COMMISSIONER OF INCOME-TAX VS SMT. LALITA M. BHAT, 1998 PTD-BOMBAY-HIGH-COURT-INDIA 454 (1995)

Income-tax---

----Association of persons---Assessment---Member of A.O.P.---Computation of share of member of A. O. P.---Income-tax payable by A.O.P. is not deductible---Indian Income-tax Act, 1961, Ss. 86 & 110.

A conjoint reading of sections 86 and 110 of the Income Tax Act, 1961, makes it clear that the portion of the amount which a member 1,z entitled to receive from the association of persons is exempted from income -tax if income-tax has already been paid thereon by the association of persons. The expression "any portion of the amount which the assessee is entitled to receive from the association" in section 86(v) means the amount of share of the assessee in the income of the association to which he is entitled and this amount has to be determined without deduction of any income-tax payable or paid thereon by the association of persons. The share of income or amount receivable by the assessee is not dependent on the amount of tax payable by the association of persons because income-tax itself is payable on the "income". The "amount" referred to in section 86(v), in any event, would be the amount receivable by the member of the association of persons out of its income without deduction of the income-tax paid by the association of persons thereon. If no income-tax has already been paid by the association of persons thereon, section 86(v) will not apply and the member of such association of persons would not be entitled to any exemption in respect of the amount receivable by him as a member thereof.

Dr. V. Balasubrarnaniam with P.S. Jetley for the Commissioner.

Soli Dastur with J.D. Mistry for the Assessee.

JUDGMENT

DR. B.P. SARAF, J.---By this reference under section 256(1) of the Income-tax Act, 1961 "the Act", made at the instance of the Revenue, the Income-tax Appellate Tribunal, Bombay, has referred the following question of law to this Court for opinion:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the share income from the association of persons includible in the assessee's hands as a member thereof is to be determined only after deducting from the association of person's income-tax payable by it? "

The material facts are few and uncontroverted. The assessee, Smt. Lalita M. Bhat, is an individual. She is also a member of an association of persons "A.O.P." carrying on business in the name and style of Nova Company. Her share in the profits of the said association of persons was two-third. The association of persons was assessed separately. In her assessment for the assessment year 1975-76, the assessee claimed that her share in the profits of the association of persons was not includible in her individual assessment. In the alternative it was claimed that if at all the assessee's share was includible in her income for the rate purposes, it would be her share in the profits of association of persons arrived at after deduction of the income-tax payable thereon. The Income-tax Officer did not accept either of these contentions of the assessee. He rejected the first contention relying on the provisions of section 66 of the Income Tax Act, 1964, which provides for inclusion of the share of the assessee in the income of the association of persons on which no tax is payable, in the total income of the assessee for rate purposes. The second contention of the assessee was rejected by the Income-tax Officer on the ground that there was no provision in the Act to take the share after deduction of the tax paid by the association of persons from the share of the assessee in the income thereof and in that view of the matter, added her entire share of income from the association of persons to her other income for computing her total income for the purpose of her individual assessment. The assessee appealed to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) allowed the appeal of the assessee and directed the Income-tax Officer to delete her share in the profits of the association of persons altogether from her total income and not to add the same even for rate purposes. Aggrieved by the above order of the Commissioner (Appeals), in Revenue appealed to the Income-tax Appellate Tribunal "the Tribunal". Two contentions were raised by the Revenue before the Tribunal. First, that the share of the assessee in the profits of the association of persons was includible in her total income. Second, that what was includible was the share of the assessee in the income of the association of persons without deduction of the tax paid thereon by the association of persons. The Tribunal accepted the first contention of the Revenue in view of the provisions of section 66 read with section 86(v) and section 110 of the Act and held that the share of the assessee in the income of the association of persons on which income-tax has already been paid by the association of persons was includible in the income of the assessee for rate purposes. The Tribunal, however, did not accept the second contention of the Revenue that it was the share of the assessee in the profits of the association of persons without making deduction of the income-tax paid by the association of persons thereon, which was includible in the income of the assessee in her total income. The Tribunal held that the expression "any portion of the amount which he is entitled to receive from the association" In section 86(v) of the Act would mean the share of the net income left after payment of income-tax thereon by the association of persons. Aggrieved by this finding of the Tribunal, the Revenue is before us by way of this reference.

We have heard Dr. Balasubramaniam, learned counsel for the Revenue as well as Mr. Soli Dastur, learned counsel for the assessee. The submission of Dr. Balasubramaniam, on behalf of the Revenue is that though no income-tax is payable by an assessee on the amount which he or she is entitled to receive from the association of persons on which income-tax has already been paid by the association of persons, such amount is includible in the total income of the assessee and the assessee is allowed in deduction at the average rate in respect of such exempted income. It was contended that the income-tax paid by the association of persons cannot be deducted in computing such amount. Our attention was drawn in this connection to section 67 of the Act which provides for deduction of the share of the amount of tax paid by a registered firm from the share of income received by the assessee from such firm. It was contended that it is abundantly clear from the above provision that wherever the Legislature intended to exclude the share of income-tax paid on the income, it has specifically provided for the same. According to learned counsel for the Revenue, in the absence of any such provision the amount receivable from the association of persons would mean the amount receivable out of the income of the association of persons arrived at before payment of tax. According to counsel, the expression "on which tax has already been paid" is in fact intended to restrict the exemption to only such portion the amount on which "income-tax has already been paid" and for no other purpose.

Mr. Soli Dastur, learned counsel for the assessee, on the other hand, submits that the share of income or the amount receivable by the assessee from the association of persons which can be included in the income of the assessee by virtue of section 66 read with section 86(v) of the Act would mean the amount which the assessee is entitled to receive from the association of persons and such amount, according to Mr. Dastur, can be obtained only by deducting the amount of income-tax paid by the association of persons on such income.

We have carefully considered the rival submissions. We have also perused the scheme of the Act and the relevant provisions thereof. Chapter VI1 of the Act specifies incomes forming part of the total income on which no income-tax is payable. Section 86(v) of the Act which forms part of the said Chapter, which is relevant for the purpose of the present case, reads:

"86. Other incomes.---Income-tax shall not be payable by an assessee in respect of the following---

(v) if the assessee is a member of an association of persons, or a body of individuals other than a Hindu undivided family, a company or a firm, any portion of the amount which he is entitled to receive from the association or body on which income-tax has already been paid by the association or body".

In Chapter VI of the Act, which deals with aggregation of income, etc., section 66 provides that---

"In computing the total income of an assessee, there shall be included all income on which no income-tax is payable under Chapter VII."

Section 110 lays down the mode of calculating income-tax in cases where exempted income is included in the total income. It provides:

" 110. Determination of tax where total income includes income on which no tax is payable. ---Where there is included in the total income of an assessee any income on which no income-tax is payable under the provisions of this Act, the assessee shall be entitled to a deduction, from the amount of income-tax with which he is chargeable on his total income, of an amount equal to the income-tax calculated at the average rate of income-tax on the amount on which no income-tax is payable."

On a conjoint reading of the above provisions it is clear that the portion of the amount which a member is entitled to receive from the association of persons is exempted from income-tax if income-tax has already been paid thereon by the association of persons. Obviously, what is exempt from income-tax is the portion of the amount which the assessee is entitled to receive from the association of persons as its member. It is not the amount reduced by the amount of income-tax paid thereon by the association of persons. Payment of income-tax on such amount by the association of persons, in fact, is a condition precedent on fulfilment of which the amount received by the member would be exempt from income-tax.

It is pertinent in this connection to note that under section 86(v) of the Act, exemption of the amount receivable by a member from the association of persons is dependant on the actual payment of income-tax by the association of persons unlike section 86(iii) of the Act Where the exemption has been made available to a partner of an unregistered firm in respect of the portion of his share in the profits and gains of the firm "on which income-tax is payable by the firm". The distinction in the language of the two clauses is significant. Obviously, the Legislature intended to extend the benefit to partners of unregistered firms in respect of the portion of their share in the profits thereof even in cases where income-tax was payable by the firm even though it had not already been paid. Whereas, the exemption has been granted to the member of the association of persons only if "income-tax had already been paid by the association of persons" In the case of an unregistered firm it is the assessee's share in the profits of the unregistered firm under clause (iii) that is exempt, whereas in the case of an association of persons it is the amount which the assessee is entitled to receive from the association of persons. The amount of share in the unregistered firm or the amount the member of the association of persons is entitled to receive from the association of persons, is not the amount receivable without deduction of the tax paid thereon. This view also gets support from section .67 of the Act, which lays down the method of computing the partner's share in the income of the firm. Clause (c) of subsection (1) thereof specifically provides for deduction of income-tax payable by the firm from its total income before ascertaining or apportioning the same amongst the partners. No such provision has been made for computation of the amount receivable by a member of the association of persons. The legislative intent is thus clear. Income-tax paid by the association of persons is, therefore, not to be deducted from its income for determining the amount receivable by a member of the association of persons. The condition of payment of income-tax by the association of persons in section 86(v) is intended merely to restrict the exemption to the amounts receivable by the members of the association of persons from such of the association of persons only who have already paid income-tax on such income. The language is clear and unambiguous. The condition is "actual payment of income" acid not that "income-tax is payable"

The construction of section 86(v) and the true meaning of the 3 expression "any portion of the amount which a member of the association of persons is entitled to receive from the association of persons" assume importance despite the fact that no income-tax is payable on such income inasmuch as it is to be included in the total income of the member of the association of persons by virtue of section 66 of the Act. As a result, income -tax payable by the assessee has to be determined with reference to the total income including such exempted income, which has the effect of enhancing the average rate of income-tax applicable to the taxable income. In this process the income-tax computed on the total income at the specified rates would also include income-tax on the exempted income. It is for this reason that section 110 of the Act provides for grant of deduction from the amount of income-tax so calculated, of an amount equal to the income-tax calculated at the average rate of income-tax on the amount on which no income-tax is payable.

The contention of Mr. Dastur for the assessee which also found support from the Tribunal, is that the amount which the assessee is entitled to receive from the association of persons means the amount which he is entitled to receive reduced by the amount of tax paid by the association of persons in respect thereof. In other words, according to learned counsel, in determining the amount receivable by the assessee from the association of persons as his share, the income-tax paid by the association of persons on such amount has to be deducted from the total income of the association of persons. Dr. Balasubramaniam, learned counsel appearing for the Revenue, vehemently opposes the above interpretation suggested by learned counsel for the assessee. According to him, such an interpretation is wholly erroneous and runs counter to the scheme of the Act and clear language of section 86(v) of the Act. Accepting such an interpretation will tantamount to applying the method laid down in section 67 of the Act for computing a partner's income from a firm to the computation of the amount receivable by a member of the association of persons also which is not only impermissible but contrary to all well-known principles of interpretation of statutes.

We have carefully considered the rival submissions. However, on a perusal of the provisions of sections 86(v), 66 and 110 of the Act, we find it difficult to accept the interpretation suggested by Mr. Dastur, learned counsel for the assessee. In our view, the expression "any portion of the amount which the assessee is entitled to receive from the association" means the amount of share of the assessee in the income of the association to which he is entitled and this amount has to be determined without deduction of any income-tax payable or paid thereon by the association of persons. The share of income or amount receivable by the assessee is not dependent on the amount of tax payable by the association of persons because income-tax itself is payable on the "income". The share of the income of the members of the association of persons or the amount receivable by them is not dependent on payment of income-tax, though they might be liable to pay the share of income-tax payable or paid by the association of persons. The tax paid by the association of persons, therefore, does not have the effect of reducing the profits or income of the association of persons. Payment of tax is a phenomenon which takes place on accrual of income. The Income-tax paid by the association of persons, therefore, does not have the effect of reducing the income of the association of persons or the amount receivable by its members. If the Legislature had intended to provide for deduction of income -tax paid by the association of persons from its income in computing the amount receivable by its members, it would have said so, as has been done in the case of share of income from a firm in section 86(iii) read with section 67 of the Act.

It is thus, clear that under section 86(v), no income-tax is payable by an assessee who is a member of an association of persons on the portion of the amount which he is entitled to receive from the association of persons. This exemption is conditional on payment of income-tax by the association of persons on such income. If no income-tax has already been paid by the association of persons thereon, section 86(v) will not apply and the member of such association of persons would not be entitled to any exemption in respect of the amount receivable by him as a member thereof. We are, however, of the firm opinion that the "amount" referred to in section 86(v), in any event, would be the amount receivable by the member of the association of persons out of its income without deduction of the income-tax paid by the association of persons thereon.

In the light of the above discussion, we are of the clear opinion that the Tribunal was not correct in law in holding that the share of income from the association of persons includible in the assessee's hands as a member thereof has to be determined after deducting from the association of persons income the amount of income-tax already paid thereon. Accordingly, we answer the question referred to us in the negative and in favour of the Revenue.

In the facts and circumstances of the case, there shall be no order as to costs.

M.B.A./1247/FCOrder accordingly.