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Issues: (i) Whether, where the previous year was extended to 18 months on permission of the Income-tax Officer, the income of that entire period was chargeable to tax at the rate applicable to the total income of that period or only at the rate applicable to a proportionate 12 months' income; (ii) Whether income from property in such a case was to be assessed for the full 18-month period or only for the notional income of 12 months.
Issue (i): Whether, where the previous year was extended to 18 months on permission of the Income-tax Officer, the income of that entire period was chargeable to tax at the rate applicable to the total income of that period or only at the rate applicable to a proportionate 12 months' income?
Analysis: Under sections 3 and 4 of the Income-tax Act, 1922, tax is levied on the total income of the previous year. The previous year defined in section 2(11) is ordinarily a 12-month period, but it may be longer where the assessee changes the accounting year with permission and subject to conditions. Once the change is permitted and the previous year for the relevant assessment year covers 18 months, the entire income of that period forms the basis of assessment. The condition attached to the permission prevented any part of the income from escaping taxation, and the statute did not warrant splitting the extended previous year into a 12-month notional period for rate purposes.
Conclusion: The income of the 18-month period was chargeable to tax at the rate applicable to the total income of that period, not at the rate applicable to proportionate 12 months' income.
Issue (ii): Whether income from property in such a case was to be assessed for the full 18-month period or only for the notional income of 12 months?
Analysis: Section 9 taxes property income on the annual value, meaning the sum for which the property may reasonably be expected to let from year to year. That measure is ordinarily annual, but it remains the measure of assessment even when the previous year is extended beyond 12 months. The provision does not require the property income of an 18-month previous year to be confined to the notional annual value of 12 months only. The proper method is to apply the annual value as the standard and assess the income for the whole extended previous year.
Conclusion: Income from property was assessable for the full 18-month previous year and not confined to the notional income of 12 months.
Final Conclusion: The reference was answered against the assessee and in favour of the revenue, holding that the extended previous year was taxable as a whole and that property income was to be assessed on the basis of that full period.
Ratio Decidendi: When an assessee's previous year is lawfully extended beyond 12 months with the revenue authority's consent and subject to conditions, the entire income of that extended period is taxable as the total income of the year, and the annual value basis for property income does not confine assessment to only 12 months.
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