Non-resident partner's share income was assessable on the firm without foreign-income exclusion, and maximum-rate tax applied.
Under the second proviso to section 23(5)(a) of the Indian Income-tax Act, 1922, a non-resident partner's share in a resident registered firm was assessable on the firm without excluding income arising outside the taxable territories under section 4(1)(c), because the proviso fastened only that share income and did not import the general exclusion rule. Section 17 also applied in this setting, so the non-resident partner's share income was taxable at the maximum rate. Both issues were decided against the assessee, confirming assessment of the share income on the firm and application of the special non-resident rate.
Issues: (i) Whether, under the second proviso to section 23(5)(a) of the Indian Income-tax Act, 1922, the share income of a non-resident partner in a resident registered firm could be assessed on the firm without excluding income arising outside the taxable territories under section 4(1)(c). (ii) Whether section 17 of the Indian Income-tax Act, 1922 applied so as to levy tax on such share income at the maximum rate.
Issue (i): Whether, under the second proviso to section 23(5)(a) of the Indian Income-tax Act, 1922, the share income of a non-resident partner in a resident registered firm could be assessed on the firm without excluding income arising outside the taxable territories under section 4(1)(c).
Analysis: The relevant scheme of section 23(5)(a) required the total income of the firm to be determined first, and then, in the case of a registered firm, the share income of each partner to be dealt with according to the statutory formula. In the case of a non-resident partner, the second proviso did not call for determination of his total income in the ordinary sense. It made only his share of the firm's income assessable on the firm, and did not incorporate the exclusionary rule in section 4(1)(c) for income arising outside the taxable territories. The language of the proviso did not justify importing that deduction.
Conclusion: The share income of the non-resident partner was assessable on the firm without exclusion under section 4(1)(c), and this issue was decided against the assessee.
Issue (ii): Whether section 17 of the Indian Income-tax Act, 1922 applied so as to levy tax on such share income at the maximum rate.
Analysis: Section 17 dealt with the special case of a non-resident and prescribed taxation at the maximum rate. Read with section 23(5)(a), the expression "total income" in section 17 had to be construed in the special setting of a non-resident partner of a resident registered firm. Since the non-resident partner's share income alone was brought to tax under the proviso, that share income was treated as the relevant income for applying the maximum rate. The court also relied on the broader statutory scheme and the earlier authority which had rejected exclusion of foreign-accruing partnership profits in such a situation.
Conclusion: Section 17 applied and the tax at the maximum rate was correctly levied, against the assessee.
Final Conclusion: Both referred questions were answered against the assessee, confirming assessability of the non-resident partner's share income on the firm and the applicability of the maximum-rate provision.
Ratio Decidendi: Where a resident registered firm has a non-resident partner, the second proviso to section 23(5)(a) fastens assessment of that partner's share income on the firm without importing the exclusion in section 4(1)(c), and section 17 applies to tax that share at the rate applicable to a non-resident.
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