Remission of trading liability not taxable where business had already ceased; previous year accepted as calendar year 1958.

Section 10(2A) of the Income-tax Act, 1922 did not tax a remission or cessation benefit where the assessee's business had already ceased before the relevant previous year, because the deeming fiction extended only to treating the amount as business profits accrued in that year and did not deem a discontinued business to have been carried on. The later insertion of section 41(1) of the 1961 Act supported that construction. The assessee's previous year was the calendar year 1958, as reflected in its returns and revised returns, so the assessment year was 1959-60.

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Issues: (i) Whether section 10(2A) of the Income-tax Act, 1922 applied to a benefit arising from remission or cessation of trading liability when the assessee's business had already ceased before the relevant previous year; (ii) whether the assessee's previous year was the calendar year 1958 so as to support assessment for 1959-60.

Issue (i): Whether section 10(2A) of the Income-tax Act, 1922 applied to a benefit arising from remission or cessation of trading liability when the assessee's business had already ceased before the relevant previous year.

Analysis: Section 10(1) charges tax only on profits and gains of a business carried on by the assessee during the relevant accounting year. Section 10(2A) is part of the scheme of section 10 and creates a fiction that the amount obtained on remission or cessation is deemed to be business profits and deemed to have accrued during that previous year. That fiction does not extend further to deem a discontinued business to have been carried on during the year of remission or cessation. The later insertion of section 41(1) of the Income-tax Act, 1961, which expressly covers cases where the business is not in existence, supported this construction of the earlier provision.

Conclusion: Section 10(2A) did not apply where the business had ceased before the relevant previous year, and the addition of Rs. 18,401 was not taxable.

Issue (ii): Whether the assessee's previous year was the calendar year 1958 so as to support assessment for 1959-60.

Analysis: Under section 2(11) of the Income-tax Act, 1922, the assessee could choose the relevant previous year where its accounts were made up to a different date. The record showed that the assessee had opted for the calendar year 1958 in its returns and had not altered that position in the revised returns.

Conclusion: The previous year was the calendar year 1958 and the assessment year was 1959-60.

Final Conclusion: The reference was answered for the assessee on the principal question, with costs awarded to the applicant.

Ratio Decidendi: A deeming provision taxing remission or cessation of liability does not, without express words, also deem a discontinued business to have been carried on during the year of remission, and tax under the business head remains conditioned by business being carried on in the relevant previous year.

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