This article has been written by Jitendra Kumar and Jutirani Talukdar, students of Symbiosis Law School, Pune.
Brief of the case
Name of the case
Jain Brothers v. Union of India
AIR 1970 SC 778 and (1969) 3 SCC 311
Date of Judgement
18th November, 1969
Decided by (Justice)
M. Hidayatullah, J.M. Shelat, C.A. Vaidialingam,
A.N. Grover, A.N. Ray
Facts of the case
The case of Jain Brothers v. Union of India, analyses the constitutional validity of double taxation in India. Jain brothers was a firm having its business in the state of New Delhi. A notice for accounting year 1960-61 was served to the firm, under Section 22(2) of the Income Tax Act, 1922 as they had not filed their return in time. The Income Tax Officer, after completing the assessment on 20th November, 1964, issued a notice to show cause the penalty against the appellant, Jain Brothers, under Section 271 of the Income Tax Act, 1961 (“the Act”) read with Section 274 of the Act.
Further, the Income Tax Officer also levied a penalty of INR 1,03,434 for non- compliance of the notice under Section 22(2) of the Income Tax Act, 1922. The appellants filed a writ petition in the Delhi High Court, challenging the constitutional validity of Section 23(5) of the Income Tax Act, 1922, Section 271(2) of the Act and Section 297(2)(g) of the Act. The Delhi High Court dismissed the writ petition and the appellants filed an appeal with the supreme court contending that Section 23(5) of the Income Tax Act, 1922 results in double taxation and Section 297(2)(g) is violate of Article 14 of the Constitution of India.
The Supreme Court in its appeal, held that the Constitution of India does not contain any provision regarding a prohibition of double taxation. The Supreme Court also paid attention to the Finance Act, 1956 stating that in view of the amendment made by the Finance Act of 1956 in section 23(5) of the Income Tax Act, 1922, the tax payable by the firm as also the amount to be included in the income of each partner was to be determined. The Supreme Court stated that if any double taxation was present, then the legislation itself has sanctioned it. Hence, the provision of section 271 of the Act of 1961 will apply mutatis mutandis to proceedings relating to penalty initiated in accordance with section 297(2)(g) of that Act.
The case of Jain Brothers v. Union of India is an appeal case in the Supreme Court of India. It was originally filed in the Delhi Court on 26th August, 1966 and the order of the High Court of Delhi, in which the appellants were not granted any relief was on the order of the Commissioner of Income Tax dated 23rd November, 1964.
The issues involved in the case of Jain Brothers v. Union of India are as follows:
- The firm was to show cause as to why an order imposing a penalty should not be passed on account of its failure to furnish the return within time, in lieu of the notice served under Section 271 of the act read with section 274 of the Act;
- The constitutional validity of Section 23(5) of the Income Tax Act, 1922, as the firm contended that the said section called for double taxation;
- Whether the firm and the partners are a separate entity and whether both can be subjected simultaneously to tax; and
- The constitutional validity of Section 297(2) (g) of the act, as the appellant contends it to be unconstitutional and violative of Article 14 of the Constitution of India.
The statutory provisions and various legislations as applicable to the case of Jain Brothers v. Union of India are as follows:
- Section 23(5) of the Income Tax Act, 1922;
- Section 271(2) of the Act;
- Section 297(2)(g) of the Act;
- Article 14 of the Constitution of India; and
- Section 14 of the Finance Act, 1956.
Analysis of Jain Brothers v. Union of India
The Supreme Court dismissed the appeal that has been submitted by the appellant, Jain Brothers. Jain Brothers v. Union of India is a landmark judgment which justifies the implication of the applicability of double taxation in India. It is important to note here that the assessing year of the appellant was in fact 1960-61, the same year as the introduction of the amended Income Tax Act, 1961, hence both the validity of relevant sections of the Income Tax Act, 1922 and relevant the Income Tax Act, 1961 is adjudged in this judgment.
Constitutional validity of Section 23(5) of the Income Tax Act, 1922
The Delhi High Court refused to provide relief as it ascertained that the appellants, Jain Brothers, had debarred themselves due to delay in filing return. The Supreme Court in its appeal stated that, the validity of this provision arises only in this way that it is the assessment made under it which can form the basis for imposing the penalty. In its opinion, the questioning of validity of Section 23(5), the Supreme Court, asserted that it is directly related to the imposition of the penalty. It is important to note here that Section 23(5) of the Income Tax Act, 1922 was amended through Section 14 of the Finance Act, 1956. After the amendment a registered firm was liable to pay income-tax independently of the tax payable by the individual partners of the firm on their share of profits. Prior to the amendment of 1956 where the firm was unregistered the tax payable by the firm was computed as in the case of any other entity and the firm itself had to pay the tax. If the firm was registered under section 26A it did not pay the tax and there was no assessment of its liability.
No juristic personality of the firm: It should be observed here that the case is an occurrence of 1961, where the firm and their partners were considered to be separate entities. The evolvement of firm’s liabilities being directly imposed on its partners and the juristic personality of the firm had yet not developed. Hence, the court, taking the precedence of the English principle stated that the firm does not have a separate juristic personality. Moreover, in the case of Commissioner of Income-tax v. Murlidhar Jhawar & Purna Ginning & Pressing Factory, stated that partners of an unregistered firm may be assessed individually or collectively when the firm is unregistered, but the same cannot be assessed twice.
Assessing who qualifies as a taxable entity: The Supreme Court went in length to analyse the qualification of a taxable entity. It took reliance to Section 3(42) of the General Clauses Act which provides that a person includes “any company or association or body of individuals whether incorporated or not.” Placing this reliance, the court stated that the characteristic of a firm being a separate entity was established substantially. However, in the present case, the firm, did not pay any tax itself and the assessment was made on the individual partners in accordance with the provisions of that section. Hence, after 1956 the firm did not cease to be an assessee; on the contrary it was recognised as a separate entity and was subjected to tax as such.
The 1956 amendment: As stated earlier, Section 23(5) was amended through the passage of law in the form of the Finance Act, 1956. Hence, placing reliance in the case of Murlidhar Jhawar, where the provisions which came up for consideration had no parallel to those made in respect of a registered firm by an express amendment of section 23(5) by the Finance Act of 1956. Hence the matter not may not be carried further where the statute has made an express provision for the income of the firm and the income in the hands of the partners being both liable to tax.
Taxation of partners of the firm: Each partner’s share in the firm’s profits was added to his income and after determination of the total income of each partner the levy was made on him individually. After 1956, tax at low rate become assessable on a registered firm though it was not liable to pay super-tax. The partners of the registered firm remained liable for being charged on their individual assessment to both income-tax and super-tax in respect of their share in the profits of the firm. The partner, however, was entitled to certain rebate under section 14(2)(aa).
Jain Brothers in the appeal maintained that the firm and their partners do not constitute a separate entity. They contended that either the firm can be taxed or the partners of the firm, however, both cannot be simultaneously taxed.
Double Taxation: By taking the above contentions, it was analysed by the court that there can be double taxation if the legislature has distinctly enacted it. It is only when there are general words of taxation and they have to be interpreted, they cannot be so interpreted as to tax the subject twice over to the same tax. It was analysed that the constitution does not contain any prohibition as to double taxation. Even if section 23(5) provides for the machinery for collection and recovery of the tax, once the legislature has, in clear terms, indicated that the income of the firm can be taxed in accordance with the Finance Act of 1956 as also the income in the hands of the partners, the distinction between a charging and a machinery section is of no consequence.
Hence, through the interpretation provided by the Supreme Court, it can be rightly said that after 1956, so far as registered firms are concerned the tax payable by the firm itself has to be assessed and the share of each partner in the income of the firm has to be included in his total income and assessed to tax accordingly. If any double taxation is involved the legislature itself has, in express words, sanctioned it.
Constitutional validity of Section 297(2) (g) of the Act
The above stated provision appears in chapter XXIII of the act and provides for repeals and savings. What needs to be noted here is that with the introduction of the Income Tax Act, 1961, the Income Tax Act, 1922 was repealed. Hence, the court had to go into the merits of the case to identify the validity and the application of Section 297(2) (g) of the act. According to clause (b) where a return of income is filed after the commencement of the Act of 1961 the assessment has to be made in accordance with the procedure specified in the Act of 1961.
Verbatim of Section 297(2) (g) of the Act: Section 297 (2) (g) of the Act states:
“Any proceeding for the imposition of a penalty in respect of any assessment for the year ending on the 31st day of March, 1962, or any earlier year, which is completed on or after the 1st day of April, 1962, may be initiated and any such penalty may be imposed under this Act. “
The contention of the appellants in the case was that the said section is violative of Article 14 of the Constitution of India as it creates a discrimination between two sets of assessees with reference to a particular date, namely, completion of assessment proceedings on or after the first day of April, 1962. In other words, the assessees have been classified into two groups for imposition of penalty; the first group is of those assessees whose assessments have been completed before 1st April, 1962.
Penalty as applicable under Section 297(2) (g) of the Act: The Supreme Court asserted that in the present case, the second group of assesses whose assessment is completed on or after the first day of April, 1962, had to be proceeded with for the imposition of penalty in respect of any assessment for the year ending on 31st day of March, 1962, or any earlier year under the Act of 1961. It is important to note here that in the present case the assessment of tax was conducted by the Income Tax Officer in the year 1964. Hence, the penalty is also to be imposed in the present case under the 1961 Act.
Contradictory of the 1922 Act: It is further pointed out that under clause (a) of section 297(2) where a return has been filed before the commencement of the Act of 1961, i.e., 1st April, 1962, the proceedings for assessment have to be taken under the Act of 1922. If the assessment had to be made under the Act of 1922 there seems to be no rationale behind the provisions contained in clauses (f) and (g) which introduce an apparent inconsistency and contradiction with what is provided by clause (a). Logically, it is claimed, the proceedings for imposition of penalty should have followed the same course as the assessment where the return of income has been filed. Penalty partakes of the character of an additional tax and therefore its imposition should not have been made dependent on the date when the assessment has been completed, particularly when under clauses (a) and (b) it is the date of filing of the return which govern the procedure relating to assessment under one Act or the other.
Discretion by the Income Tax Officer: As stated earlier, the tax assessment was completed in the year 1961. Hence, in the present case if the tax assessment had been completed before 1962, then Income Tax Act, 1961 would not have been applicable. This provides certain discretion on the part of the Income Tax.
Officer in lieu of completing the tax assessment. The Supreme Court in the present context stated that:
“There is no presumption that officers or authorities who are entrusted with responsible duties under the taxation laws would not discharge them properly and in a bona fide manner. If in a particular case any mala fide action is taken that can always be challenged by an assessee in appropriate proceedings but the mere possibility that some officer may intentionally delay the disposal of a case can hardly be a ground for striking down clause (g) as discriminatory under Article 14.”
The court also stated that event of the assessment being made on or before 1st April, 1961, has no reasonable relation with the object of legislation.
Reliance can be placed on Gopichand Sarjuprasad v. Union of India, where it was ascertained that no discrimination is practiced in enacting that clause which would attract the application of Article 14. The classification made is based on intelligible differentia having reasonable relation to the object intended to be achieved. The object essentially was to prevent the evasion of tax.
The Supreme Court dismissed the appeal to be in reaffirmation with the Delhi High Court. The case of Jain Brothers v. Union of India provides for a landmark judgment to assess the constitutional validity of double taxation. What is most interesting to note is that the year of completion for assessment by the Income Tax Officer was 1964, had the assessment been completed in the year before 1962, there would have been no question of the applicability of the Income Tax Act, 1961. This provided for certain discretion by the Income Tax Officer. However, the court ascertained that this specific even has no connection or significant whatsoever with that of the enactment of a legislation.
Moreover, it should be observed that double tax avoidance in India is only conducted in the international scenario. There are various treaties which provides for double tax avoidance between India and other countries. Double Taxation is the imposition of two or more taxes on the same income, asset or financial transaction. It refers to taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country. Under the Income Tax Act, 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation. Section 90 is for taxpayers who have paid the tax to a country with which India has signed Double Tax Avoidance Agreement (“DTAA”), while Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed a DTAA. Thus, India gives relief to both kinds of taxpayers.
The case of Jain Brothers v. Union of India also provides for valid justification for Section 297(2) (g) of the act which provides for certain penalties to be levied. It provides valid understanding of an assessed. An important question arises whether the firm is different entity from its partners. The author is of the view that the judgement was delivered when there were not enough cases regarding assessing the liability of a firm and having a rationale relationship between the firm and its partners. The firm is considered a different entity in manner of taxation. However, today, this is easily manipulated by structuring companies to be tax friendly and making use of the ever-modifying corporate tax and the declining rates subjected to the same.
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