O. RM. M. SP. SV. FIRM vs. THE COMMISSIONER OF INCOME-TAX-MADRAS

CIVIL APPEAL No. 751/1965Supreme Court[1967] 1 S.C.R. 90514 October 1966Bench: 3 JudgesAuthor: J.C. SHAH, V. RAMASWAMI, VISHISHTHA BHARGAVA B8 pages
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What were the facts?

The assessee, a firm, was the successor to a Hindu undivided family business that operated in India and Malaya. This business was assessed under the Indian Income Tax Act, 1918. Following a partition of the family on June 2, 1938, the business continued as a partnership in the assessee firm. The firm was dissolved on March 2, 1952. For the assessment year 1952-53, the assessee claimed relief under Section 25(3) of the Income Tax Act, 1922, following the business's discontinuance. The Income Tax Officer rejected this claim, as did the Appellate Assistant Commissioner, who held that foreign business income was taxed only on remittance to India and not the business itself under the 1918 Act. The Appellate Tribunal partially allowed the claim, excluding rental income from Malayan properties. The High Court, on reference, ruled in favour of the revenue, disagreeing with the Tribunal.

What did the Supreme Court hold?

The Supreme Court held that the High Court erred in its interpretation of Section 25(3) of the Income Tax Act, 1922. Regarding the first issue, the Court ruled that when Section 25(3) refers to tax charged on any business, it means tax charged on the owner of the business. Given that the entire income of the foreign business was remitted to India and taxed under the 1918 Act, the foreign business must be considered as having been charged to tax under that Act. Therefore, the assessee is entitled to relief under Section 25(3) for the foreign business. Concerning the second issue, the Court, referencing its decision in Commissioner of Income-tax, Bombay City-I v. Chugandas & Co., held that the exemption under Section 25(3) is general and not restricted only to income taxed under the head 'Profits and gains of business, profession or vocation'. Income from different heads, like rental income from properties owned by the foreign firm, does not cease to be income of the business for the purpose of this exemption. Thus, the assessee is also entitled to relief under Section 25(3) for the rental income from the discontinued foreign properties. The judgment of the High Court was set aside.

What were the issues?

1. Whether the assessee is entitled to relief under Section 25(3) of the Income Tax Act, 1922, in respect of the foreign business (Penang, Ipoh, and Kambar), considering the business was assessed under the Indian Income Tax Act, 1918, and subsequently discontinued. - Assessee's contention: The foreign business was charged to tax under the 1918 Act, and therefore, upon discontinuance, relief under Section 25(3) is admissible. - Revenue's contention: The foreign business itself was not assessed under the 1918 Act; only the income remitted to India was taxed, thus Section 25(3) is not applicable to the foreign business. 2. Whether the assessee is entitled to relief under Section 25(3) of the Income Tax Act, 1922, with regard to rental income from house properties owned by the foreign firm, which was discontinued. - Assessee's contention: The rental income from the foreign properties, being part of the discontinued business, should also qualify for relief under Section 25(3). - Revenue's contention: (Not explicitly recorded, but implied by the High Court's decision against the assessee on this point, suggesting the revenue argued it was not covered by Section 25(3).)

Which sections of the Income-tax Act were involved?

Section 25(3),Section 3,Section 6,Section 7,Section 10,Section 12,Section 12A,Section 12AA,Section 12B,Section 26(A)

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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.si- Whether 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 mem- bers 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 Commio- sioner was dis

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