Case Note & Summary
The appeal arose from a reference under the Income Tax Act, 1922 concerning the entitlement of an assessee firm to relief under Section 25(3) upon discontinuance of its business. The assessee firm, O.RM.M.SP.SV. Firm, was registered under Section 26A of the Income Tax Act, 1922. Prior to the firm's constitution, its partners were members of a Hindu undivided family that carried on money-lending business in India and the former Federated Malaya States, assessed under the Indian Income Tax Act, 1918. The family disrupted its joint status on June 2, 1938, and the members continued the business as partners. The firm was dissolved on March 2, 1952, and in the assessment for the year 1952-53, the assessee claimed relief under Section 25(3) of the 1922 Act. The Income Tax Officer rejected the claim on March 7, 1956, holding that foreign business as such was not assessed under Section 3 of the 1918 Act, only income received in British India was assessed. The Appellate Assistant Commissioner dismissed the appeal for the same reason. The Appellate Tribunal partly allowed the appeal, granting relief for the foreign business but denying relief for rental income from house properties in Malaya. On reference, the High Court answered both questions of law in favour of the Department, holding that the foreign business was not charged under the 1918 Act because only remittances from profits were taxed. The assessee appealed to the Supreme Court. The Supreme Court examined the provisions of Section 25(3) of the 1922 Act and the charging provisions of the 1918 Act. The Court observed that the purpose of Section 25(3) was to avoid double taxation that arose when the 1922 Act changed the basis of taxation from income of the assessment year under the 1918 Act to income of the previous year under the 1922 Act. The Court held that when Section 25(3) refers to tax charged on any business, it means tax charged on the owner of the business. Since the lower courts found that the entire income of the foreign business was remitted to the assessee and tax was imposed on that income under the 1918 Act, the foreign business must be held to have been charged under the provisions of the 1918 Act. Consequently, the assessee was entitled to relief under Section 25(3) for the foreign business at Penang, Ipoh and Kambar. Regarding rental income from house properties owned by the foreign firm, the Court held that business income broken up under different heads only for computation of total income does not cease to be income of the business. Therefore, the rental income from house properties owned by the business was business income, and the assessee was entitled to relief under Section 25(3) on that income as well. The Court disapproved the decision in Commissioner of Income-tax, Madras v. S.V.R.M. Palaniappa Chettiar & Others, 20 I.T.R. 170, and referred to Commissioner of Income-tax, Bombay City I v. Chugandas & Co., [1964] 8 S.C.R. 332. The appeal was allowed, and the High Court's judgment was set aside.
Headnote
A) Income Tax - Relief on Discontinuance of Business - Section 25(3) of Income Tax Act, 1922 - Foreign Business Income Charged Under 1918 Act - Assessee firm, successor to Hindu undivided family business in India and Malaya, was assessed under Indian Income Tax Act, 1918 on entire profits of foreign money-lending business remitted to British India - Court held that when Section 25(3) refers to tax charged on any business, it means tax charged on the owner of the business, and since entire foreign income was assessed under 1918 Act, the foreign business was charged under that Act within meaning of Section 25(3) - Held that assessee entitled to both parts of relief under Section 25(3) in respect of foreign business at Penang, Ipoh and Kambar (Paras 1-7). B) Income Tax - Business Income - Rental Income from Business Assets - Section 25(3) of Income Tax Act, 1922 - Assessee also sought relief on rental income from house properties owned by foreign firm discontinued in year of account - Court held that business income broken up under different heads only for computation of total income does not cease to be income of business; therefore rental income from house properties owned by business is business income - Held that assessee entitled to relief under Section 25(3) on rental income from house properties (Paras 1-7).
Issue of Consideration
Whether the assessee firm was entitled to relief under Section 25(3) of Income Tax Act, 1922 in respect of foreign business at Penang, Ipoh and Kambar; whether the assessee was entitled to relief under Section 25(3) on rental income from house properties owned by the foreign firm which was discontinued in the year of account
Final Decision
Supreme Court allowed the appeal, set aside the High Court judgment, and held that the assessee was entitled to relief under Section 25(3) of Income Tax Act, 1922 in respect of both foreign business profits and rental income from house properties. High Court answered both questions in favour of Department; Supreme Court reversed.
Law Points
- Legal points not extracted
- Section 25(3) of Income Tax Act
- 1922 grants relief when tax was charged on the owner of any business under Indian Income Tax Act
- 1918
- including foreign business income remitted to British India
- business income broken up under different heads for computation does not cease to be business income
- rental income from house properties owned by a business is business income for purposes of Section 25(3)
