SOLI M. COWASJEE VS COMMISSIONER OF INCOME TAX (INVESTIGATION), 1992 PTD-SUPREME-COURT 1632 (1991)

(On appeal from the judgment and order of the High Court of Sindh dated 19-9-1984 in TTR Nos. 187, 219, 222, 189, 190, 193 to 201, 205, 206, 208, 209, 220, 221 and 223 to 254 of 1974).

(a) Income Tax Act (XI of 1922)---

----Third Sched., Part I, cl. (ii) & S.48---Constitution of Pakistan (1973), Art.185(3)---Leave to appeal was granted to consider the questions as to whether the High Court was right in holding that assessee was not entitled to refund of his share of super tax paid by the registered firm of which he was a partner in view of the provision of cl. (ii) of Part I of the Third Sched to the Income-tax Act, 1922 read with S.48 and whether in view of S.48 of the Act was there any need to make specific provision for refund in proviso (ii) of Part I of the Third Schedule of the said Act.

(b) Income Tax Act (XI of 1922)---

----S.16(1)(b)---Computation of Income-tax for purposes of proviso (ii) of Part A of Part I of the Schedule to the relevant Finance Act/Ordinance has to be made without reference to S.16(1)(b) of the Act.

Commissioner of Income Tax v. Anwaraly Haji Noor Muhammad Civil Appeal No.246-K of 1980 ref.

(c) Income Tax Act (XI of 1922)---

----S.55---Firm---Held, though a firm was not a legal person or a judicial entity but for the purposes of income-tax or super-tax the firm was to be treated as "an entity distinct from the persons who constitute the firm".

Watson & Everitt v. Blunden 18 TC 402 (CA); Income Tax Commissioner v. Gibbs 24 TC 221 and Arunachalam Cheetien v. CTT 1936 ITR 173 (PC) ref.

(d) Income Tax Act (XI of 1922)---

----S.55 & Third Sched., Part I, cl. (ii)---Firm while being assessed to super-tax is a distinct assessing unit and even if the partner due to loss in other business suffers an overall loss, it will not reduce the liability of such firm from payment of super-tax on its business in which it has earned profit and gains.

Once a firm or individual is treated as assessable entity, the law relating to charge assessment and recovery shall be applied to it/him. In pursuance of section 55 super-tax is levied on a registered firm which has to pay it. Part I of the Third Schedule merely provides the rates of the income-tax and the manner in which it should be calculated. The proviso is applied only to determine the amount of income-tax to be levied. It will not apply to cases or to persons whose income is not assessable to income-tax. It does not confer a right to claim refund of the same. The firm while being assessed to super-tax is a distinct assessable unit and even if the partner due to loss in other business suffers an overall loss, it will not reduce the liability of such firm from payment of super-tax on its business in which it has earned profit and gains.

(e) Income Tax Act (XI of 1922)---

----S.48---Provisions of S.48 can be pressed in service for the purpose of claiming refund of super-tax---Claim of refund---Essentials.

Section 48 is a part of the machinery of the charge, assessment and recovery of income-tax and, thus, can be pressed in service for the purpose of claiming refund of the super-tax. Section 48 is couched in general terms which provides that any individual, company, local authority, firm or any partner of the firm may apply for refund of so much of the amount of the tax paid by him which exceeds the amount properly chargeable under the Act. This section refers to refund of the tax chargeable under the Act. Section 2(14) defines "tax" as "tax payable" under the Act and includes penalty, interest, fee and charges leviable under the Act. Super-tax is also charged under the Act and, therefore, section 48 will be applicable for claiming refund. However, before any refund can be claimed the assessee has to satisfy the Income Tax Officer that the amount of the tax paid by him or on his behalf exceeds the amount with which he is properly chargeable under the Act. This pre-condition should be satisfied before claiming a refund.

In the absence of entitlement to claim refund, section 48 cannot be pressed in service.

Khalid Anwar, Advocate Supreme Court, instructed by Yousuf Rafi, Advocate-on-Record for Appellants.

Nasrullah Awan, Advocate Supreme Court, instructed by S.M. Abbas, Advocate-on-Record for Respondent.

Date of hearing: 17th November, 1991.

JUDGMENT

SALEEM AKHTAR, J.---In all these appeals the appellant is a partner of various firms, some of which have also paid super-tax. The controversy arose on the allocation of the super-tax paid by the firm in the hands of the partners and on the question, whether the partners who had suffered losses in their individual assessment and were not liable to pay any tax could claim refund of their respective share of super-tax paid by the firm and debited to their account. The Appellate Assistant Commissioner ordered that the proportionate share of super-tax should be allocated to the partners on the basis of total super-tax payable by the firm in their profit sharing capacity. He further directed the refund of super-tax to the partner who suffered loss in his individual assessment. The Department appealed against this order before the Tribunal which confirmed the treatment given to allocation of super-tax. However, with regard to refund it was observed as follows:---

"So far as the second issue is concerned, it is obvious that in case the partner's total income is a loss no tax will be payable by him and, as in accordance with the relevant provision of the Finance Acts the tax payable by a partner has to be calculated by taking into account the portion of super-tax paid by the registered firm, appropriate to the partners share, the logical conclusion would be that where no tax is payable by the partner, the super-tax paid by the firm on his behalf should be the extra payment which would be uncalled for and must be deemed as part of the taxes attributable to the partner so that the thereof would become a necessary result. Otherwise a partner suffering a loss will still have to pay super-tax in violation of the relevant provisions of the Finance Act although his liability to tax would be nil. This obviously cannot be the intention of the legislature, which has already provided a deduction to the partner of this part of the taxes paid by the firm. In this view of the matter no exception can be taken to this direction of the Appellate Assistant Commissioner either. The departmental appeals must accordingly fail."

2. By a direct reference under section 66(1) of the Income Tax Act, 1922, the following question was raised:--

"Whether under the facts and circumstances of the case the learned Tribunal was justified in holding that while working out the proportionate share of the super-tax attributable to each partner, the total super-tax should be allocated to the partners of the firm in the profit sharing capacity and not as laid down in section 16(1)(b) of the Income Tax Act and whether in the event of partners having lower income or losses the super -tax paid by the registered firm can be reduced or refunded to the petitioners.

The High Court answered as follows;

"For the foregoing reasons, our answer to the first part of above?quoted question is that the Tribunal was justified in holding that while working out proportionate share of the super-tax attributable to each partner, super-tax should be allocated to the partners of the firm in the profit-sharing capacity and not with reference to section 16(1)(b) of the .Act. However, our answer to the second part of the above question is that under the proviso a partner can claim refund of the tax amount (which includes income tax and super tax) in excess of 75% or in excess of any other specified maximum percentage in the Finance Act of the relevant assessment year, of the income, for bringing down his total liability maximum to 75% or other specified percentage but he cannot claim the refund of the super tax on the ground that his overall income was low or that overall he has suffered loss."

The appellant challenged the second part of the judgment reproduced above and leave was granted to consider the following questions:--

"(i) Whether the High Court was right in holding that the petitioner was not entitled to refund of his share of super-tax paid by the registered firm of which he was a partner in view of the provisions of clause (ii) of Part I of the Third Schedule to the Income Tax Act, 1922, read with section 48; and

(ii) Whether in view of Section 48 of the Income Tax Act, 1922, was there any need to make specific provision for refund in proviso (ii) of Part I of the Third Schedule to the said Act."

3. Mr. Khalid Anwar, the learned counsel for the appellant, has contended that when the appellant is not liable to pay income tax he cannot be subjected to pay super tax and the same having been paid by the firm he is entitled to its refund to the extent of his proportionate share. In order to appreciate the contention raised by the learned counsel for the parties and the controversy involved the following provisions of the Act have been referred:

" Section 16--(1) In computing the total income of an assessee--

(a) any sums exempted under the first proviso to subsection (1) of section 7, the second and third provisos to section 8, subsection (2) of section 14, section 15, section 15A, section 15B, section 15C, (sections 15D,15E and section 15F) shall be included;

(b) when the assessee is a partner of a firm, then, whether the firm has made a profit or a loss; his share (whether a net profit or a net loss) shall be ~ taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of the previous year increased or decreased respectively by his share in the balance or the profit or loss of the firm after the deduction of super-tax payable by the firm, if any, and any interest, salary, commission or other remuneration payable to any partner in respect of the previous year:

Provided that if his share so computed is a loss; such loss may be set?off or carried forward and set off in accordance with the provisions of section 24;

(c) ......................

(2) ................??????????????

(3) ????????????

"Section 48. Refunds.--(1) If any individual, Hindu undivided family, company, local authority, firm or other association of persons, or any partner of a firm or member of an association individually satisfied the Income Tax Officer or other authority appointed by the Central Government in this behalf that the amount of tax paid by him or on his behalf or treated as paid on his behalf for any year exceeds the amount with which he is properly chargeable tinder this Act for that year, he shall be entitled to a refund of any such excess.

Section 55. Charge of super-tax.--(1) In addition to the income tax, charged for any year, there shall be charged, levied and paid for that year in respect of the total income of the previous year or previous years, as the case may be, of any individual, Hindu undivided family, company, local authority, unregistered firm, registered firm or other association of persons or the partners of the firm or members of the association individually, an additional duty of income tax (in this Act referred to as super-tax) at the rate or rates laid down for that year by the Central Act:

Provided that where under the provisions of clause (b) of subsection (5) of section 23 an unregistered firm has been assessed in the manner applicable to a registered firm super-tax shall be payable by the firm and each partner of the firm individually on his share in the income, profits and gains of the firm.

Proviso (ii) to Para A of Part I of the Third Schedule to the Income Tax Act.

(ii) the income tax payable shall in no case exceed (a) the amount by which the total income exceeds Rs.6,000 or (b) the amount representing seventy-five per cent of the total income, whichever amount is the less, and, where such income includes any income from a share of the income, profits and gains of a firm to which paragraph C of Part II applies, such portion of the super-tax payable under the said paragraph as bears to the total amount of such super-?tax the same proportion as his share of income, profits and gains of the firm bears to the total income of the firm shall be added to the income tax payable by such -partner under this paragraph and, if the sum so arrived at exceeds seventy-five per cent of the total income of. such partner (including his share of income, profits and gains of the firm) the amount of income tax payable by him under this paragraph shall be reduced by the amount of such excess."

The claim for refund of super-tax has been based mainly on the interpretation of provisos (ii) of Part I of the Third Schedule to the Income Tax Act. Part 1 of the Third Schedule prescribes the rates of income tax in respect of individual, Hindu undivided family, unregistered firm and association of persons not being a company or local authority. This proviso fixes the maximum ceiling for assessing income tax and the method for calculating such ceiling has also been given. It provides that income tax payable shall not exceed the amount by which the total income exceeds Rs. 6,000 or 75% of the total income whichever is less. But where such total income of the individual also includes his share of income in a registered firm on which super-tax is chargeable as provided by Para C of Part 11 of the Third Schedule the formula for determining the amount in excess of 75% of the total income has differently been provided. The Income Tax Officer has to take into account such portion of the super-tax payable under the said paragraph as bears to the total amount of such super-tax the same proportion as his share of income, profits and gains of the firm bears to the total income of the firm and then. the income tax payable by such partner is added to his share of super tax so calculated and if the total exceeds 75%. of the total income of such partner the income tax payable by him shall be reduced by the amount of such excess.

4. The Tribunal had relied on an illustration chart for calculating the income tax payable by the assessee for explaining the formula provided by Proviso (ii) to Part A of Part I of the Third Schedule reproduced above. The illustration alongwith the observation of the High Court which has approved it reads as follows:-?

???????????

It may be noted that in (he above case the income of the partner is Rs.230,708. The Income-tax payable on the above amount comes to Rs.148,474 whereas the super-tax paid by the firm on account of the above partner is Rs.56,592 thus making a total of Rs.205,066. Since proviso (ii) provides that income tax which includes super-tax shall not exceed 75% of the income of an assessee, and as the above sum of Rs.205,066 exceeds the above maximum limit of 75% of the income, the assessee's liability to pay tax has been reduced to the maximum limit of 75% of his income, which works out to Rs.173,031. In the above quoted example the aforesaid sum of super-tax namely Rs.56,592 has been deducted from the above sum of Rs.173,031 for the reason that this sum was already paid by the firm on behalf of the assessee partner and therefore he was allowed to pay Rs.173,031 minus Rs.56,592, equivalent to Rs.116,439. The above example contained in the above-quoted chart succinctly explains the effect of Proviso (ii).

In our view, the proviso provides maximum limit of the liability of a tax-payer by providing that his total liability of income tax which will include super-tax shall not exceed 75%. It does not provide that an assessee will be entitled to the refund of the super-tax in case over all he suffers loss in a particular assessment year."

For calculating the income tax payable by the assessee Proviso II takes into account the super-tax paid by the firm and as the amount of super-tax representing assessee's sharer is excluded from the income tax payable on the total income to bring about the net income

tax chargeable as illustrated above, the question of refund of super-tax does not arise as the same has been deducted from the income tax payable by the assessee/partner. So far as section 16 is concerned, as held in Civil Appeal No.246-K of 1980, Commissioner of Income Tax v. Anwaraly Haji Noor Muhammad, the computation of income tax for purposes of Proviso (ii) of Part A of Part I of the Schedule to the relevant Finance Act/Ordinance has to be made without reference to section 16(1)(b) of the Act. It was observed:

"The share of the super-tax allowable to the partner is to be in the same proportion as in his share in the total income. The share of the partner has in this context not the artificial, restricted and purposive meaning as is given in clause (b) of subsection (1) of section 16 of the Act. The third step in exercise is again taken care of by the statute in the following words:---

`If the sum so arrived at exceeds seventy-five per cent. of the total income of such partner (including his share of income, profits and gains of the firm) the amount of income-tax payable by him under this paragraph shall be reduced by the amount of such excess.'

It is clear, therefore, that the departmental view is entirely based on and gives a restricted, referential meaning to the expression `his share' by linking it to section 16(1)(b). There being no statutory mandate for that, such curtailment cannot be permitted as it is to the prejudice of the assessee."

In this view of the matter section 16 can hardly be relevant for purposes of the present controversy.

5. Section 55 of the Act is the charging provision for super tax which provides that:

"In addition to the income tax charged for any year super-tax shall be charged, levied and paid for that year in respect of the total income of the previous year of any individual, Hindu undivided family, company, local authority, unregistered firm, registered firm or other associations of persons or the partner of the firm or members of the association individually at the rate or rates laid down for that year by an Act of the Parliament."

Under section 55 a registered firm is charged to super-tax. The learned counsel for the appellant contended that a partnership firm is not a legal entity and, therefore, it is the partner who is in fact charged to tax. It is true that a firm is not a legal person or a juridical entity but for the purposes of income tax or super-tax the firm is treated as `an entity distinct from the persons who constitute the firm. Reference can be made to Watson & Everitt v. Blunden, 18 TC 402 (409) (CA). This judgment was approved by House of Lords in City of London, Income Tax Commissioner v. Gibbs, 24 TC 221 (248). Reference can also be made to Arunachalam Cheetien v. CIT, 1936 ITR 173 (178) (PC). Like section 3 of the Income Tax Act which is a charging section for the purposes of tax, section 55 also provides that the firm or the partners of the firm individually are charged to tax and are treated as assessable entities. Once a firm or individual is treated as assessable entity, the law relating to charge, assessment and recovery shall be applied to it/him. In pursuance of section 55 super-tax: levied on a registered firm which has to pay it. Part I of the Third Schedule merely provides the, rates of the, income-tax and the manner in which it should be calculated. The proviso is applied only to determine the amount of income-tax to be levied. It will not apply to cases or to persons whose income is not assessing to income-tax. It does not confer a right to claim refund of the same. The firm while being assessed to super-tax is a distinct assessable unit and even if the partner due to loss in other business suffers an overall loss, it will not reduce the liability of such firm from payment of super-tax on its business in which it has earned profit and gains.

6. The contention of the learned counsel is that the appellant is entitled to refund under section 48 of the Act Section 58 provides that all provisions of the Act relating to charge, assessment, collection and recovery of income tax except those specified therein shall apply to the charge assessment, collection and recovery of super-tax. Therefore, the entire machinery provided for charging, assessment and collection with the exceptions mentioned in it-are applied to the assessment proceedings of super-tax. Section 48 is a part of the machinery of the charge, assessment and recovery of income-tax and, thus, can be pressed in service for the purpose of claiming refund of the super-tax. Section 48 is couched in general terms which provides that any individual, company, local authority, firm or any partner of the firm may apply for refund of so much of the amount of the tax paid by him which exceeds the amount properly chargeable under the Act. This section refers to refund of the tax chargeable under the Act. Section 2(14) defines "tax" and "tax payable" under the Act and includes penalty, interest, fee and charges leviable under the Act. Super-tax is also charged under the Act and, therefore, section 48 will be applicable for claiming refund. However, before any refund can be claimed the assessee has to satisfy the Income Tax Officer that the amount of tax paid by him or on his behalf exceeds the amount with which he is properly chargeable under the Act. This pre-condition should be satisfied before claiming a refund. In the present case, as discussed above, neither on the interpretation of section 16 or proviso (ii) to Para A of Part I of the Third Schedule, the appellant is entitled to claim refund. Therefore, in the absence of entitlement to claim refund, section 48 cannot be pressed in service. We, therefore, dismiss the appeal.

M.BA./S-705/S ????????????????????????????????????????????????????????????????????????????????? Appeal dismissed.