1940 (9) TMI 21 - HC - Income Tax

Summary

Issues:
Interpretation of Section 14(2)(b) of the Indian Income-tax Act regarding exemption claim for income received from a registered firm assessed at a lower amount.

Detailed Analysis:
The judgment pertains to a reference under Section 66(2) of the Indian Income-tax Act concerning the entitlement of an assessee to claim exemption under Section 14(2)(b) of the Act for income received from a registered firm assessed at a lower sum. The primary issue revolves around whether the assessee, a partner in a Calcutta firm, can claim exemption for the amount received from the firm when the firm itself was assessed at a smaller sum. The specific question before the court was whether the assessee was entitled to exemption under Section 14(2)(b) for the amount received from the firm. The assessment year in question was 1934-35, where the assessee, Seth Kanhaiya Lal, received interest income from the Calcutta firm of Sadhuram Tularam, which was a significant portion of his total income.

The judgment delves into the details of the partnership arrangement and the income structure of the firm, emphasizing that the firm had to pay substantial interest to its partners, including the assessee. The firm's assessment in Calcutta for the relevant year showed a lower income figure due to business losses and other factors. The court highlighted that the question of whether the Income-tax Officer of Calcutta's assessment method was correct was not under consideration, with the focus solely on the tax liability of the amount received by the assessee from the firm.

The court referred to a previous case involving the same assessee to explain the application of Section 14(2)(b) and the conditions for claiming exemption. It clarified that for income to be exempt under this section, the profits of the firm must have been assessed to income-tax, not merely calculated during the assessment process. The judgment emphasized that the exemption provision aims to prevent double taxation and applies when the firm's profits have been taxed, not just considered in the assessment calculations.

The court rejected the assessee's argument that once the firm was assessed to income-tax, the partner should be exempt from tax on the income received from the firm. The judgment reiterated that the exemption under Section 14(2)(b) applies only to the proportionate share of the profits assessed to tax in the hands of the firm, not to all income received from the firm. Ultimately, the court answered the reference question in the negative, stating that the assessee was not entitled to claim exemption for the entire amount received from the Calcutta firm under Section 14(2)(b) of the Income-tax Act.

In a separate judgment, the second judge concurred with the decision, providing additional clarification on the interpretation of "to assess to income-tax" under Section 14(2)(b). The judge explained that the section applies only to amounts that have actually been assessed to tax, not merely considered for calculating tax liability. The court concluded by directing the Commissioner of Income-tax to be informed of the judgment, with the assessee bearing the costs of the reference and the Department's counsel entitled to a fee.

In conclusion, the judgment provides a detailed analysis of the application of Section 14(2)(b) of the Income-tax Act in determining the tax liability of income received from a registered firm assessed at a lower amount, emphasizing the conditions for claiming exemption and the prevention of double taxation.