Commissioner Of Income-Tax, Madras (Central) v. K. Saraswathi Ammal And Others

The Judgment of the Court was delivered by

Govindan Nair, C.J:— These are references made by the Income-tax Appellate Tribunal, Madras Bench, of the two questions arising in relation to the assessment of the legal representative of one Loganatha Mudaliar and Tarapore, both partners of a firm called M/s. Tarapore & Co. The questions read as follows:

T.C No. 343 of 1974:

“Whether, on the facts and in the circumstances of the case, it has been rightly held that the assessee was entitled to rebate on the share of dividend received from the firm, M/s. Tarapore & Co., when the relief by way of rebate had already been granted to the firm under section 85?” T.C No. 385 of 1974:

“Whether, on the facts and in the circumstances of the case, it had been rightly held that the assessee was entitled to rebate on the share of dividend received from the firm, M/s. Tarapore & Co., when the relief by way of rebate had already been granted to the firm under section 85?”

2. The firm, of which the said Loganatha Mudaliar and Tarapore were partners, held certain shares in Kalinga Tubes Ltd. It is admitted that Kalinga Tubes Ltd. is an industrial undertaking which would fall under s. 84 of the I.T Act, 1961. The question now arises by virtue of s. 85. This section had been deleted by the Finance (No. 2) Act of 1967, with effect from April 1, 1968. Before its deletion the section read as follows:

“85. Dividend from new industrial undertaking or hotel business or ship.— Subject to any rules that may be made by the Board in this behalf, income-tax shall not be payable by a shareholder in respect of so much of any dividend paid or deemed to be paid to him out of the profits and gains derived by a company from an industrial undertaking or the business of a hotel or a ship to which section 84 applies as is attributable to that part of such profits and gains on which income-tax is not payable by the company under section 84.”

3. After deleting the section, the Finance Act of 1968 reintroduced the section with an amendment. The amended section substituted the words “by an owner of the shares in respect of so much of any dividend paid or deemed to be paid” for the words “by a shareholder in respect of so much of any dividend paid or deemed to be paid to him” which occurred in s. 85.

4. The amended section was to apply for the years 1962 to 1968. The year of assessment with which we are concerned is 1962-63. It is agreed on all hands that we must decide the question referred to us in the light of the provision in the amended s. 85 which has been reintroduced by the Finance Act of 1968.

5. The firm of Tarapore & Co. got the benefit of s. 85, and the dividend income received from Kalinga Tubes Ltd. was exempted in computing the taxable income of the firm, Tarapore & Co. When the two partners, Loganatha Mudaliar and Tarapore, claimed exemption of the share of the dividend received by them from Kalinga Tubes Ltd. on the basis that their share of income from the firm contained the income received by the firm by way of dividend from Kalinga Tubes Ltd. it was contended by the revenue that the benefit that was available to the firm would not be available to the partners of the firm. This contention was negatived by the Tribunal on the basis that the income received by the distribution of the income of the firm by division of the profits and gains of the firm in accordance with the terms of the partnership deed gave to each of the partners the same type of income which the firm had received to the extent to which the income of the firm consisted of the dividends from the shares held by the firm in Kalinga Tubes Ltd. and that, therefore, the partners were also entitled to the same exemption. It was pointed out that there were two assessments of the same income, once in the hands of the firm and thereafter the same income by distribution among the partners of the firm will get assessed in the hands of the partners. The reasoning, as we understand it, proceeds on the basis that a particular type of income has been exempt from tax under the I.T Act and irrespective of the question in whose hands the income was sought to be taxed to income-tax, that type of income must get exemption from tax. This is an understandable position, for, a particular type of income, depending upon its nature, has been exempt from tax under the I.T Act. The section, as it was originally worded, covered a part of a dividend received by a shareholder. After the amendment, the wording of the section has been altered and exemption has been granted to the owner of the shares. This difference has been noticed by the Tribunal. The Tribunal applied the analogy of the decision in CIT v. Arun Industries, [1966] 61 ITR 241 (Guj). The particular question that arose before the court therein is not the same as we are considering in these cases. But certainly the decision gives an indication of the principle to be applied.

6. Counsel on behalf of the revenue mainly emphasised the distinction that has been introduced by the amendment to s. 85. It was contended before us that the firm was the owner of the shares in Kalinga Tubes Ltd. and that the partners cannot be said to be the owners of the shares and, therefore, it was urged that the partners cannot get the benefit of s. 85.

“The property of the firm” is statutorily defined in s. 14 of the Partnership Act; the property that has been brought in by the partners and the property that is acquired by a firm will be the property of the firm. According to s. 14 of the Partnership Act, when one talks of the property of the firm, it has to be remembered that a firm as such is not a legal entity; nor can a firm as such, according to the English concept, hold property. This is the reason why the Supreme Court in two decisions held that when the firm is dissolved and the partnership assets are distributed among the partners, there will be no transfer of the property of the firm in favour of the partners so as to attract the provisions of the I.T Act for capital gains. The decisions are Cit, Up v. Sh. Bankey Lal Vaidya (Dead) By Lawyers† , [1971] 79 ITR 594 (SC) and Commissioner Of Income Tax, Madhya Pradesh v. Dewas Cine Corporation, [1968] 68 ITR 240 (SC). These two decisions clearly show that in general law the firm cannot be treated as the owner of the shares in Kalinga Tubes Ltd. But, for the purpose of the I.T Act, the firm has been made a legal entity just as a person, as a firm is included in the definition of the term “person” under the I.T Act. The firm is a separate entity for the purpose of assessment and, therefore, a firm will be entitled to the exemption under s. 85. Whatever that be we are not concerned with that now, and we do not wish to express any opinion on that matter. As far as the individuals who make up the partners of the firm are concerned, we have no doubt that the properties, which are called the assets of the firm, really vest in the partners of the firm. This has also been said by the Supreme Court in the decision, Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300. Each of the partners may not hold any specific shares; nor can it be said that each partner holds all the shares in Kalinga Tubes Ltd. But this does not matter. The partners are the owners of the shares and the general principle of law cannot be abrogated and we cannot conceive of a hypothetical ownership of these shares and deny the partners, who, in law, own the property and in whom the property is vested, the benefit of s. 85. We have, therefore, to proceed on the basis that the partners are the owners of the shares in Kalinga Tubes Ltd. The two partners of the particular firm with which we are concerned, Tarapore & Co., between them held all the shares. From it the dividend income was received. No point was made that the share of profits and gains of the firm received by the partners from the firm did not include the dividend income received from Kalinga Tubes Ltd. On the other hand, the case proceeded on the basis that the share of profit received by each partner, who are the partners concerned in these two references consisted of the dividend income received by the firm from Kalinga Tubes Ltd. This particular income is an income exempt from income-tax. The partners were also assessable on that income, though the same income had been assessed in the hands of the firm, Tarapore & Co. The nature and extent of the exemption granted is by picking up the income of a particular nature and exempting it from the provisions of the Act, though the wording of s. 85 indicates that it is only the owners of the shares who will be entitled to that exemption. We have already pointed out that the partners are the owners of the shares. The income being of that particular type, namely, income by way of dividend from the shares of a concern, which is an industrial undertaking falling under s. 84, we have no doubt whatever that the income in the hands of the partners, to the extent to which they have received the income because of the distribution according to the shares of the partners, will also have to be exempted under s. 85. We, therefore, answer the questions referred to us in the affirmative, that is, in favour of the assessee and against the department. The assessee in T.C No. 385 of 1974 will have his costs of the reference from the revenue. Advocate's fee Rs. 250. There will be no order as to costs in T.C No. 343 of 1974, as nobody appeared for the assessee.