Taxability of post-cessation professional fees: outstanding receipts remained taxable when linked to services earlier rendered.

Outstanding professional fees received after discontinuance of a profession remained taxable as income when the receipts were referable to services previously rendered. The majority held that the charging provisions taxed income received in the previous year, that the heads of income served only classification and computation, and that receipts of later recoveries were assessable on the cash basis in the year of receipt subject to allowable deductions. It further held that computation must follow the method of accounting regularly employed, and that the provision dealing with cessation of business did not exclude later recovery of fees earned during the life of the profession. A dissenting opinion would have treated such post-cessation receipts as non-taxable.

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Issues: Whether outstanding professional fees received after discontinuance of a profession are taxable as income in the year of receipt under the Indian Income-tax Act, 1922.

Analysis: The majority held that the charging provisions of the Act bring to tax income, profits and gains received in the previous year, and that the heads of income in Section 6 operate as machinery for classification and computation. On the cash basis, receipts collected after discontinuance do not cease to be income merely because the profession has ended, provided they are referable to professional work previously done. The majority further held that Section 13 requires computation according to the method of accounting regularly employed, and that receipts of outstanding professional fees are assessable in the year of receipt, subject to permissible deductions. Section 25 was treated as dealing with a different situation and not as excluding taxability of later recoveries of fees earned during the life of the profession.

Conclusion: The outstanding professional fees were taxable as income in the year of receipt, and the question was answered in the affirmative, in favour of the Revenue.

Dissenting Opinion: Stone C.J. held that receipts collected after the profession had ceased were not income, profits or gains capable of taxation under the Act, except for the portion received before discontinuance. He considered that once the profession had ended, the later recoveries were not assessable.

Ratio Decidendi: Under the Indian Income-tax Act, 1922, receipts of outstanding professional fees remain taxable income when received after discontinuance of the profession if they are referable to services previously rendered and are to be computed in accordance with the accounting method regularly employed by the assessee.

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