# Comml.uloner o/ lncomt-taz, ModrtU v. S.Y .R.M. Polanlappa Chtttlor

- **Citation:** [1967] 1 S.C.R. 905
- **Court:** Supreme Court of India
- **Decided:** 1966-10-14
- **Bench:** J.C. Shah, V. ilAMAsWAMI, V. Bhargava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/comml-uloner-o-lncomt-taz-modrtu-v-s-y-r-m-polanlappa-chtttlor-3931
- **Pages:** 8

## Headnote

Income Tax Act, 1922, s.
25(3)-Assessee firm successor to joint
ftmtily business in India and abroad asse.s1ed to tax under Income Tu
Act, 1918- Entire foreign income of business abroad remitted to India--
Whether Tax under 1. 3 of 1918 Act, was on income of busine.siWhether rental income from property of firm abroad was business income
·-Whether relief under s. 25(3) can be claimed.
Prior to the coostitution of the assessee firm, ita partners were members of a Hindu undivided family which camed oil mooey-lencliog bull.-
um in India and in Malaya and which was assessed to tax under the
Income "fax Act, 1918. There was a partition in the family on June 2,
1938, and thereafter ita members contil\ued the business as partners in
the assessee firm.
The firm was dissolved on March 2, 1952. In the
assessment for tbe year 1952-53, the
assessee applied for relief under
s. 25(3) of the Income Tax Act,. 1922. This claim was rejected by tbe
Income Tax Officer and an appeal to the Appellate Assistant Commiosioner was dismissed on the view that in the case of business carried on
in foreign territory, the business :as such was not assessed under s. 3 of
the 1918 Act and only income received in India was so assessed; consequently, no relief cou!d be claimed under s. 25 ( 3) of the 1922 Act.
A further appeal to the Appellate Tribunal was partly allowed as
the Tribunal considered that the assessee was. entitled to relief under
s. 25 (3) except in respect of the income received by the assessee firm
from certain house properties in Malaya. Tue Higb Court, upon a reference, disagreed with the Tribunal and held in favour of the department.
On appeal to this Court,
HELD : (i) Tue High Court was in error in holding that tire foreign
business of the assessee was not charged
under the provisions of the
1918 Act. The assessee was therefore entitled to relief under s. 25(3).
When s. 25 ( 3) refers to tax charged on any business, it is intended
to refer to tax charged on the owner of any business. If tax is shoW11
to have been charged in respect of the- income of the business under the
1918 Act, the owner or successor-in-interest in relation to the busine&&
will be entitled to get the benefit of the exemption under s. 25(3) if tile
bllsiness is d,iscontioued.
In the context of the finding by the lower
courts that the entire income 1>f the foreign business was remitted lo
the a~essee and tax imposed on that income under the 1918 Act, the
foreign business of the assessee must be held to have been charged uod..-
the provisions of the 1918 Act within the meaning of s. 25(3) of the
1922 Act. [911 F-Hl
(ii) The assessee was also entitled to relief DDder s. 25(3) on the
rental income from the house properties owned by the foreign firm .which
was discontinued in the year of account.
M!7Sap C.I./66-12
908
SUPUlll ODUaT UPOllft
[1967) I s.c.a.
11.,.;.. Income is broken
up under different heads only for
tho
,...... ot compulalloll of the Iola! lnc:ome.
By that breaking ~ Ille
illcome don not cease to be tbe income of tbe business. (912 B-FJ
Comml.uloner o/ lncomt-taz, ModrtU v. S.Y .R.M. Polanlappa Chtttlor
4 OthtTS. 20 l.T.R. 170, di.rapprovtd: Commullontr of lncomt-taz, Bom-
"-1 Ci17 I "· ChUlondM 4 Co., (1964] 8 S.C.IL 332, referred to.
A
CmL APPELLATB 1UltJSDicnON: Civil Appeal No. 751 of 1965.
II
Appeal from the judgment and order dated December 18,
1962 of the Madras High Court in Tax Case No. 143 of 1960.
A. K. Sen, K. Parasarn, K. Rajender Chaudhuri and J K. R
Chaudhuri, for the appellant.
B. Sen, T. A. Ramachanaran, S. P. Nayyar for R. N. Sachthey,
for the respondent.

## Text

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0. RM. M. SP. SV. FIRM
v.
THE COMMISSIONER OF INCOME-TAX-MADRAS
October 14, 1966
[J.C. SHAH, V. ilAMAsWAMI AND V. BHARGAVA, JJ.j
Income Tax Act, 1922, s.
25(3)-Assessee firm successor to joint
ftmtily business in India and abroad asse.s1ed to tax under Income Tu
Act, 1918- Entire foreign income of business abroad remitted to India--
Whether Tax under 1. 3 of 1918 Act, was on income of busine.siWhether rental income from property of firm abroad was business income
·-Whether relief under s. 25(3) can be claimed.
Prior to the coostitution of the assessee firm, ita partners were members of a Hindu undivided family which camed oil mooey-lencliog bull.-
um in India and in Malaya and which was assessed to tax under the
Income "fax Act, 1918. There was a partition in the family on June 2,
1938, and thereafter ita members contil\ued the business as partners in
the assessee firm.
The firm was dissolved on March 2, 1952. In the
assessment for tbe year 1952-53, the
assessee applied for relief under
s. 25(3) of the Income Tax Act,. 1922. This claim was rejected by tbe
Income Tax Officer and an appeal to the Appellate Assistant Commiosioner was dismissed on the view that in the case of business carried on
in foreign territory, the business :as such was not assessed under s. 3 of
the 1918 Act and only income received in India was so assessed; consequently, no relief cou!d be claimed under s. 25 ( 3) of the 1922 Act.
A further appeal to the Appellate Tribunal was partly allowed as
the Tribunal considered that the assessee was. entitled to relief under
s. 25 (3) except in respect of the income received by the assessee firm
from certain house properties in Malaya. Tue Higb Court, upon a reference, disagreed with the Tribunal and held in favour of the department.
On appeal to this Court,
HELD : (i) Tue High Court was in error in holding that tire foreign
business of the assessee was not charged
under the provisions of the
1918 Act. The assessee was therefore entitled to relief under s. 25(3).
When s. 25 ( 3) refers to tax charged on any business, it is intended
to refer to tax charged on the owner of any business. If tax is shoW11
to have been charged in respect of the- income of the business under the
1918 Act, the owner or successor-in-interest in relation to the busine&&
will be entitled to get the benefit of the exemption under s. 25(3) if tile
bllsiness is d,iscontioued.
In the context of the finding by the lower
courts that the entire income 1>f the foreign business was remitted lo
the a~essee and tax imposed on that income under the 1918 Act, the
foreign business of the assessee must be held to have been charged uod..-
the provisions of the 1918 Act within the meaning of s. 25(3) of the
1922 Act. [911 F-Hl
(ii) The assessee was also entitled to relief DDder s. 25(3) on the
rental income from the house properties owned by the foreign firm .which
was discontinued in the year of account.
M!7Sap C.I./66-12
908
SUPUlll ODUaT UPOllft
[1967) I s.c.a.
11.,.;.. Income is broken
up under different heads only for
tho
,...... ot compulalloll of the Iola! lnc:ome.
By that breaking ~ Ille
illcome don not cease to be tbe income of tbe business. (912 B-FJ
Comml.uloner o/ lncomt-taz, ModrtU v. S.Y .R.M. Polanlappa Chtttlor
4 OthtTS. 20 l.T.R. 170, di.rapprovtd: Commullontr of lncomt-taz, Bom-
"-1 Ci17 I "· ChUlondM 4 Co., (1964] 8 S.C.IL 332, referred to.
A
CmL APPELLATB 1UltJSDicnON: Civil Appeal No. 751 of 1965.
II
Appeal from the judgment and order dated December 18,
1962 of the Madras High Court in Tax Case No. 143 of 1960.
A. K. Sen, K. Parasarn, K. Rajender Chaudhuri and J K. R
Chaudhuri, for the appellant.
B. Sen, T. A. Ramachanaran, S. P. Nayyar for R. N. Sachthey,
for the respondent.
The Judgment of the Court was delivered by
Ranwwaml, J, This appeal is brought, by certificate,fagainst
Ille judgment of the Madras High Court dated December 18,
1962 in T.C. No. 143 of 1960.
The appellant (hereinafter called the 'assessee') was a firm
Qiled O.RM.M.SP. SY. Firm which was registered under s. 26(A)
of the Income-tax Act, 1922 (hereinafter called the '1922 Act').
Prior to the constitution of the firm, the partners were memben
of a Hindu undivided family. The family
which consisted of
Meyyappa Chettiar and his two brothers carried on money-lending
business in India and in the former Federated Malaya States and
it was assessed under the Indian Income-tax Act, 1918 (hereinafter called the '1918 Act'). There was a disruption of the joint
family status on June 2, 1938, and thereafter the members of the
family continued the business as partnel'$. In the course of the
assessment for the year 1939-40 it
was claimed by Meyyappa
Chcttiar, one of the members of the family that having regard to
the severance of joint family statu.q, the income of the family from
April 13, 1938 to June 2, 1938 was not liable to be taxed by reason
of the provisions of s. 25(3) & (4). The lncome-taA Officer accepted
the fact. of partition amongst the members of the family, but rejected
the contention that the family was not liable to pay tax on the profits
for the said period. The High Court ultimately called for a reference
on the following question:
"Whether the income of the family from 13th April 1938
to 2nd June 1938 is not liable to be taxed by virtue of Section
25(3) of the Indian J ncome-tax Act"
After receipt of the reference the High Court held that there
was no discontinuance of the business within the meaning of s. 25(3).
The view taken by the High Court was that when a Hindu undivided
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RM. M. SP. F'lRM v. c.1.T. (Ramaswami, J.)
907
family carrying on a business, which was taxed under the 1918 Act,
became disrupted and the members continued the business thereafter as partners, there could be no discontinuance but only
succession by the firm of the business of the family. It was held in
that case that it was the assesse-firrn which took over the business
of the Hindu undivided family. The firm was dissolved on March 2,
1952. In the assessment for the year 1952-53 the assessee applic4
for relief under s. 25(3) of the 1922 Act. The claim was rejected
by the Income-tax Officer on March 7, 1956. The assessee preferred
an appeal to the Appellate Assistant Commissioner who dismissed
the appeal holding that in the case of business carried on in foreign
territory the business as such is not assessed under s. 3 of the 1918
Act but only receipt of the income in British India is assessed and it
cannot therefore be held that the foreign business of the appellant
was charged to tax under the 1918 Act. The assessee took the matter
in further appeal to the appellate Tribunal which considered that
fbe assessee was entitled to relief under s. 25 (3) of the 1922 Acs
except for the income received from the house properties in Malaya.
The appellate Tribunal accordingly allowed the appeal of the assessee
in part. Both the assessee and the Department applied to the appellate Tribunal for reference of the questions of law to the High Court.
The appellate Tribunal allowed the applications and stated a caM
to the High Court on the following questions oflaw:
"(i) Whether the assessee is entitled to both the parts of
the relief contemplated under section 25(3) of the Act in respect
of foreign business at Penang, Ipoh and Kambar?
(ii) Whether the applicant is also entitled to relief under
section 25 (3) of the Act with regard to rental income from houso
prnperties owned by the foreign firm which was discontinued
in the year of assessment."
The appellate Tribunal also referred another question for the
opinion of the High Court but it is not the subject-matter of tla•
present appeal.
The High Court held that the assessee was not entitled to relief'
under s. 25(3} of the 1922 Act and accordingly answered both the
questions in favour of the Department. The view taken by the
High Court was that the foreign business of the assessee cannot
be deemed to have been charged under the provisions of the 1918
Act because the assessee was only taxed on remittances received
from the profits of the foreign business and there was no tax on the
foreign business itself under the 1918 Act. The High Court accordingly reached the conclusion that the assessee was not entitled to
relief under s. 25 (3) of the 1922 Act.
908
SUPllBMB COUJ. T llBPOll TS
(1967) 1 S.C.R.
Section 25 (3) of the 1922 Act is to the following effect:
"25. (3) Where any business, profession or vocation
on which tax was at any time ·charged under the provisions
of the Indian Income'.tax Act, 1918 (VII of 1918), is discontinued, then, unless there has been a succession by virtue of
which the provisions of sub-section (4) have been rendered
applicable no tax shall be payable in respect of the income,
profits and gains of the period between theend of the previous
year and the date of such discontinuance, and the assessec
may further claim that the income, profits and gains of the
previous year shall be deemed to have been the income,
profits and gains of the said period. Where any such claim
is made, an assessment shall be made on the basis
of the income, profits and gains of the said period, and if
an amount of tax has already been paid in respect of the
income, profits and gains of the previous year exceeding the
amount payable on the basis of such assessment, a refund
shall be given of the difference."
Under this section exemption from liability to pay tax in respect of
the income, profits and gains may be claimed by an assessee if the
business is one in respect of which tax was charged at any
time under the 1918 Act, and the business is discontinuedthere being no succession by virtue of which the provisions of
sub-section (4) of s. 25 have been rendered applicable. Section 25(3)
however, applies even if the person assessed under the 1918 Act was
different from the person who claims relief under that section provided the former was the predecessor-in-interest of such person in
relation to the business. The reason for enacting s. 25(3) was that
under the 1918 Act, income-tax was levied by virtue of s. 14{2) of
the 1918 Act, on the income of the year of assessrnent. Tax was,
therefore, levied in the financial year 1921-22 on the income of that
year.
By the 1922 Act the basis of taxation was altered and by
s. 3 of that Act, charge for tax was imposed upon the income of
the previous year. When the 1922 Act was brought into force on
April 1, 1922, two assessments in respect of the same income for the
year 1921-22 had to be made. The income for 1921-22wasaccordingly
charged to tax twice; it was charged under the 1918 Act and it was
also charged to tax under s. 3 of the 1922 Act read with the appropriate Finance Act, resulting in double taxation in respect of the
income for that year. But with a view to make the nuRJber of
assessments equal to the number of years during which the business
was carried on, the legislature enacted the exemption prescribed
by s. 25(3). This benefit was however restricted only to the income,
profits and gains of business, profession or vocation on which tax
had been charged under the provisions of the 1918 Act.
By enactini:
s. 25(3) the legislature intended to exempt the income, profits and
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RM. M. SP, FIRM v. c.r.T. (Ramaswami, J.)
909
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gains resulting from the activity styled business, profession or
vocation from tax when the business, profession or vocation is discontinued if tax was charged in respect thereof under the 1918 Act.
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The first question to be considered in this appeal is whether
the assessee is entitled to both parts of relief contemplated under
s. 25(1) of the 1922 Act in respect of the foreign business at Penang,
Ipoh and Kambar. The controversy between the parties turns on
the question whether the foreign business of the assessee was at any
time charged under the provisions of the 1918 Act. It has been
found by the appellate Tribunal that the assessee was taxed on remittances received from and out of the profits of the foreign business.
The finding of the Appellate Assistant Commissioner is stated in
these terms :
"The entire profits of the foreign business came to be
assessed in the hands of the appellant under the 1918 Act,
not because it was a business income but because such income had been remitted into British India. Therefore, in fact
also it is not the foreign profits of a business that has been
charged to tax but only the remittance which in the particular
case was not less than the profits of the year."
We have therefore to proceed on the footing that the assessee
received the entire profits of the foreign business in British India
and the entire profits were assessed to inocme-tax in the hands of
the assessee under the 1918 Act. It is necessary, at this stage, to
set out the relevant provisions of the 1918 Act.
Section 3, the charging section stated as follows:
"3. (I) Save as hereinafter provided, this Act shallapply
to all income from whatever source it is derived, if it accrues
or arises or is received in British India, or is, under the provisions of this Act, deemed to accrue or arise or to be received
in British India.
"
Section 5 mentioned the classes of income chargeable to
income-tax and reads as follows:
"5. Save as otherwise provided by this Act, the following classes of income shall be chargeable to income-tax in
the manner hereinafter appearing, namely-
(i) Salaries.
(ii) Interest on securities.
(iii) Income derived from house property.
(iv) Income derived from business.
910
SUPUYB couaT R.BPO&TS
(1967) I S.C.R.
(v} Professional earnings.
(vi) Income derived from other source5."
Soction 9 of the 1918 Act enumerated the permissible deductions
in the computation of the profits of the business. The question
for determination is whether the foreign business of the assessce
was at any time charged under the provisions of s. 3 of the 1918 Act.
It has been found in this case that the entire income of the foreign
business was remitted to the assessee and tax imposed on that income
tmderthe 1918 Act. We are of the opinion that in the context of these
facts the foreign business of the assessee must be held to be charged
under the provisions of the 1918 Act within the meaning of s. 25(3}
of the 1922 Act. It is manifest that bys. 3 of the 1918 Act the chargu
was made on the receipt of income in British India and as the income
received by the assessee was derived from the foreign business and
wa.~ in relation to the foreign business it must be taken that there was
an assessment to tax on the foreign business within the meaning of
a. 25(3) of the 1922 Act. In 01.her words, the tax under the 1918
Act was charged upon the assessee in respect of his activity styled
•foreign business' and in relation to it and it must hence be taken,
upon the facts found by the appellate Tribunal in this case, that
the foreign business of the assessee was charged under the 1918 Act
within the meaning of s. 25(3) of the 1922 Act. The High Court
has taken the view that the foreign business of the assessee was not
charged under the 1918 Act because what was taxed was the remittances received by the assessee from the foreign business and not
the foreign business itself.
In taking this view, the High Court
has followed its previous decision in Commissioner of IncomNax,
Madras v. S.V.R.M. Pa/aniappa Chettiar and Others(') in which it
was held that the words "on which" ins. 25(4)ofthe 1922 Act cannot
be interpreted as meaning "with reference to which" and that in
order to claim and avail the benefit under s. 25(4) the tax clearly
should be charged on the business as such under the 1918 Act. At
page 173 of the Report Satyanarayana Rao, J. stated as follows:
"The relief under sub-clause (4) is permissible only if
the tax on the business was charged under the provisions of
the Indian Income-tax Act, 1918. If the foreign business
at Muor was not and could not have been charged under the
Act and the share in the profits of the family from that
foreign business was charged under section 3 only on the receipt in British India, can it be said that the charge so made
was a charge of a tax on the foreign business. The income
received by the joint family could not have been charged
under the head 'income derived from business' but only as a
receipt under section 3. The argument, however, on behalf
I 20 l.T.R. 170.
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RM. M. SP. PUtM II. C.l.T. (Rama.rwami, J.)
911
of the Bllsessee by bis learned Advocate Mr. Rajah Iyer waa
that the words "on which tax was at any time charged"
11hould be construed as meaning "with reference to which
tax was at any time charged." In other words, the conten·
tio!l is that the income derived by the assessee was in relation
to a ·business and therefore the assessment of the income
musi be treated as an assessment of the business. No doubt,
under the provisions of the Income-tax Act, the tax is payable by an assessee but the assessment of the tax is on the
basis of various heads of income derived by the assessce
one of which is business. It cannot, therefore, be said that
because tax was payable by the assessee on the profits received from a business in a foreign territory such assessment is an assessment of the business."
In our opinion, the view adopted by the High Court in CommissiUMr
of Income-tax, Madras v. S. V.R.M.Pa/aniappa Chelliar and Others( )
must be taken to be impliedly over-ruled by the recent decision of
this Court in Commissioner of Income-tax. Bombay City-I v.
Chugandas &. Co.(2) in which the question was whether the intereat
on securities
formed part of the assessee's business income
for the purpose of the
exemption from tax under s. 25(3)
of the 1922 Act. It wa11 held by this Court that the assessee
was entitled to exemption under s. 25(3) in respect of interest
on securities as well, and there was no reason to restrict the
condition of the applicability of the exemption under s. 25(3) only
to income on which the tax was payable under the head "Profits
and gains of business, profession or vocation". It was further
observed in that case that tax i~ charged under the Income-tax ActB
on specific units, such as, individuals, Hindu undivided families,
companies, local authorities, firms and associations of persons C11c.
and business, profession or vocation is not a unit of assesstncnt.
When, therefore, s. 25(3) enacts that tax was charged at any time on
any business, it is intended that the tax was at any time charged on
the owner of any business. If that condition be fulfilled in respect
of the income of the business under the 1918 Act, the owner or his
successor-in-interest in relation to the business, will be entitled to set
the benefit of the exemption under it if the business is discontinued.
We are accordingly of the opinion that the High Court was in error
in holding that the foreign business of the assessee was not charged
under the provisions of the 1918 Act. The first question must
therefore be answered in favour of the assessee and it must be held
that the assessee is entitled to both parts of relief contemplated
under s. 25(3) of the 1922 Act in respect of the foreign busineeses
at Penang, Ipoh and Kambar.
(I) 20 l.T.R. 170.
(2) [1964] 8 C.S.R. 332.
912
SUPREME COUllT llBPOllTS
[1967] I S.C.L
The second question of law arising in this appeal is whether
the auessee was entitled to relief under s. 25(3) of the 1922 Act with
regard to the rental income from house properties owned by the
foreign firm which was discontinued in the year of account. A
simllar question was the subject-matter of consideration in Commissioner of Income-tax, Bombay City-Iv. Chugandas and Company(!)
which has already been referred to.
In that case, the assessee firm,
a dealer in securities holding securities as its stock-in-trade, had been
charged to tax under the 1918 Act, in respect of business. It received
Rs. 4,13,992 and Rs. 1,01,229 as interest on securities in the years
1946 and 1947 respectively. The firm discontinued its business
on June 30, 1947. The question at issue was whether the interest
on securities formed part of the assessee's business income for the
purpose of the exemption from tax under s. 25(3) of the 1922 Act.
It was held by this Court that the assessee was entitled to exemption
under s. 25(3) in respect of interest on securities as well. It was
pointed out that there was no reason to restrict the condition of the
applicability of the exemption under s. 25(3) only to income on which
the tax was payable under the head "Profits and gains of business,
profession or volcation". The exemption under s. 25(3) is general.
It was explained by this Court that the heads of income described
in s. 6 of the 1922 Act, and further elaborated for the purposes of
computation in ss. 7 to 10 and 12, 12A, l2AA and 12B, are intended
merely to indicate the classes of income. The heads do not exhaustively delimit sources from which income arises. Business
income is broken up under different heads only for the purpose of
computation of the total income.
By that breaking up the income
does not cease to be the income of the business, the different heads
of income being only the classification prescribed by the Incometax Act for computation. The ratio of this decision applies to the
present case and it must accordingly be held that the assessee is
entitled to relief under s. 25(3) of the 1922 Act with regard to the
rental income from the house properties owned by the foreign firm
which" was discontinued in the year of account.
For these reasons the judgment of the Madras High Court
is set aside and this appeal must be allowed with costs.
R.K.P.S.
Appeal allowed.
(I) (1964] 8 S.C.R. 331.
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