discontinuance and (ii) the substitution of the income for that period for the income of the previous year in so far as it may be advantageous to him.
The whole of the controversy in this case, in so far as question No. 1 is concerned, revolves on the question whether the foreign business of the assessee was at any time charged under the provisions of the Indian Income-tax Act, 1918. It is not now disputed by the department that the assessee was taxed on remittances received from and out of profits from the foreign business. The finding of the Appellate Assistant Commissioner in respect of assessment under the 1918 Act is in these term :...... The entire profits of the foreign business came to be assessed in the hands of the appellant under the 1918 Act, not because it was a business income, but because such income had been remitted into British India. Therefore in fact also it is not the foreign profits of a business that has been charged to tax but only the remittance which in the particular case was not less than the profits of the year'.
We have, therefore, to proceed on the footing that the assessee received remittances from foreign parts from and out of its income in the foreign businesses and those remittances were taxed under the 1918 Act. In fact, before the amendment of the year 1939, even a resident within the taxable territory cannot be made liable for his foreign income unless it was received or accrued within the taxable territory. The 1939 amendment however introduced a change whereby a residents total income comprises income accruing or arising in any part of the world. The assessee could, therefore, have been taxed only on the basis of receipt of foreign income within the taxable territory. We may also assume that the amounts taxed should have been received by the assessee as remittances of profits of foreign business. It is now settled law that an amount of income, profits or gains can be received only once as income. If the income had been received a such in the foreign territory and thereafter transmitted to the taxable territory, it would not be receipt of income. The following observation of Kania J. in Kamdar (B.M.), In re has been approved by the Supreme Court in Keshav Mills Ltd. v. Commissioner of Income-tax at pages 241, 24 :
'It is true that the words used in section 4(1)(a) relate to the first receipt after the accrual of the income. Once it is received by the party entitled to it, in respect of any subsequent dealing with the said amount it cannot be said to be received as income on that occasion.'
Though the facts warrant the conclusion in the present case that the assessee received all the income from his foreign business and suffered tax on such receipt, the question still remains whether it can be said that its foreign business was charged to tax under the 1918 enactment.
We shall now refer to the origin and necessity of provisions like sub-section (3) and (4) of section 25 of the Act. Under the Indian Income-tax Act of 1918, income-tax was charged or the income of the year in which the return was made by the assessee. The income of the year however could not be computed till the year ended. So the revenue ascertained the income of 'the previous year' and levied tax on such income provisionally. After the actual income was ascertained the assessment was completed. Then the assessee would be entitled to refund if he had paid more tax on the provisional assessment or he would pay the deficiency if he had paid less. This mode of levying and collecting tax involved an accounting between the revenue and the assessee and difficulties were encountered in the working of the Act. The 1922 Act introduced a change and tax was exigible on the income of the previous year. This Act came into force on April 1, 1922. The income of the year 1921-22 suffered two assessments, as the operation of the 1918 Act was kept in force for one year by virtue of section 68, which was subsequently deleted. In respect of the year 1921-22, both the 1918 and the 1922 Acts applied and the result was a double assessment. Hence, the necessity for a provision like section 25(3) arose. If the income of a business was assessed to tax under the 1918 Act and no relief was given in respect of the income during the year of discontinuance the revenue would have collected tax for one year more than the total number of years of duration of the business. Section 25(3) was enacted to remove this inequity.
Turning now to the question in issue, we have first to take note and have regard to the language of the statute. The words of the section are 'where any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income-tax Act, 1918, is discontinued.....' Under the Act of 1918 business income was computed and assessed to tax under section 9. Section 5 of that Act defined the classes of income chargeable to income-tax, analogous to the present section 6, and that included 'income derived from business'. Section 9 of the Act enumerated the permissible deductions in the computation of the profits of the business. Regarding the scheme of taxation there is not much difference between the 1918 and the 1922 Acts except for the radical change in regard to the computation of the income for the 'previous year' which was introduced by the 1922 Act in substitution of the income for the assessment year as provided under the 1918 Act. The charge on business is really the charge on the income from the business. Income-tax is a tax on income, and not tax on property or tax on business etc., though for purposes of computation of income specific heads of charge are created. Whatever does not fall within the special heads, falls within section 12, the residuary provision. Even emphasising the words 'on which' occurring in section 25(3) it should be noted that the tax on business,in the context, is a convenient description for tax on business income. The essential incidence of tax is upon the persons conducting the business in respect of the income from such business. Where as assessee received money prior to 1939 in the taxable territory from foreign business income, he was taxed only because income, though the business, as such, was beyond the purview of the taxing enactment. While it is true that the receipt can be described as part or whole of the business income, as the case may be, it is equally true that the basis of taxation was not that it was income, profits and gains of a business but that the assessee received in the taxable territory income which he earned beyond the territory.
We shall now refer to the decision of this court in Commissioner of Income-tax v. S.V.R.M. Palaniappa Chettiar. This has been very much relied on by the learned counsel for the department, and indeed his submission is that that decision completely supports him, to contend that the decision of the Tribunal is wrong. Learned counsel for the assessee has attempted to distinguish that case from the facts of the present case, and we have to consider whether there is any real distinction. That was a case in which the assessee was a Hindu undivided family. The family was a partner in a money-lending business carried on at Muor in the Federated Malay States. The family assets were partitioned and the share of the family in the above said business at Muor was allotted to two of the members of the family. It was claimed that by the partition and the allotment of the familys share of the business to two of its members, there was a succession and on the basis of that succession the Hindu undivided family was entitled to relief under section 25(4) of the Act. The Tribunal upheld the assessees contention and the following question was referred to this cour : 'Whether, when a Hindu undivided family on a partition is succeeded to by one or more of its members in respect of the familys share in the business of a foreign firm and the family was assessed in respect of that share under the Act of 1918, the firm not having been assessed, is the family entitled to relief under section 25(4) of the Income-tax Act as amended by the Amendment Act of 1939?' This court held that the family was not entitled to relief under section 25(4), inasmuch as the business as such was not charged to tax under the 1918 Act. The following observation of Satyanarayana Rao J. at page 173 has been relied upon by learned counsel for the departmen :
'The relief under sub-clause (4) is permissible only if the tax on the business was charged under the provisions of the Indian Income-tax Act, 1918. If the foreign business at Muor was not and could not have been charged under the Act and the share in the profits of the family from that foreign business was charged under section 3 only on the receipt in British India, can it be said that the charge so made was a charge of a tax on the foreign business. The income received by the joint family could not have been charged under the head income derived from business but only as a receipt under section 3. The argument, however, on behalf of the assessee by his learned advocate, Mr. Rajah Iyer, was that the words on which tax was at any time charged should be construed as meaning with reference to which tax was at any time charged. In other words, the contention is that the income derived by the assessee was in relation to a business and therefore the assessment of the income must be treated as an assessment of the business. No doubt, under the provisions of the Income-tax Act, the tax is payable by an assessee but the assessment of the tax is on the basis of the various heads of income derived by the assessee one of which is business. It cannot, therefore, be said that because tax was payable by the assessee on the profits received from a business in a foreign territory such assessment is an assessment of the business.'
Then again at page 174 botto :
'Of course, if the assessee succeeded in establishing that in fact, though wrongly, such profits were taxed on the basis of a business carried on by the assessee though in foreign territory the fact of such assessment might possibly enable the assessee to claim the benefit of section 25(4). But of this there is no proof. It is possible to interpret section 25(4) as meaning that if in fact there was an assessment of the business carried on in a foreign territory, though legally such assessment was not permissible, the requirement of the section is satisfied and it would not be now open to us to question the legality of such assessment made under the provisions of the Act of 1918. It is unnecessary, however, to express any final opinion on this aspect though the language of section 25(4) on which tax was at any time charged seems to indicate that such argument is possible.'
We have no doubt that the learned judge, Satyanarayana Rao J. held that it would not be enough for an assessee claiming the benefit of section 25(4), which in terms is not different from section 25(3) - section 25(3) relates to discontinuance and section 25(4) relates to succession - to show that he was assessed to tax on the receipts from a foreign business. The learned judge seems to be emphatically of the opinion that if the business of the assessee was not or could not have been charged under the 1918 Act, the sub-section would not operate to give relief to the assessee. There is no possibility of misunderstanding the observation of the learned judge, which, speaking with respect, seems to be quite clear. Learned counsel for the assessee submits that that case has to be distinguished from the present case because what was received by the assessee family was only a share of the profits of the foreign business, in which the family was a partner. Reliance is placed on the following passage in the judgment of Satyanarayana Rao J. at page 17 :
'The share in the profits of the joint family which were received in British India were alone subject to the charge and not the business.'
But we are unable to understand what difference there could be between the assessee who was merely a partner of a foreign business and in such capacity received his share and paid tax on that receipt and the assessee who was himself the sole proprietor of that business and paid tax on the receipt from such business.
The case in Annamalai Chettiar v. Commissioner of Income-tax has been referred to by learned counsel for the assessee. There was a Hindu undivided family consisting of a father and his son which carried in money-lending business in different vilasams at Penang. On 28th March, 1939, there was a partition in the family under which some of the vilasams were allotted to the father and the rest were allotted to the son who was the assessee. During the assessment year 1939-40 the assessee claimed that there was a discontinuance of the business within the meaning of section 25(3) of the Act, and as the business of the joint family was taxed under the Act of 1918, it was not liable to the taxed for the period between April 13, 1938, and March 23, 1939. It was held that on partition the assets of the joint family were split up, and the joint family business no longer continued its existence but was terminated, and that therefore there was discontinuance within the meaning of section 25(3) and the family was taxed under the Act of 1918 was not mooted. The department did not contend in that case that the benefit of section 25(3) would not be available to the assessee as there was no charge on the business under the 1918 Act. It is true that on the facts of the case the family conducted business in foreign parts under various vilasams. But we are unable to treat this decision as authority for holding that an assessment on the receipts from a foreign business would in effect be a charge of tax on the business income as such.
The distinction between tax on receipts derived from a source which being a foreign business was not taxable and tax on the income from business as such as is real and merely verbal. If only a portion of the foreign business income is received in India, and that is taxed, as it can be, can it be said that the assessees business which is the source is charged to tax. Obviously not. This is because the foreign business income of the resident assessee could not be taxed prior to 1939 and what could be taxed was the remittance out of that income. The charge is on the remittance and not on its sources. In this view of the matter, even if the entire income from the foreign business is remitted and received in taxable territory the charge would not properly be said to be on the business source. This conclusion seems to follow inevitably from the language of section 25(3), and cannot be resisted or overcome by equating the charge on business to a charge on the receipt of the income of the business. It may be that the benefit of section 25(3) would be lost in cases where the assessee had only a business outside the taxable territories. But that is no reason for putting a stained construction upon the statutory language or to extend it beyond its plain and grammatical meaning. With respect we follow the decision of Commissioner of Income-tax v. Palaniappa Chettiar and particularly the observations of Satyanarayana Rao J. Learned counsel for the assessee submitted that the decision requires reconsideration but we do not think so. It has stood the test of time and surely the principle of stare decisis will apply. Question No. 1 is, therefore, answered in favour of the department and against the assessee.
Question No. 2 is really unnecessary in view of our answer to question No. 1. But in our opinion the conclusion of the Tribunal was right in regard to the point raised by this question. Income from property, buildings, lands appurtenant thereto, ordinarily described as house property, is charged under section 9 of the Act. It is a separate head of charge like section 10 which covers income from business, profession or vocation. The house property income can be assessed only under section 9 and not under section 10, even if the income is treated by the assessee as part of his business profits and even if the income is derived in the course of the business of letting houses. It is the ownership of the property and the resulting income therefrom qua owner that attracts assessment. There is no element of business in such ownership; nor can the ownership be submerged or effaced by the conduct of the assessee dove-tailing it in a business activity. This is now settled law and no useful purpose would be served by referring to the decisions on the subject. Section 25(3) deals only with business, profession or vocation. Property income cannot, under whatever circumstances derived, be comprised in the category of business income. The Tribunal was, therefore, right in excluding the property income from the relief under section 25(3), even if the assessee is entitled to such a relief.
It is not necessary to discus question No. 3 as the point raised therein is covered by the decision of this court in M.L.M. Muthiah Chettiar v. Commissioner of Income-tax. The formula adopted by the Tribunal in giving relief to the assessee is in accordance with that decision. Following that decision the question is answered against the department and in favour of the assessee.
There will be no order as to costs.