Bhagwati, J.:— This reference made at the instance of the Commissioner raises a short but interesting question of law relating to the interpretation of section 15C of the Income-tax Act, 1922, in its application to a registered firm. It arises out of an assessment made on the assessee, a registered firm, for the assessment year 1961-62, the corresponding account year being Samvat year 2016. The assessee at all material times carried on business of extracting oil from oil-cakes and the oil-mill of the assessee was admittedly an industrial undertaking within the meaning of section 15C. In the assessment for the assessment year 1961-62, the assessee claimed that out of its total income which was determined at Rs. 5,24,081, a sum of Rs. 94,392 was exempt from tax under section 15C on the ground that it represented profits derived by the assessee from the industrial undertaking to the extent of 6 per cent, of the capital employed in the undertaking. This claim was allowed by the Income-tax Officer to the extent of Rs. 81,855 but he granted exemption in respect of this amount only in the individual assessments of the partners in proportion to their respective shares and did not grant exemption in respect of this amount in determining the tax payable by the assessee under section 23(5)(a)(i). The assessee did not dispute the correctness of the amount of profits exempted under section 15C but was obviously dissatisfied with the order of the Income-tax Officer in so far as it did not grant exemption in respect of this amount in the determination of the tax payable by the assessee under section 23(5)(a)(i). The assessee, therefore, preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took the view that the contention of the assessee that no tax was payable by the assessee on the amount of Rs. 81,855 exempted under section 15C was correct and he accordingly directed the Income-tax Officer to exempt the said amount from the levy of the tax payable by the assessee as a registered firm though it was liable to be taken into account for the purpose of ascertainment of the rate applicable on the balance of the income. The department thereupon carried the matter in appeal to the Tribunal, but the Tribunal agreed with the view taken by the Appellate Assistant Commissioner and dismissed the appeal. It is this decision of the Tribunal which is challenged before us on behalf of the Commissioner in the present reference.

2. Now, as we have pointed out above, there is no dispute between the parties in regard to the amount of the profits liable to be exempted under section 15C. The only point in controversy is whether the assessee is entitled to exemption in respect of this amount in determining the tax payable by it under section 23(5)(a)(i). The learned Advocate-General appearing on behalf of the revenue pointed out that a firm, whether registered or not, is a unit of assessment and where the assessee is a registered firm, tax on the income of the firm is recovered through two channels, one directly from the firm and the other through its partners; it is the firm which pays the tax, in the one case by itself and in the other through its partners and tax in both cases is the tax of the firm or, in other words, the tax of the firm consists of two components, one being paid by the firm itself and the other being paid by the partners on behalf of the firm and, founding himself on this premise, the learned Advocate-General contended that when section 15C provides that no tax shall be payable by an assessee on its exempted profits this provision in its application to a case where the assessee is a registered firm can justify an exemption either in respect of one component of the tax or in respect of the other component of the tax but the exemption cannot be given in respect of both the components of the tax, for the effect of doing so would be to give the benefit of section 15C twice over to the assessee in respect of the tax payable by it.

3. The only question which can, therefore, arise is, argued the learned Advocate-General, in respect of which component of the tax the assessee should be granted exemption and to this query the answer can be only one, namely, that exemption should be granted to the assessee in respect of the tax payable through the partners, for otherwise registered firms which did not have income exceeding Rs. 40,000 during the relevant account year and which were, therefore, not liable to pay tax themselves under section 23(5)(a)(i) would not get the benefit of section 15C. Mr. H.C Shah, learned advocate appearing on behalf of the assessee, on the other hand, urged that the scheme of taxation of a registered firm embodied in the provisions of the Act as amended from 1st April, 1956, was that a registered firm was a unit of assessment, the income of which was liable to be computed under section 23(5)(a)(i) and after the computation was made, the income-tax payable by the registered firm itself was liable to be determined under section 23(5)(a)(i) and, also the share of each partner in the income of the registered firm was liable to be added to his other income and the tax payable by him on the basis of his total income including his share of the firm's income was liable to be determined under section 23(5)(a)(ii), so that the income of the registered firm as computed under section 23(5)(a) was liable to be taxed in the hands of the registered firm as also in the hands of the partners and since the registered firm and the partners were all distinct and separate assessees, each of them was entitled to claim the benefit of section 15C in his or its assessment to tax in respect of the exempted profits comprised in his or its income. Mr. H.C Shah contended that, when tax payable by the registered firm was sought to be determined, the registered firm could always contend that no tax was payable by it on the exempted profits under section 15C and equally when tax payable by a partner of the firm was sought to be determined in his individual assessment, he could claim that no tax was payable by him on his share of the exempted profits under the same section. The assessee was, therefore, entitled, argued Mr. H.C Shah, to the benefit of section 15C in respect of the exempted profits in determination of the tax payable by it under section 23(5)(a)(i). These were the rival contentions urged before us and they raised an interesting question of construction of section 15C.

4. In order to arrive at a proper determination of this question of construction, it is necessary to have a look at the provisions of section 23 which deals with “assessment”. But before we do so, it would be convenient to refer to the definition of “assessee” given in section 2(2) which says that “assessee” means a person by whom income-tax or any other sum of money is payable under the Act and includes every person in respect of whom any proceeding under the Act has been taken for the assessment of his income or of the loss sustained by him or of the amount of refund due to him. It is clear from this definition that an “assessee” means not only a person by whom income-tax is payable under the Act but also a person in respect of whom any proceeding under the Act has been taken for the assessment of his income. Bearing this definition in mind, let us now turn to the provisions of section 23. It is clear, on a reading of section 23, that “down at least to the middle of sub-section 5(a), ‘assess’ and, ‘assessment’ refer, primarily, to the computation of the amount of income and ‘assessee’ means, primarily, a person the amount of whose income is being computed. The section requires the Income-tax Officer to do two things: first to compute or ‘assess’ a person's total income, and then to determine the sum payable as tax. Sub-sections (1) to (4) set out alternative methods of computation or ‘assessment’. In the normal case the person whose income is being computed is the person who pays the tax and for that case these sub-sections also provide for the Income-tax Officer taking the second step and determining the sum payable as tax. But the case of a firm is specially dealt with by sub-section (5)”. This sub-section consists of two clauses: clause (a) deals with the case of a registered firm and clause (b) deals with the case of an unregistered firm and these clauses make a distinction between the assessment procedure in regard to a registered firm and that in regard to an unregistered firm. To appreciate the difference in regard to the assessment procedure, it is necessary to bear in mind that there are three distinct steps in assessment proceedings, (i) computation of the taxable income, (ii) determination of the tax payable and (iii). demand for the tax so found due. Now registration of the firm makes no difference for the purposes of the first stage, but it does make a difference for the purposes of the second and third stages. A firm being a unit of assessment, the income of the firm is computed in its hands as that of an entity, irrespective of whether the firm is registered or unregistered. But after the income of the firm is computed or “assessed” under one of the earlier sub-sections, sub-section (5) makes a distinction between registered firms and unregistered firms in regard to the next two stages, namely, the determination of the tax payable and the demand and so far as these two stages are concerned, the question of registration has a material bearing.

5. Now in this connection it is necessary to notice not only the position prevailing in the relevant year of account but also the position which prevailed prior to the amendment made in section 23(5) by the Finance Act, 1956, with effect from 1st April, 1956. Prior to the amendment, the position was as follows: Where the firm was unregistered, the tax payable by the firm itself was determined as in the case of any other distinct entity and the demand or levy was also made on the firm itself. On the other hand, where the firm was registered, the firm did not itself pay the tax and, therefore, the tax payable by the firm was not determined; but each partner's share in the firm's profits was added to his other income, the tax payable by each partner on the basis of his total income (including his share of the firm's profits) was determined, and the demand or levy was also made on the partners individually. In either case, there was no double taxation. If the firm was registered, the tax was collected from the partners individually and no levy was made on the firm itself. If the firm was unregistered and the tax had been paid by the firm itself, no tax was payable by the partners in respect of their respective shares which had already borne tax in the hands of the firm (vide section 14(2)(a)). This position obtained not only in respect of income-tax but also in respect of super-tax. The amendment made by the Finance Act, 1956, did not make any change in this scheme barring one material difference and that was that income-tax at specially low rates was, under the amendment, assessable on a registered firm, though no super-tax was at all still assessable on it. The partners of a registered firm were also liable, as before the amendment, to be charged in their individual assessments to both income-tax and supertax in respect of their share of the firm's profits. So there was double taxation, in the case of a registered firm, so far as income-tax but not supertax was concerned, and, therefore, to obviate the resultant hardship, the legislature also introduced section 14(2)(aa) which, broadly stated, provided that no tax shall be payable by a partner of a registered firm, in respect of that portion of his share in the profits or gains of the firm as is equal to the difference between his share in the total income of the firm and his share in such total income excluding the income-tax, if any, payable by the firm. The object of this provision obviously was that, since the registered firm itself was now liable to pay tax, the divisible profits to that extent would stand reduced and, therefore, the partner of the registered firm should not be liable to pay tax in respect of the portion of the tax paid by the firm proportionate to his share which having been paid by the firm would not come to his share on division of the profits. The result, therefore, is that now after the amendment the registered firm itself is liable to pay income-tax at specially low rates and, subject to the partial relief granted under section 14(2)(aa), the individual partners are also liable to pay both income-tax and super-tax on their respective shares of the firm's profits in their personal assessments. This is broadly the scheme of taxation in regard to a registered firm and it is in the context of this scheme that we have to decide what is the true effect of section 15C in its application to a registered firm.

6. It would be convenient at this stage to set out the provisions of section 15C, since the decision of the question before us turns primarily on the true construction of that section. Section 15C was introduced in the Act by the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, and, omitting provisions immaterial, it runs as follows:

“15C. (1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking to which this section applies as do not exceed six per cent, per annum on the capital employed in the undertaking, computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue …….

(3) The profits or gains of an industrial undertaking to which this section applies shall be computed in accordance with the provisions of section 10.

(4) The tax shall not be payable by a shareholder in respect of so much of any dividend paid or deemed to be paid to him by an industrial undertaking as is attributable to that part of the profits or gains on which the tax is not payable under this section….

(6) The provisions of this section shall apply to the assessment for the financial year next following the previous year in which the assessee begins to manufacture or produce articles and for the four assessments immediately succeeding.”

7. Sub-section (2) sets out the kind of industrial undertaking to which the section applies and since it was common ground between the parties that the industrial undertaking of the assessee was an industrial undertaking to which the section applied, it is not necessary to refer to that sub-section. Turning now to the relevant portion of sub-section (1), which contains the operative provision, granting exemption, what it provides is that tax shall not be payable by an assessee on so much of the profits or gains derived from the industrial undertaking as does not exceed six per cent. per annum on the capital employed in the undertaking. Now a registered firm is clearly and indisputably an assessee within the ambit of section 15C. A registered firm, as pointed out above, was an assessee within the meaning of the definition contained in section 2(2) even prior to the amendment made by the Finance Act, 1956, since though no income-tax was payable by it, it was certainly an entity in respect of whom section 23(5) authorised a proceeding to be taken for the assessment of its income. After the amendment made by the Finance Act, 1956, a registered firm would also fall within the first part of the definition of “assessee” in section 2(2) since income-tax is now payable by it under section 23(5)(a)(i). There is, therefore, no doubt that section 15C must apply to a registered firm and the effect of that section in its application to a registered firm would be that no tax shall be payable by a registered firm on the exempted profits. Of course, it must be pointed out that the provisions enacted in section 15C postulate an assessee by whom tax is payable and declare in respect of such an assessee that tax shall not be payable by him on exempted profits. The section cannot, therefore, apply where there is an assessee who is not liable to pay tax. That such an assessee can exist is clear from the second part of the definition of “assessee” in section 2(2) and, as a matter of fact, prior to the amendment made by the Finance Act, 1956, a registered firm was such an assessee, since no tax was payable by the registered firm itself. But now after the amendment made by the Finance Act, 1956, tax is payable by the registered firm itself under section 23(5)(a)(i) and section 15C can and must, therefore, apply to a registered firm and, consequently, while determining the tax payable by the registered firm under section 23(5)(a)(i), the revenue would be bound to grant to the registered firm exemption in respect of tax on the exempted profits. There can, therefore, be no doubt that, on a true construction of section 15C, the assessee was entitled to claim exemption from payment of tax in respect of the amount of exempted profits in the determination of the tax payable by it under section 23(5)(a)(1).

8. But, contended the learned Advocate-General, the exemption was already granted to the assessee when no tax was charged from the partners on their respective proportionate shares in the exempted profits and that the exemption could not, therefore, be granted once again to the assessee. The argument was based on the premise that the tax assessed on the partners and payable by them in respect of their respective shares in the profits of the firm was tax payable by the partners on behalf of the assessee, or, in other words, was tax payable by the assessee through the partners and that the exemption contemplated by section 15C was, therefore, granted to the assessee when it was taken into account in the individual assessments of the partners. This premise is in our opinion unsound for it ignores the true scheme of taxation in regard to a registered firm which we have set out above. When the share of each partner in the firm's profits as computed under section 23(5) is taken in the individual assessment of the partner and the total income of the partner including his share of the firm's profits is assessed and the tax payable by him is determined either under the unamended, section 23(5)(a) or under the amended section 23(5)(a)(ii), the tax so determined is payable by the partner as an assessee in his own liability as tax due in respect of his total income and not on behalf of the firm or in discharge of the liability of the firm. This is clear enough on a plain reading of the section itself but it is made abundantly clear by two circumstances which are very eloquent. In the first place, the tax which is determined to be payable by the partner is not on his share of the firm's profits standing by itself but on his total income which may include other profits or losses and it may be that, if there are other losses, the share of the firm's profits to which the partner is entitled may be wiped off by the losses and ultimately no tax or very little tax may be payable by the partner and it would be impossible to say that such tax is payable by the partner on behalf of the firm. Secondly, while including the partner's share of the profits of the firm, the partner would be entitled to a deduction in respect of the expenditure incurred by him wholly and exclusively for the purpose of earning his share of the profits. This circumstance would also show that when the tax payable by the partner is determined under the unamended section 23(5)(a) or the amended section 23(5)(a)(ii), the partner is assessed as an assessee in respect of his own income and the tax is determined to be payable by him in his own liability as an assessee and not on behalf of the firm. It is, therefore, not correct to say that the tax payable by the partner in respect of his share of the firm's profits is tax payable by the firm. The learned Advocate-General however urged that if this view is taken, the logical consequence would be that the benefit of section 15C would be wholly unavailable in the case of a registered firm prior to the amendment of section 23(5)(a), for, admittedly, on this view, no tax could be said to be payable by the registered firm under the unamended section and the provisions of section 15C can have no application to an assessee by whom no tax is payable. He submitted that the only way in which the benefit of section 15C could be given to a registered firm under the unamended section was by regarding the tax payable by the partner in respect of his share of the firm's profits as tax payable by the firm so that the registered firm would then be an assessee liable to pay tax and it would be possible to give effect to the injunction contained in section 15C in relation to the registered firm by taking into account the exemption in the determination of the tax payable by the partner. This contention, we are afraid, is without merit and cannot be accepted. The short answer to this contention is that though undoubtedly no tax being payable by the registered firm, the registered firm would not be an assessee falling within section 15C and the benefit of section 15C would not be available to the registered firm—as a matter of fact there would be no occasion or necessity for the registered firm to claim the benefit of section 15C since no tax would be payable by it—each partner of the registered firm when assessed on his total income including his share in the profits of the firm as provided in the unamended section 23(5)(a), would be an assessee in his own liability and would be entitled to claim as an assessee, when the tax payable by him in respect of his share of the exempted profits and the benefit of section 15C would thus be available to all the partners of the registered firm and section 15C would not be rendered inapplicable in the case of a registered firm. The learned Advocate-General, however, urged a difficulty in the acceptance of this view and that difficulty, in his submission, was created by the provision enacted in section 15C, sub-section (6). He pointed out that section 15C, sub-section (6), clearly indicated that the assessee to whom the benefit of section 15C, sub-section (1), is given by the legislature must be a person who manufactures or produces articles in the industrial undertaking and, therefore, in a case where the industrial undertaking is carried on by a registered firm, the assessee entitled to claim the benefit of section 15C, sub-section (1), would be the registered firm and not an individual partner of the registered firm, since it would not be possible to say of an individual partner that he manufactures or produces articles in the industrial undertaking. Now it is undoubtedly true that if sub-sections (1) and (6) of section 15C are read together, the assessee referred to in sub-section (1) must be a person who manufactures or produces articles in the industrial undertaking but it is indisputable that where a firm manufactures or produces articles, every partner of the firm does so. No authority is needed for this proposition, but if any authority were needed, it is to be found in the decision of this court in Sitaram Motiram Jain v. Commissioner of Income-tax [1961] 43 I.T.R 405, 412., where K.T Desai C.J, as he then was, observed as follows:

“We shall next deal with the point whether a business which has been carried on by a partnership could be regarded as a business carried on by a partner. A ‘partnership’ is defined by section 4 of the Indian Partnership Act, as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. When a firm carries on business, it is a business carried on by the partners of that firm. One partner is the agent of the other in carrying on that business. When a partnership carries on a business each partner thereof carries on that business…”

9. There is, therefore, nothing in sub-section (6) which should compel us to hold that in the case of a registered firm, the assessee contemplated by sub-section (1) can only be the registered firm and not a partner of the registered firm. Where a registered firm manufactures or produces articles in the industrial undertaking, every partner of the registered firm does so and he would, therefore, be an assessee within the meaning of section 15C, sub-section (1), and would be entitled to claim that no tax is payable by him in respect of his share of the exempted profits in his individual assessment. Another difficulty suggested by the learned Advocate-General was that if in the case of a registered firm a partner of the registered firm could be regarded as an assessee for the purpose of claiming the benefit under section 15C, sub-section (1), the result would be that each partner would be entitled to claim exemption from tax in respect of the whole of the exempted profits but this difficulty is also in our opinion unreal like the first one and is clearly dispelled by the plain language of sub-section (1). Applied to the case of a partner of a registered firm who is an assessee, subsection (1) says that no tax shall be payable by him on the exempted profits. If there is any part of the exempted profits in his hands, he shall not be liable to pay tax on it. Ordinarily when the profits of the registered firm are distributed amongst the partners, each partner would get a portion of the exempted profits in proportion to his share and on that portion of the exempted profits in his hands he would not be liable to pay tax under sub-section (1). This in our opinion is the only correct way of looking at sub-section (1) and it is not only supported by the language of the sub-section but also accords with common sense. It is, therefore, clear that when the exemption was granted under section 15C, sub-section (1), in the individual assessments of the partners, it was granted because each partner as an assessee was entitled to claim that no tax was payable by him on the exempted profits in his hands and not because no tax was payable by the registered firm as an assessee on the exempted profits. That was not an exemption granted to the registered firm in the determination of the tax payable by it and, therefore, when the registered firm as an assessee claimed exemption from tax in respect of the exempted profits in the determination of the tax payable by it under, section 23(5)(a)(i), there was no question of the benefit of sub-section (1) being given over again to the registered firm. The partners and the registered firm are distinct and separate assessees and each being an assessee within the meaning of section 15C, sub-section (1), can claim, when the tax payable by it is sought to be determined, that no tax is payable by it on the exempted profits in its hands and it must, therefore, follow that, in the present case, the assessee being a registered firm, was entitled to claim in the determination of the tax payable by it under section 23(5)(a)(i) that no tax was payable by it on the exempted profits under section 15C, sub-section (1).

10. It was then contended by the learned Advocate-General that if the construction contended for on behalf of the assessee were accepted, the result would be that in the case of a registered firm the partners would obtain the benefit of section 15C twice over. The registered firm would obtain the benefit of section 15C in the determination of the tax payable by it on its income and when the registered firm obtains that benefit, the partners of the registered firm would in effect and substance obtain it and then the partners of the registered firm would again obtain the benefit under section 15C in their individual assessments. The legislature, it was argued, could not have intended to confer this double benefit in the case of a registered firm when it did not confer such double benefit on an unregistered firm or a registered firm whose income did not exceed Rs. 40,000. This contention overlooks the fact that unlike an unregistered firm or a registered firm whose income does not exceed Rs. 40,000, a registered firm whose income exceeds Rs. 40,000 is an entity whose income is taxed twice over, once in its own hands and then in the hands of the partners and it is for this reason that the benefit of section 15C is granted both in the determination of the tax payable by the registered firm and in the determination of the tax payable by the partners of the registered firm. Where there is an unregistered firm, the tax payable by it on its income is determined as if it is a distinct unit of assessment and its income is assessed to tax in its own hands: its income is not assessed to tax once again in the hands of the partners: vide section 14(2)(a). Equally where there is a registered firm whose income does not exceed Rs. 40,000 and no tax is, therefore, payable by the registered firm itself under section 23(5)(a)(i), the income of the registered firm is not assessed to tax in the hands of the registered firm but is assessed to tax only in the hands of the partners and there is, therefore, again no double taxation of such income in the hands of two distinct assessable entities. But in the case of a registered firm whose income exceeds Rs. 40,000, there is double taxation of the same income, once in the hands of the registered firm and then in the hands of the partners and that is why in the determination of the tax in each case the benefit of section 15C is made available by the legislature. The object of the legislature clearly is that no tax shall be payable in respect of the exempted profits in whosoever's hands the exempted profits may otherwise be liable to be taxed. This object of the legislature is amply demonstrated by the provision enacted in sub-section (4) of section 15C which provides that no tax shall be payable by a shareholder in respect of so much of any dividend paid or deemed to be paid to him by an industrial undertaking as is attributable to that part of the profits or gains on which the tax is not payable under the section. When a company is carrying on an industrial undertaking and earns exempted profits, the company could of course get the benefit of section 15C in its assessment but when dividend is paid by the company out of the exempted profits, the shareholder in respect of the dividend so received by him would not get the benefit of the section because of two reasons: (1) he would not be an assessee who manufactures or produces articles, for it is the company which would be manufacturing or producing articles and a company is in the eye of the law a distinct and separate entity from its shareholders; and (2) it would not be possible to say that the dividend received by him represents profits or gains derived from the industrial undertaking: the immediate effective source of the dividend would be the shareholding and not the industrial undertaking and the dividend cannot, therefore, be said to be revenue derived from the industrial undertaking and the shareholder would not be entitled to claim the benefit of the section in respect of the dividend. That is why the legislature enacted sub-section (4) with a view to securing that exempted profits should not only be exempt from tax in the hands of the company but should also be exempt from tax in the hands of the shareholder when he receives them in the shape of dividend. The legislative intent is thus manifest that no part of the exempted profits should suffer tax in the hands of any assessee and the construction which we are placing on section 15C, sub-section (1), completely accords with this legislative intent.

11. Some reference was made to section 14(2)(aa) in the course of the arguments but that section does not throw any light on the construction of section 15C, sub-section (1). That section was necessitated because of the amendment of section 23(5)(a) and was introduced in order to give partial relief to the partners of a registered firm which became necessary by reason of the registered firm being directly made liable to pay tax under section 23(5)(a)(i) and it has nothing to do with section 15C, subsection (1).

12. We are, therefore, of the view that the assessee in the present case was entitled to exemption from tax in respect of Rs. 81,855 being the amount of exempted profits under section 15C in the determination of the tax payable by the assessee under section 23(5)(a)(i). Our answer to the question referred to us is accordingly in the affirmative. The Commissioner will pay the costs of the reference to the assessee.