- (1.) This is an appeal by special leave against a judgment of the Madras High Court rendered in its advisory jurisdiction in a case stated under S. 66 (1) of the Income-tax Act, 1922, hereinafter referred to as the "Act". The appellant was a non-resident individual. During the previous year ending April 12, 1956 relevant to the assessment year 1956-57, he was a partner of a registered resident firm which carried on money lending business in India and Malaya. The entire income of that firm for the assessment year in question accrued outside India. The appellant's share in the income of the firm came to Rs. 62,612 the whole of which was foreign income. The appellant had also incurred a loss of Rs. 8,484/- in his own business at Madras. While assessing the appellant the Income-tax Officer set off the loss in the appellant's Madras business against the foreign income and assessed him at the maximum rate as the appellant had not filed a declaration in terms of the proviso to S. 17 (1). The Appellate Assistant Commissioner confirmed the assessment. An appeal was taken to the Appellate Tribunal but it failed. Two questions of law were referred by the Tribunal. (1) "Whether the assessment made on the assessee, a non-resident, by including in his total income his share of foreign income of the resident firm of Messrs. K. V. Al. Rm. Rm. Ramanathan Chettiar, is valid in law (2) Whether the levy of the tax at the maximum rate is correct - The High Court answered the questions referred against the assessee on the ground that the points were covered by its previous decision in Gnanam and Sons v. Commr. of Income tax, Madras (1961) 43 ITR 485 (Mad).
(2.) The argument which was raised before the Madras High Court in the above case (Gnanam and Sons), (1961) 43 ITR 485 (Mad) was based largely on a reading of two provisions of the Act. Under Section 4 (1) (c) when a person was not resident in the taxable territories the income, profits and gains which accrued or arose to him without the taxable territories were not to be included in his "taxable income" unless they were brought into or received by him in the taxable territories. Sub-section (5) (a) of S. 23 was intended to tax the total income of each partner of the firm including therein his share of its income, profits and gains of the previous year. The argument raised was that this concept of the total income must be carried into the second proviso to S. 23 (5) (a) relevant to a non-resident partner. It would, therefore, mean that this income arose wholly outside the taxable territories and had to be excluded by virtue of the operation of S. 4 (1) (c) of the Act.
(3.) Under section 23 (5) when the assessee is a registered firm and its income has been assessed the income tax payable by itself shall be determined and the total income of each partner of the firm including therein his share of its 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. The provisions relating to payment of income tax by the firm itself were introduced by the Finance Act, 1956. The position before 1956 was that where the firm was registered the firm did not itself pay the tax and therefore each partner's share in the firm's profits was added to his other income and the tax payable by each partner on the basis of his total income was determined and the demand was also made on the partners individually. After 1956 income tax at low rates became chargeable on the registered firms but the partners continued to be assessed individually in the same way as before. There can be no manner of doubt that the unit of assessment was the registered firm and when it was assessed and its total income computed the individual partners were taxed under S. 23 (5) (a) on their respective shares of the firm's income.;