HARRIES, C.J. - This is a reference made by the Income-tax Appellate Tribunal at the instance of the Commissioner of Income-tax, West Bengal, in which the Court is asked to express its opinion upon the following question, :-
'Whether in the facts and circumstances of the case the Tribunal was right in holding that in the assessment of the income for the assessment year 1938-39, Section 23 (5) (a) which was introduced in the Indian Income-tax Act in 1939 was applicable ?'
The Appellate Tribunal had held that the section was applicable disagreeing with the view of the Income-tax Officer and the Appellate Assistant Commissioner.
The assessee was a firm, P.M. Bagchi & Co., which had been in existence for some time though its constitution had changed. In the year 1937 a receiver was in possession of the partnership assets on behalf of the then partners. On 16th December, 1937, the receiver sold the right, title and interest of these three partners in the business and the present assessees purchased. The year of assessments is the year 1938-39 the accounting year being 1937-38. There was difficulty in the assessment as the tax authorities claimed that certain income had escaped assessment and should be assessed under Section 34 of the Indian Income-tax Act. Eventually an assessment was made on 31st March, 1943, but it is clear that that assessment was for the assessment year 1938-39.
The assessment made was on the total income of the firm, whereas the assessees claimed that the income of the firm should not be assessed but rather the share of profits of each partner in the partners hands.
The assesses relied upon Section 23 (5) of the Indian Income-tax Act which, in so far as it is relevant, is in these terms :-
'Nothwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the firm has been assessed under sub-section (1), sub-section (3) or sub-section (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 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.'
This provision was the result of the Income-tax Amendment Act of 1939 which came into force on April 1 of that year. This provision therefore was not operative during the assessment year 1938-39 which of course came to an end on 31st March, 1939, that is a day before the amendment came into force.
The effect of his amendment was that the income of a registered firm was not assessed to tax separately. What was assessed was the total income of each partner including his share of the profits of the partnership.
Before this amendment the income of the partnership firm was separately assessed and tax was paid at the rate applicable to that income. After the amendment the tax payable on the profits of a partnership is paid at the rate appropriate to the total income of each individual partner. For example, before the 1939 Act the profits of a firm which shall we say amounted to Rs. 3,00,000 would be assessed at the rate applicable to Rs. 3,00,000 whereas after the amendment no assessment would be made on the sum of Rs. 3,00,000 but the assessment would be made on the income of each partner which would include his share of the partnership profits and at the rate appropriate to such income of each partner.
The Income-tax Officer and the Appellate Assistant Commissioner were of opinion that the provisions of the Income-tax Amendment Act, 1939, could have no application to this assessment for the year 1938-39. The Appellate Tribunal however came to the conclusion that even for the year 1938-39 the provisions of the 1939 Act would be applicable if the assessment was made after 1st April, 1939.
Dr. Gupta on behalf of the authorities has contended that retrospective effect cannot be given to the 1939 Amendment Act. His contention is that this Act has seriously affected the rights of Government. Government had a right before 1st April, 1939, to levy tax on profits of a partnership at the rate applicable to the total profits whereas after the 1939 amendment the tax must be levied on the share of each partner at the rate applicable to the total income of each partner. Dr. Gupta has pointed out that the rate upon which tax could be levied on the total income of the partnership might be very much higher than the rate upon which tax could be levied on the total income of each partner. That being so he contends that Government would lose revenue as a result of the amendment made in 1939.
If this amendment affected substantive rights then it is quite clear that retrospective effect could not be given to it. It has been laid down time and again by their Lordships of the Privy Council and by Courts in this country that a statute will not affect rights which had accrued before a statute came into force unless there are express words in the statute affecting such rights or where a retrospective effect to the statute is inevitable by necessary intendment or implication.
On the other hand Dr. Radhabinod Pal has contended that this new sub-section 23(5) introduced by the 1939 Amending Act was nothing more than a procedural section and did not affect at all the Governments right to revenue. Retrospective effect is given to statutes affecting only procedural matters and if this amendment was purely procedural then retrospective effect could be given to it and it could be made to apply to an assessment year before 1st April, 1939.
Dr. Pal admits that there is a difference in the methods of assessments. But his argument is that there is no difference in the result. After the 1939 amendment the profits of the partnership are taxed in the hands of the individual partner and at the rates applicable to the total income of each individual partner. Before 1939 the profits were taxed at the rate applicable to the total profits of the partnership and such rate might well be higher than the rates applicable to the total incomes of the individual partners. Dr. Pal however points out that where the rate of tax applicable to the total income of the partnership was greater than the rates applicable to the total incomes of the partners the partners were entitled to a refund of the difference by reason of Section 48(2) of the Indian Income-tax Act, 1922, as amended and which was in force up to 31st March, 1939. That sub-section was in these terms :
'If a member of a registered firm or any person who being a minor has been admitted to the benefits of partnership in such firm satisfies the Income-tax Officer or other authority appointed by the Central Government in this behalf that the rate of income-tax applicable to his total income of the previous year was less than the rate at which income-tax has been levied on the profits or gains of the firm of that year or that his total income of the previous year was below the minimum chargeable with income-tax he shall be entitled to a refund on his share of those profits or gains calculated at the difference between those rates or at the rate at which income-tax has been levied as the case may be.'
From this sub-section it is clear that where a partner was liable to pay income-tax at the rate of X annas in the rupee on his total income but the profits of the partnership had been assessed and made liable to tax at the rate of Y annas in the rupee the partner was entitled to a refund of Y-X, in case the rate of Y was greater than the rate of X. In other words the amount of tax which the Government obtained before 1st April, 1939, was not the tax levied at the maximum rate on the total partnership income but rather the amount of tax payable upon each partners share of the partnership profits levied at the rates appropriate to the total income of each partner. That is precisely what the Government obtained after the amendment in 1939. Before 1939 though the partnership profits were assessed at the rate applicable to the total profits nevertheless what the Government obtained eventually as a result of Section 48 was less. They actually obtained what they now obtain after the amendment in 1939.
It seems to me therefore that Section 23(5) simply introduced a new method of arriving at the net amount of tax on the partnership profits. Before 1939 the method was rather cumbrous. The total partnership profits were assessed and thereafter each partner was entitled to a refund. There is now no necessity for a refund because the profits are assessed in the hands of each individual partner and therefore the difference in the rates contemplated in Section 48 (2) can no longer arise. The amount eventually obtained by Government is precisely the same and therefore it appears to me that we are bound to hold that this amendment in 1939 was purely procedural and merely affected the machinery for collecting the tax rather than the tax itself. It is a more convenient method of collecting the amount which Government obtained in rather more complicated circumstances before 1939. As this amendment was procedural, retrospective effect could be given to it and that being so it appears to me that the view of the Tribunal was right, and therefore I would answer the question submitted in the affirmative.
The assessees are entitled to the costs of these proceedings Certified for two Counsel.
BANERJEE, J. - I agree.
Reference answered in affirmative.