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V.R.S.A.R Arunachalam Chettiar Assessee. v. The Commissioner Of Income-Tax, Madras .
Structured Summary of the Opinion — Sir C. V. Kumaraswami Sastriar, Kt., J.
Factual and Procedural Background
The assessee was a member of a joint undivided Hindu family (father and brothers). The joint family jointly held a 50/76ths interest in a money‑lending business carried on at Taiping in the Federated Malay States. On 5 November 1925 the family was partitioned and the assessee's share in the Taiping business as a going concern fell to him personally. During the year of account (Krodhana: 13 April 1925 to 12 April 1926) and the year of assessment 1926–27, the joint family received remittances of Rs. 29,218 (received before the partition) and Rs. 15,037 (received after the partition). The assessee kept accounts on a cash basis. The Income‑tax Officer assessed the assessee personally upon these sums as foreign profits brought into British India taxable under Section 4(2) of the Income‑tax Act, the officer having overruled the assessee's objections. The opinion is a reference arising from that assessment.
Legal Issues Presented
- Whether sums remitted to the joint family and/or to the assessee are taxable on the assessee under Section 4(2) as foreign profits brought into British India.
- Whether Section 26 of the Income‑tax Act (as then in force) applies to foreign firms and to a change of constitution resulting from partition of an undivided Hindu family so as to render the person who becomes entitled to the business during the year liable to assessment.
- Whether, on partition of an undivided Hindu trading family by allotting the business as a going concern to one member, the profits earned in the year of partition lose their character as profits (becoming capital) and therefore become non‑taxable as income of the recipient.
- Whether sums received by the undivided family before partition can be assessed on an individual member after partition—i.e., whether Section 14(1) prohibits such individual taxation for amounts received as a member of an undivided Hindu family.
- Whether amendments enacted later (Act III of 1928 introducing Section 25‑A and re‑casting Section 26) have retrospective application to the period in question.
Arguments of the Parties
Assessee's Arguments (as presented in the opinion)
- The allotment of the Taiping business to the assessee on partition should be treated as a transfer of capital: he received capital (his share), not profits liable to income‑tax.
- Because the moneys were received by him as a member of the joint family, the tax liability should rest with the joint family and not be imposed on him individually; Section 14 of the Income‑tax Act exempts sums received "as a member of a Hindu undivided family."
- The cessation of the joint family during the year of assessment does not affect the assessee's claim; there was no provision in the Act (prior to the 1928 amendment) to tax a family that dissolved during the year of assessment.
- Section 26 cannot apply because the firm/business is situate outside British India; only income actually brought into British India is taxable.
- Analogies drawn with company winding‑up cases: when a limited company is wound up and assets distributed, undivided profits distributed as assets are not taxable as profits of the recipient (counsel relied on decisions such as Inland Revenue Commissioners v. Burrell and related authorities).
Revenue's Arguments (as presented or inferred in the opinion)
- The Income‑tax Officer treated the remitted sums as profits of a business outside British India brought into British India and assessed the assessee under Section 4(2).
- Reference was made (by Mr. Patanjali Sastri) to earlier legislative provisions (Section 5(1) of the Act of 1886 and Section 12(1) of the Act of 1918) and an argument that Section 14(1) was intended only to prevent double taxation, implying that if the undivided family ceased to exist the individual who received the sum could be taxed.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Inland Revenue Commissioners v. Burrell | Held that on winding up of a limited company undivided profits of past years and the year of winding up were assets and not profits for the purpose of taxation. | The court distinguished this authority: it did not apply because there was no winding up, no closing of accounts and re‑investment as new capital in the present case; the business continued as a going concern and only the ownership changed. |
| Inland Revenue Commissioners v. Blott; Inland Revenue Commissioners v. Greenwood | Held that allotment of shares out of undivided profits (as a form of bonus) could not be treated as part of the total income for the purpose of super‑tax. | The court treated these authorities similarly to Burrell and held them inapplicable because the facts here did not involve winding up or distribution of profits as assets—profits remained profits and the business continued. |
| Partington v. Attorney‑General | Principle that fiscal statutes must be given the letter of their words: if the taxpayer falls within the literal language he must be taxed; equitable construction is not permissible to extend liability where the statute's terms do not reach. | The court invoked this principle to emphasize strict adherence to the statutory language (not to import equitable considerations to tax where the statute exempts). It supports the conclusion that sums received by a member as part of an undivided family (per Section 14(1)) are not taxable on the individual under the statute as it stood. |
| Lord Advocate v. Fleming (per Lord Halsbury) | When construing fiscal statutes the court has to look to the statute itself rather than relying on a governing principle outside the statute. | The court relied on this guidance to justify adherence to the clear language of Section 14(1) and related provisions in deciding that the pre‑partition receipt belonged to the joint family for tax purposes. |
Court's Reasoning and Analysis
The court proceeded by reference to the relevant statutory provisions and the undisputed facts. It began with the text of Section 4(2), which makes profits and gains of a business accruing or arising outside British India taxable if they are received in or brought into British India (subject to the three‑year limitation). The court observed that had the joint family remained undivided, the joint family itself would have been taxable on the remitted sums because the family members were resident in British India and the sums were profits.
Turning to Section 26 and the question whether it applies to foreign firms or to a change of constitution by partition, the court rejected the submission that Section 26 is limited to firms situated in British India. It reasoned that Section 4(1) makes profits of a company outside British India taxable when brought into British India and that Section 26 governs who is to be assessed when there is a change in constitution; there is nothing in Section 26 to confine its application geographically. Thus Section 26 may be applied to reach persons who became entitled to the business on a change (including partition), and in that sense it is analogous to ordinary partnership changes (e.g., retirement and assignment of interest).
On the core question whether profits earned in the year of partition lose their character as profits and become capital on allotment of the business to one member, the court considered the assessee's reliance on company winding‑up authorities. The court distinguished those authorities because in the cited company cases there was a winding up or a distribution of assets out of undivided profits; the business there ceased and the profits were converted into distributable assets. In the present case the business continued as a going concern; accounts were not closed, the profits remained profits, and only ownership changed. Therefore the post‑partition remittance of Rs. 15,037 was taxable as profits received by the person who became entitled.
By contrast, the pre‑partition sum of Rs. 29,218 was received by the joint family while the family was still undivided and, applying Sections 14 and 16, the court held that the assessee is not taxable on that amount. The court read Sections 4(2), 14, 16 and 26 together and observed that Section 26 does not preclude a person from claiming exemptions expressly provided in other sections. The court emphasised that Section 14(1) states generally that tax shall not be payable by an assessee in respect of any sum which he receives as a member of an undivided Hindu family; Section 16 excludes Section 14(1) from a list of items to be included in computing total income, reinforcing the exemption.
The court acknowledged that Parliament later amended the Act (Act III of 1928) to introduce Section 25‑A and re‑cast Section 26 to deal with partitions occurring during a year. However, because that amendment post‑dates the period under assessment, the court held it could not be applied retrospectively. The court invoked established authorities (Partington and Lord Advocate v. Fleming) to stress that fiscal statutes must be construed by their words and that one cannot extend tax liability where the statute's clear terms do not reach.
Holding and Implications
Holding:
- The reference is answered in favour of the assessee in part: the assessee is not taxable in respect of the sum of Rs. 29,218 received by the joint family before the partition (this sum belonged to the undivided family and was exempt from taxation on the individual under Section 14(1) as interpreted by the court).
- The sum of Rs. 15,037 remitted after the partition (i.e., received by the assessee as the person who became entitled to the business during the year) is taxable as profits brought into British India under Section 4(2).
- Rs. 100 paid in O. P. No. 127 of 1928 shall be refunded by the Commissioner to the assessee.
Implications: The decision applies the existing statutory text (as at the period under assessment) strictly. Direct effects are limited to the parties: the pre‑partition remittance is treated as belonging to the joint family and not chargeable to income‑tax on the individual, whereas sums remitted after the partition to the member who became the sole proprietor are taxable. The court noted that the legislative defect concerning taxation where a family is partitioned during the year was remedied by subsequent amendment (Act III of 1928), but it refused to apply that later amendment retrospectively. The opinion does not purport to create a broader retrospective principle; it rests on statutory construction of the law as it then stood.
Disposition: Reference answered. Judges Odgers and Wallace concurred.
Sir C. V. Kumaraswami Sastriar, Kt., J. — The assessee, prior to the 5th November, 1925, was a member of a joint undivided family consisting of his father and brothers. The joint family so constituted was entitled to 50/76ths share in a money-lending business carried on at Taiping in the Federated Malay States. On the 5th of November, there was a partition amongst members of the joint family and in that partition the interest of the family in the Taiping business as a going concern fell to the share of the assessee. Prior to the date of the partition, there had been a remittance to the joint family of Es. 29,218 in the year Krodhana (13th April 1925 to 12th April 1926). Subsequent to the partition, there was a further remittance of Es. 15,037. These sums were remitted not in one lump sum; but that makes no difference.
The year of account in the present case is Krodhana (13th April, 1925 to 12th April, 1926) and the year of assessment 1926-27. The accounts were kept on cash basis.
The Income-tax Officer overruled the objections of the assessee and assessed the assessee on these sums as being foreign profits brought into British India and taxable under Sect. 4 (2). Hence this reference.
The contention for the assessee is that, as he got the Taiping business for his share of the joint family, what he got was capital and that he could not be taxed as having received any profits. It is also contended that as the moneys were received by him as a member of the joint family he could not be taxed, and it is the joint family that should be taxed and not the assessee individually, that under Sect. 14 of the Income-tax Act, he is not liable to assessment, that the fact that the joint family ceased to exist during the year of assessment does not make any difference, so far as he is concerned, that there was no provision in the Act for taxing the joint family dissolved during the year of assessment or account and that this defect has only been removed by Sects. 25 (a) and 26 inserted by an amendment of the Act (III of 1928). It is also contended that Sect. 26 can have no application, as the firm is situate outside British India and it is only the income that is brought into British India that is taxable.
There is no dispute about the facts as set out. Sect. 4 (2) enacts that,
“profits and gains of a business accruing or arising without British India to a person resident in British India (shall, if they are received in or brought into British India, be deemed to have been accrued or arisen in British India and to be profits and gains of the year in which they are so received or brought) notwithstanding the fact that they did not so accrue or arise in that year, provided that they are so received or brought in, within three years of the end of the year in which they accrued or arose.”
It is therefore clear that had the joint family of which the assessee was a member continued without partition during the year of assessment, the joint family would have been taxable in respect of the sums of Rs. 29,218 and Rs. 15,037 received in British India, as it is not disputed that the members of the joint family were residents in British India and that the sums remitted were profits.
Sect. 28, as it stood in 1925-1926, ran as follows:
“Where any change occurs in the constitution of a firm or where any person has succeeded to any business, profession or vocation, the assessment shall be made on the firm as constituted, or on the person engaged in the business, profession or vocation, as the case may be, at the time of the making of the assessment”.
I do not think that the contention that Sect. 26 has application only to firms in British India and has no application to firms outside British India can be accepted.
Sect. 4 (1) makes the profits of a company outside British India taxable if brought into British India. There is nothing in Sect. 26 which limits the scope of the section to firms in British India. Sect. 4 declares that the income of a foreign firm is taxable. In dealing with the income which is so taxable and determining who is the person to pay the tax, there is no reason why the provision of Sect. 26 should not be applicable. Sect. 26 only deals with the persons who are to be assessed. Where there is a change, I am of opinion that Sect. 4 enacts when the profits of a foreign firm are taxable and Sect. 26 states whom you have to reach to collect the tax. The mere fact that the firm, if it brought no profits into British India, would not be taxable does not affect the question. Any enquiry for the purpose of ascertaining whether the sum is taxable or not and whether it is profits or capital got back and who is to pay the tax is within the scope and jurisdiction of the Income-tax Officers, and for that purpose the accounts of the foreign firm may be scrutinised. It is not therefore correct to say that in the case of foreign firms whose profits are brought into British India and taxable under Sect. 4 (2) the other provisions of the Income-tax Act are inapplicable.
The next question is whether in the case of partition of an undivided family, the members of which are carrying on business, Sect. 26 applies where during the year in question the business falls to the share of one or more of the members. Having regard to the wording of Sect. 26, I do not see anything to prevent its application. Prior to the partition, all the members of the joint family constituted the firm. By reason of the partition, certain members who constituted the firm ceased to have any interest in the firm and their interest, by reason of the partition, devolved on the person or persons to whom their shares in the business have been allotted. It is difficult to distinguish this case from the case of an ordinary partnership where, there are say, four parties and three of them retire from the business, assigning their interest to the fourth partner and the fourth partner continues the business. I am of opinion that in cases where there has been a partition of an undivided Hindu trading family Sect. 26 applies and the person who becomes entitled to the business during the year in question cannot escape liability unless he can bring himself within any other section exempting him from liability.
The next question is whether in the case of a partition amongst the members of a joint family, where a person becomes entitled on partition to a foreign business as his share, the profits earned in the year in which the partition takes place lose the character of profits, as being merged in the capital and should be treated as the capital of the person who gets the business on partition
The argument of Mr. Krishnaswami Aiyangar for the assessee is that where a partition takes place between the members of an undivided family, a person in consideration of his share in all the joint family properties gets a particular item, which presumably is equivalent to his share in the properties, which were clubbed together for ascertaining his share and therefore it should be taken that what he gets is not profits or capital in the business, but the value of the whole of the business as representing his share and so far as he is concerned it is his capital.
It is argued that the position is similar to that where a limited company is wound up and the assets distributed, where there is no question of taxable profits, as regards the shareholders to whom the assets are distributed.
Reference has been made to Inland Revenue Commissioners v. Burrell, where it was held that on the winding up of a limited company, the undivided profits of past years and the year in which the winding up occurred, were assets and not profits for the purpose of taxation and to Inland Revenue Commissioners v. Blott. Inland Revenue Commissioners v. Greenwood(2) where it was held that where a limited company passed a resolution that out of its undivided profits a bonus should be paid to the shareholders and that such payment should take the form of certain shares being allotted to them, the shares so allotted could not be treated as part of the total income for the purpose of super-tax.
I do not think the principle of these cases has any application to cases where on a partition between the members of a joint family a business as a going concern is allotted to a share of one member. It is not suggested in the present case that when the business was allotted the accounts of the business were closed, profits ascertained and such ascertained profits added to the capital and a new business in which this capital was invested was carried on. Nor is it suggested that the business was wound up. The profits remained as profits, the business went on as before and the only change was that instead of all the members of the joint family being interested in the business, one of them acquired the interests of the others and became the sole proprietor. So far therefore as the sum of Rs. 15,037 received by the assessee after the partition is concerned, I am of opinion that it is taxable.
As regards the sum of Rs. 29,218 received before the partition it is not disputed that this sum was received by the joint family of which the petitioner was a member, and it seems to me that having regard to the provisions of Sects. 14 and 16 the assessee is not taxable.
In a case like the present, we should read Sects. 4. (2), 14, 16 and 26 together. No doubt Sect. 26 says that, when there is a change, the person liable is the person engaged in the business at the time of making the assessment. But the section does not prevent him from claiming any of the exemptions conferred by the other sections of the Act.
Sect. 14 (1) runs as follows:—
“The tax shall not be payable by an assessee, in respect of any sum which he receives as a member of a Hindu undivided family.
(2) The tax shall not be payable by an assessee in respect of—
(a) any sum which he receives by way of dividend as a shareholder in a company, where the profits or gains of the company have been assessed to income-tax; or
(b) such an amount of the profits or gains of any firm which have been assessed to income-tax as is proportionate to his share in the firm.”
It will be noted here that, while Sub-cl. (2) only exempts cases where a company or firm has already been assessed, Sub-cl. (1) puts no such limitation but states generally that the tax shall not be payable by an assessee, in respect of any sum which he receives as a member of an undivided Hindu family.
Provision is made in Sect. 3 for the taxation of undivided Hindu families, and it says that income-tax can be charged on the income, profits and gains of the previous year of every individual, company, firm and Hindu undivided family.
Sect. 16 (1) runs as follows:
“In computing the total income of an assessee sums exempted under the proviso to Sub-sect. (1) of Sect 7, the provisos to Sect. 8 Sub-sect. (2) of Sect. 14 and Sect, 15 shall be included.”
Here again, it will be noted that Sect. 14 (1) is not to be included, i. e., any sum received by a member of an undivided Hindu family.
There was no provision in the Act, until the recent amendment by which undivided families which became divided during the course of the year could be reached. To remedy this defect, the legislature amended the Act by enacting Sect. 25-A and by re-casting Sect. 26 of the old Act. Cl. 1 of Sect. 25-A provides for an enquiry by the Income-tax Officer when a partition is alleged, and an order by him as to whether he finds the partition provided. Cl. 2 runs as follows:
“Where such an order has been passed, the Income-tax Officer shall make an assessment of the total income received by or on behalf of the joint family as such, as if no separation or partition had taken place, and each member or group of members shall in addition to any income-tax, for which he or it may be separately liable and notwithstanding anything contained in Sub sect. (1) of sect. 14, be liable for a share of the tax on the income so assessed, according to the portion of the joint family property allotted to him or it;**** Provided that all the separated members and groups of members shall be liable jointly and severally, for the tax assesssed on the total income received by, or on behalf of the joint family as such.”
In my view, the provision of Sects. 14 and 16 being clear and the amendment introduced by Act III of 1928 being much later than the period for which the income has been assessed, no consideration as to the inconvenience or as to any person escaping from taxation can arise. There is no ambiguity in the sections and the clear meaning of Sect. 14 (1) is that where a member of an undivided Hindu family during the period when the family is joint receives any portion of the income of the joint family, he is not liable to taxation, but it is the joint family which under Sect. 3 should be charged. This is not a case where we have to construe a doubtful section.
In Partington v. Attorney-General,, Lord Cairns observed as follows:
“I am not at all sure that, in a case of this kind—a fiscal case—form is not amply sufficient; as I understand the principle of all fiscal legislation, it is this: if the person sought to be taxed comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible in any statute what is called an equitable construction, certainly such a construction is not admissible in a taxing statute where you can simply adhere to the words of the statute.”
As observed by Lord Halsbury in Lord Advocate v. Fleming, in construing such Acts we have no govering principle of the Act to look at; we have simply to go on the Act itself to see whether the duty claimed is that which the legislature has enacted.
Reference has been made by Mr. Patanjali Sastri to Sect. 5 (1) of the Act of 1886, and Sect. 12 (1) of the Act of 1918 and it is argued that all that was done by Sect. 14 (1) of the present Act was to prevent double taxation and that if the undivided family ceased to exist, there is no reason for the individual member who receives the sum not being taxed.
In the present case, I fail to see any reason why one member of an undivided Hindu family should be taxed for a sum received by all the members of the undivided family. The new amendment, which I have referred to, shows that the legislature intended that the member should only pay a tax proportionate to his share. There is no question of any equitable consideration in cases where one member of an undivided family after partition is sought to be made liable to pay tax on the whole sum which he and the other members of the family received before partition, irrespective of his share. However this may be, it seems to me, having regard to the decisions I have referred to, we cannot in a fiscal enactment, where the language is clear, go beyond the plain meaning of the section. It is very probable that in the Income-tax Act of 1922 the legislature, by oversight or owing to bad draftsmanship omitted to prescribe for cases where there has been a partition in an undivided family, but it has now been remedied by Act III of 1928. I do not think I can by any rule of construction practically make Sect. 25-A retrospective, by enacting that the same principle is to be applied to case coming under the Act of 1922.
I am of opinion that the assessee is not taxable, as regards the sum of Rs. 29,218, received before the partition by the joint family. Rs. 100 paid in O. P. No. 127 of 1928 will be refunded by the Commissioner.
Odgers, J.—I agree.
Wallace, J.—I agree.
N. R. R.Reference answered.
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