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TMI Blog2019 (9) TMI 902X X X X Extracts X X X X X X X X Extracts X X X X ..... 19. All these four miscellaneous applications MA No.3-5/Gau/2019 & 06/Gau/2019 are accepted. The corresponding four appeal(s) ITA Nos. 348-351/Gau/2018 are restored at their original number(s). With the consent of all the learned representatives appearing at the assessees' and Revenue's behest, we have heard these four main cases as well. 3. The assessees' identical sole substantive ground pleaded in these appeals is that the Assessing Officer as well as CIT(A) have erred in denying sec. 10(26) exemption relief to the two partnership firms. We thus treat former assessee M/s Hotel Centre Point Shillong's appeal No. 348/Gau/2018 for assessment year 2013-14 as the "lead" case. ITA No.348/Gau/2018 AY 2013-14:- 4. We start with the basic relevant fact qua the instant sole issue of denial of sec.10(26) exemption to the assessee / partnership firm. This taxpayer is a partnership firm running its eponymous hotel business under the name and style of M/s Hotel Centre Point at Shillong. It consists of two partners S/Sh Prabhat Dey Sawyan, son of Ka Lisimon Jaid Dkhar residing at Lower Mawprem, and Mr. Walamphang Roy son of Pismon Jaid Dkhar resident of Umsohsun, Shillong. Both these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partner's only share profits. The Assessing Officer saw no merit in assessee's foregoing explanation. He quoted sec. 4(1) of the Act in the nature of the basic charging provision applicable in respect of the total income of the previous year of every person. Section 2(31) defined a "person" to include a firm as well. This followed reference to u/s 2(23) of the Act defining a firm, partner and partnership to be having the same meaning assigned to them under the Indian Partnership Act 1932. The Assessing Officer observed in the light of these provision of the Act that it was clear that a firm is a "person" chargeable to income-tax as per corresponding rates prescribed in the statute. 7. Relevant assessment order dated. 13.02.2017 indicates that the assessee had also furnished a copy of its partnership deed during the course of assessment. The Assessing Officer estimated its gross profit @ 3.5% on the total turnover of Rs.6,65,84,000/- after holding the assessee not to have submitted books of account and vouchers for necessary factual verification of the corresponding business expenses. He therefore accordingly declined the assessee's foregoing explanation to conclude that sec. 10(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the partners are by caste belonging to Khasi Tribe which is Scheduled Tribe in the State of Meghalaya. Both the partners are residing within lire area of Khasi Hills Autonomous District specified in Part - II of the Table appended to Para 20 of the Sixth Schedule to the Constitution of India. The income arising to both the partners in the tribal areas is exempt from income-tax by virtue of the provision contained under section .10(26) of the Income Tax Act, 1961 since such income does not form part of the total income liable to tax under the aforesaid Act. 3. The provisions contained under the Income Tax Act, 1961 as well as under the Constitution of India being relevant for consideration in the instant case are reproduced here-under for the sake of ready reference: (a) Section 10(26) of the Income Tax Act, 1961 "10. Incomes not included in total income- In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included- ..... ..... ..... ..... ..... ..... ...... ..... ... ..... .... .... .... ..... .... ..... (26) in the case of a member of s Scheduled Tribe as defined in clause (25) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aph 4, paragraph 5, paragraph 6, sub-paragraph (2), clauses (a), (b) and (d) of sub- paragraph (3) and sub-paragraph (4) of paragraph 8 and clause (d) of sub-paragraph (2) of paragraph 10 of this Schedule, no part of the area comprised within the municipality of Shillong shall be deemed to be within the Khasi Hills District. (3) The reference in Part IIA in the table below to the "Tripura Tribal Areas District" shall be construed as a reference to the territory comprising the tribal areas specified in the First Schedule to the Tripura Tribal Areas Autonomous District Council Act, 1979. TABLE PART I 1. The North Cashar Hills District. 2. The Karbi Anglang District. PART II 1. Khasi Hills District. 2. Jaintia Hills District. 3. The Garo Hills District. PART IIA Tripura Tribal Areas District. PART III 1. The Chakma District 2. The Mara District. 3. The Lai District. 4. It is the well-settled law as pronounced by the Hon'ble Supreme Court as well as Hon'ble High Courts in numerous cases that income earned by a member of Schedule: Tribe from any source in the areas specified in the Sixth Schedule to the Constitution of India is wholly exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 897. The aforesaid clause 13 of the General Clauses Act, 1897 is reproduced before for the sake of ready reference "13. Gender and number:- In all Central Acts and Regulations, unless there is anything repugnant in the subject or context- (1) words importing the masculine gender shall be taken to include females; and (2) words in the singular shall include the plural, and vice versa." 6. The Central Legislature, while extending the application of the provisions of the Income Tax Act, 1961 to the whole of India, considered it reasonable and proper to exempt the members of the Scheduled Castes and Scheduled Tribes residing in the areas specified in the Table attached to Paragraph 20 of the Sixth Schedule to the Constitution from the burden of income tax as because the aforesaid members as well as the areas where they resided permanently were under-developed economically as well as educationally. The object of providing exemption was to grant impetus to them for improving their lot by carrying on various productive activities including business enterprises so that during the period of subsistence of such exemption, they may rise to remunerative positions in services and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... op of the provision contained under section 10(26), it is contended that a partnership firm constituted by the members of the tribal areas specified in Part - II of the Table appended to Paragraph 20 of the Sixth Schedule for the purpose of earning income from any source of income arising in the said specified area is also entitled to avail exemption in respect of its income under section 10(26) of the 1961 Act since such income is shared by the partners who are members of the Schedule Tribes as defined in clause (25) of Article 366 of the Constitution. This is so because a partnership firm is only a collective or compendious name for all the partners. The partnership firm has no existence do hors its partners .. It is the partners who undertake to bring the firm into existence by their mutual consent and execute all the activities and works of the firm starting from the business till its end. The moment partners are out of the firm, the firm loses its identity and acquires the status of a zero. The firm itself has no independent functions or activities to be performed by it except what are accomplished by the partners acting in the joint name of the firm. The firm is not a juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income is earned by him not as an individual but as a group of individuals comprising of the members of his family. There is no dispute that all the members of the family are Khasis. 6. We have carefully applied our mind to the controversy. The words "family" is a popular expression. It should be given a normal meaning and should not be construed technically unless it is so intended by the statute. Most commonly the word "family" refers to a group of persons consisting of parents and children; father, mother and their children; immediate kindred. It also means a collective body of persons who live in one house and under one head or management; a group of blood relatives; all the relations who descend from a common ancestor, or who spring from a common root; a group of hindered persons, husband and wife and their children. (See Black's Law Dictionary). So construed, a Khasi family would mean a group of Khasis who are blood relatives or who spring from a common root. Viewed thus, it is difficult to say that the benefit of exemption from income-tax given under section 10(26) of the Act to a member of a Khasi tribe will cease to be available if such income accrues not to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "the total amount of income referred to in section 5 computed in the manner laid down in-this Act". Section 5 makes the chargeability of income dependent upon the locality of accrual or receipt of the income. It defines the extent of total income with reference to the residence of the assessee and thus makes the incidence of taxation dependent upon whether the assessee is a resident in India. It is the residence in India which entails liability to tax. A non-resident is not liable in India to get his income assessed, but if any part of his income accrues or arises whether directly or indirectly through any business connection in India or from any property in India, the same would be assessable. An "ordinary resident" as defined in section 6, does not attract additional chargeability; but being "not ordinarily resident" entitles a person to partial exemption from chargeability as a resident, to which exemption of a person who is "ordinarily resident" is not entitled. (See Kanga and Palkiuala. volume 1 - Income-tax, 6th edition, page 162). The 1961 Act abounds in instances whereby certain sources of income have been exempted from tax, while others are assessable. Section 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Income Tax Officer vs. N. Takin Roy Rumbai (1976) 103 ITR 82 (SC) wherein the Hon'ble Supreme Court at page 90 has explained the objective behind such differentiation. The said observations are reproduced below: "The object of this differentiation between income accruing or received from a source in the. specified areas and the income accruing or received from a source outside such areas, is to benefit not only the members of the Scheduled Tribes residing in the specified areas but also to benefit economically such areas. If the contention advanced by Mr. Lahiri is accepted and a member of the Scheduled Tribe residing in a specified area is held entitled to the exemption irrespective of whether the source of his income lies within or outside such areas, it will lead to potentially mischievous results and evasion of tax by assesses who do not belong to Scheduled Tribes. All that a non-tribal assessee in India need do would be to enter into a sham partnership with a member of the Scheduled Tribe residing in the specified area and ostensibly give him under the partnership a substantial share of the profits of the business while in reality, pay the tribe only a nominal amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te and schedule tribe in the specified area for carrying on business operations only in the specified area as exempt from income tax. A negative view in the matter will tantamount to denial of the fundamental right ensured under Article 19(1)(g) to carry on trade or business under the nomenclature of a partnership firm to the members of the schedule castes and schedule tribes in the specified area. Not only this, this will also be apparently violative of the provision contained under Article 301 of the Constitution which unambiguously declares that subject to the other provisions of Part XIII of the Constitution, trade, commerce and intercourse throughout the territory of India shall be free. 12. It is further submitted that income from business or profession does accrue or arise in the hands of the partnership constituted by the members of Schedule Tribes in the area specified in the Sixth Schedule and the business operations of the firm are also carried on within the specified area referred to the above. Since the exemption provision under section 10(26) has been enacted for the benefit of scheduled castes and schedules tribes residing in the specified area, it would be most a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "A bare mechanical interpretation of the words 'devoid of concept or purpose' will reduce most of legislation to futility. It is a salutary rule, well established, that the intention of the legislature must be found by reading the statute as a whole. " 30. Krishna Iyer, J. has pointed out in his inimitable style I Chairman, Board of Mining Examination and Chief Inspector of Mines v. Ramjee: "To be literal ii meaning is to see the skin and miss the soul of the Regulation. " 31. True, normally courts should be slow to pronounce the legislature to have been mistaken in its constantly manifested opinion upon a matter resting wholly within its will and take its plain ordinary grammatical meaning of the words of the enactment as affording the best guide, but to winch up the legislative intent, it is permissible for courts to take into account of the ostensible purpose and object and the real legislative intent. Otherwise, a bare mechanical interpretation of the words and application of the legislative intent devoid of concept of purpose and object will render the legislature inane. In case of this kind, the question is not what the words in the relevant provision mean but w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he various case laws related to the issue, most importantly Mahari and Sons, Supra cited by the assessee have not been dealt with at all. 16. The nomenclature of Chapter II of the Income tax Act, 1961 is "Incomes Which Do Not Form Part Of Total Income" and section 10(26) comes under the same chapter. To get a complete understanding, Section 10(26) therefore has to be read as follows "In computing the total income of a previous year of any person, any income falling within the clause 10(26) shall not be included - in the case of a member of a Scheduled Tribe.... ..... " Emphasis is laid on the mention of word Person in the prelude to the Chapter. The word person also includes, in Income tax parlance, a Firm and therefore within the meaning of Clause 10(26) a firm of tribal members also is not liable to pay tax if other conditions as embedded in the clause are complied with. Only after careful consideration, the law makers have placed the words person and member in their respective places, otherwise in the clause there would have been the mention of word Individual in place of member. The use of the word "person" in Section 10 in the context of the peculiarities of the Triba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the individuals composing it. A firm cannot possess property or employ servants, neither it can a debtor or a creditor. It cannot sue or be sued by the others. Actually the property on which the resort is situated is jointly owned by both the partners viz. Shri Prabhat Dey Sawyan and Shri Wallamphang Ray. They are cousin brothers. Section 10(26) has been intended to be a beneficial provision to provide protection to the members of the Scheduled Tribe from the burden of income-tax. In this context your attention is drawn to the concluding paragraph of the order which states that In the light of forgoing discussion we are of the clear opinion that the benefit of exemption will not only be available in cases where income accrues not to an individual but also to a group of individuals who otherwise are entitled to the benefits of section 10(26). Thus the Hon'ble High Court in unambiguous terms opined that the benefit of exemption will also be available to a group of people irrespective of status. In that pretext it may kindly be assumed that there is no distinction to be made between BOI or Firm as far as extension of the benefit of Section 10(26) of the Act. Both BOI and Firm are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociation of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and- (vii) every artificial juridical person, not falling within any of the preceding sub-clause From a reading of the inclusive definition, it is clear that firm has distinct identity as separate from that of Individual or BOI though outside of the income tax Act, it might not have separate legal existence. Not only is a firm recognized as separate person, the IT. Act provides for separate scheme of taxation for firms as under: 1. A firm is taxed as a separate entity. It is separate from its partners. It does not matter whether the firm is registered or not. 2. The definition of firm includes a Limited Liability Partneship and LLP is treated same as firm. 3. The share of partners in the income of the firm is exempted from being separately taxed, while computing his/her individual income. 4. Salary, Bonus, Commission or remuneration (by whatever name called) paid /payable to partners is allowed as deduction to the firm and same will be taxable in the hand of partners. These expenses are allowed as deduction subject to certain restriction under the Income Tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y this decision cannot be extended to other "Persons", i.e. firm, company, HUF, AJP, AOP, trusts, JV etc. are as under: (i) There is very little difference between "individuals" and "Body of Individuals" in the sense that an accumulation of individuals is a B0I. That is a BOI comprises only of individuals. ii) On the other hand, an AOP, a firm, a company could contain other entities. Hence, what applies to an "individual" may well apply to its collective, i.e. a B01. But it would most certainly not apply to AOP, Firm or Companies. iii) Companies, firms and non-individuals cannot be members of BOI, which can have only human beings or a plurality of individuals. iv) Thus the logic can be that an individual earning income can be exempt u/s 10(26) of the Act, and, so can a conglomeration of individuals. v) The case deals with "Khasi family". A "family" must always and necessarily have natural individuals. There cannot be a partnership firm or an AOP in a "Khasi family". Hence, this case is not applicable to other categories (Para-6 of Hon'ble Court' s order) vi) The decision speaks of "father, mother and children". This can never include a firm or an AOP vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... states that word importing masculine gender shall include females also and that singular shall include plural and vice versa. Placing reliance on this clause to mean that a partnership firm can be treated as belonging to a member of Scheduled Tribe is too far-fetched interpretation. The Income tax Act distinguished a firm and individual partners. They are to be assessed separately and at different rates of tax. Hence contention made in this regard is not legally acceptable. 4.3.6 A/R also referred to Article 46 of the Constitution. That article is part of Directive Principles of State Policy. Per the Article, the state is to promote educational and economic interest of weaker sections of the people, including scheduled Tribes. It is not in doubt that exemption is granted even by the LT. Act, to members of scheduled tribe in respect of certain income. But it will not be- proper to import the provision of Director Principle of State Policy into the Income-tax Act and give exemption which is not granted by the expressed provision of the Act. 4.3.7 The AIR also argued that in prelude to the Chapter on Exemption, the Act states: "In computing the total income of a previous year of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in case of computation of total income of any "person" of a previous year who is member of a schedule tribe than to an individual assessee only. His case is that the legislature has nowhere used the clinching expression "individual" category of assessee alike that u/s 10(26AAA) sec. 87A, sec. 54(1) and sec. 54F(1) etc. Learned counsel contends that wherever the legislature has intended to restrict the impugned exemption benefit, it has made it explicitly clear in the relevant legislation culminating in various statutory provisions. And that such a restrictive interpretation of sec. 10(26) would tantamount to putting the provision itself astricter to liberal use only. Our attention has been invited to the co-ordinate bench's decision in CIT vs. Mahari & Sons (supra) that the legislature has deliberately not used the expression "individual" in sec. 10(26) and has, employed the word "person" which is wide enough to include in its ambit a unit as that of Khasi family as in the present case." Hon'ble Guwahati high court's decision (supra) has discussed the issue as under:- "Viewed thus, it is difficult to say that the benefit of exemption from income-tax given under section 10( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means a glomeration of individuals who carry on the same activity with the object of earning income. Its submissions is that a partnership firm is nothing such a glomeration of individuals only. And that sec. 2(31) of the Act imports definition of a firm, a partner and partnership from the Indian Partnership Act, 1932 only meaning thereby partners collectively are taken as a firm. 14. Learned counsel thereafter referred to hon'ble apex court's decision in Dulichand Laxminarayana vs. Commissioner of Income-tax (1956) 29 ITR 535 (SC) that a firm's name is merely an expression; only a compendious mode of designating the persons who have agreed to carry on the business in partnership. And Commissioner of Income-tax vs. Ramniklal Kothari (1969) 74 ITR 57 (SC) also hold that the business carried out by a firm is business carried out by its partners wherein the former's profits are earned by the latter. The assessee's next quotes sec. 10(26) exemption clause in the statute that hon'ble apex court's decision in Commissioner of Income-tax vs. R.M. Chidambaram Pillai (1977) 106 ITR 292 (SC) holds that "the statement of the law that although, for the purpose the Income-tax Act, a fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y but only consists of individual partners for the time being, for tax law, income-tax as well as sales tax, it is a legal entity". MR. Sengupta accordingly urges us to affirm both the lower authorities' action holding the assessee as not entitled for sec. 10(26) exemption even if it is a partnership firm consisting of two partners having equal share who are themselves eligible for the very relief in individual capacity. 17. We have given our thoughtful consideration to the foregoing rival contentions. Relevant case record(s) as well as various judicial precedents quoted during the course of hearing stand perused. We wish to make clear first of all that there is no dispute between the parties about the basic relevant facts. This assessee is a partnership firm consisting to two partners having equally share. The members of Khasi tribe entitled for 10(26) exemption in their individual capacity since covered under Article 366 of the Constitution of India. The question that requires our apt adjudication herein is as to whether the assessee / partnership firm itself can also be held to be entitled for the impugned sec. 10(26) exemption since its two partners are already eligible for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribe" only. 19. Hon'ble apex court has also been settling the relevant principles of interpretation to be adopted in case of taxation laws from time to time. Their lordships latest constitution bench's decision in M/s Dilip Kumar and Company & Ors. (supra) holds that every taxing statute including, charging, computation and exemption clause (at the threshold stage) should be interpreted strictly. Further, in case of ambiguity in a charging provision the benefit must go in favour of a subject / assessee, but the same is not true for an exemption notification wherein the benefit of ambiguity must be strictly interpreted in favour of the Revenue / State. Their lordships yet another decision in Raghunath Rai Bareza vs. PNB (2007) 135 Company Cases 163 (SC) holds that it is the cardinal rule of interpretation that words used by the legislature are to be understood in their natural, ordinary or popular sense and construed as per their grammatical meaning unless such a construction leads to some absurdity or there is something in the context or in the object of the statute to suggest to the contrary. Their lordships also invoked the "Golden Rule" of Interpretation that words of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by him at the disposal of the mother. Even if he keeps some income for himself, on his death, his mother or h4er nearest female kur, takes it. After marriage, the Khasi husband goes to live in thehouse of the mother of his wife or in the house of his wife. Before the wife has a child, the husband uses sufficient part of is own earnings for the maintenance of his wife, the surplus or a portion of this surplus, he my give to his kurs. After the birth of the child, husband and wife work and earn jointly for the child. The husband works with his wife on the land, or is engaged in the trade with the capital supplied by her. The earnings of the male in such a situation cannot be distinguished from those of his wife. The individual property is thus not the norm in the Khasi society. It is, of course, not to suggest that a Khasi male cannot have his own property, earned by his own sweat. There are men of considerable property, who will dispose of that property among their relatives as they deem fit. By pointing out the above peculiarities of the Khasi clan, the point that is sought to be emphasised is that amongst the Khasis, the individual is not the unit of society. It is the family whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Areas (Reorganisation) Acts of 1971. Be that as it may, their lordships of the hon'ble apex court have settled the law now that the benefit of doubt in relation to an exemption provision in a tax law goes in favour the Revenue / State and not to the taxpayer anymore. We follow the same to hold that the assessee's arguments that a partnership firm is "a member of a scheduled tribe" is not liable to be accepted. We also make it clear that this is going by their lordships foregoing landmark decision(s), there is no scope left for us hold that there is any scope of intendment in the impugned statutory provision stretching the impugned exemption to a partnership firm as a member of Scheduled Tribe under Article 366 Constitution of India. 22. The assessee's next argument that sec. 13 of the General Clauses Act, 1897 (supra) treats masculine and singular expression in central regulations to be inter-changeable famine gender plural expression; also carries no substance since the legislature expression herein is very much clear that the impugned exemption benefit is available to a member "a of Scheduled Tribe" only takes to a partnership firm consisting of partners who are member o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus find no infirmity in the CIT(A)'s lower appellate order upholding the Assessing Officer's action that the assessee is not entitled for the exemption benefit u/s. 10(26) of the Act. 25. Coming to various judicial precedents quoted at the assessee's behest (supra), we find that none of these deals with an instant of interpretation of an exemption provision in tax laws. Their lordships determine inter-play between a partnership firm and its partners' compendious structure, former's formation and joint business carried out the former's name followed by distributing profits. There can be no dispute about the law settled therein. The same; however, does not apply in issue of sec. 10(216) exemption before us in view of our foregoing detailed discussion. We accordingly decline the "lead" case ITA No.348/Gau/2018. 26. Same order to follow in former assessee's remaining two appeal(s) ITA No.349 and 350/Gau/2018 the latter assessee's appeal ITA No.351/Gau/2018 for assessment year 2015-16; respectively as it has come on record that the sole identical issue raised therein is also that of eligibility of a partnership firm for sec. 10(26) exemption. Both the learned lower authorities have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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