TaxTMI 
TaxTMI 
1945 (3) TMI 14
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....mmission on the net profits. He was also to be provided with furnished residential. quarters free of rent and with a, motor car or at his option a monthly allowance of Rs. 500. A copy of the agreement is annexed and marked A. 3. On the 8th of September, 1939, the assessee submitted a return of income for the previous year ending on the 31st of December, 1938. In this return he included a sum of Rs. 12,302 under the head" business, profession or vocation." In the course of the assessment proceedings however he claimed that this sum was not in fact liable to taxation since he had ceased to do private professional work in view of the formation of the company and had not undertaken any such work during the relevant accounting period. The Income-tax Officer held that the income received from outstanding professional fees was liable to taxation and he completed the assessment on the following income: Rs. Salary 13,500 Profession 12,302 Dividends 378 Interest on loans 2,491 ¼ share of income from the estate of Mr. M. M. Kamdar 6,060 A copy of the assessment order is annexed and marked B. 4. On appeal the Appellate....
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....rom carrying on his profession, and it has not been establisbed that he had in fact discontinued his profession before the beginning of that year. 8. But even if the assessee did not undertake any new business in his personal capacity during the calendar year 1938 the department would still, in my opinion, be entitled to tax the professional fees which he received in that year. In claiming that these fees are not liable to taxation he relies mainly on the following observations made by Rowlatt, J., in the case of Bennett v. Ogston([1930] 15 Tax Cas 374): "When a trader or a follower of a profession or vocation dies or goes out of business... ....and there remain to be collected sums owing for goods supplied during the existence of the business or for services rendered by the professional man during the course of his life or his business, there is no question of assessing those receipts to income tax; they are the receipts of the business while it lasted, they are arrears of that business, they represent money which was earned during the life of the business and are taken to be covered by the assessment made during t....
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....rly employed by the assessee, If the assessee's interpretaon of the law were upheld a sum which clearly represents income from a profession would escape assessment merely because he has chosen to maintain his accounts on the cash basis. I submit that an interpretation which produces this result cannot be correct. As Lord Trayner remarked in Californian Copper Syndicate v. Harris([1904] 5 Tax Cas. 159): "I cannot think that income tax is due or not according to the manner in which the person making the profit pleases to deal with it". 10. As regards the assessee's contention that the amount in question is not "income" but the realisation of a debt I venture to point out that every sum received by him for professional services rendered while he was carrying on his profession was the realisation of a debt, but nevertheless it was admittedly income. I further submit that the treatment of bad debts relating to a discontinued business is not relevant to the present question since the admissibility of a bad debt as a set-off against the other income of an assessee is governed by the specific provisions of the....
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....rate, on February 16, 1938, if not before, his practice of a consulting engineer had been wholly discontinued. The exact date of such discontinuance is in some doubt, but in this Court it was agreed by counsel that February 16, 1938, should be taken as the date of discontinuance. The sum of Rs. 12,302 represents She assessee's outstanding professional fees earned from his practice as a consulting engineer previously to January 1, 1938, and paid to or re. ceived by the assessee during the calendar year 1938. It follows that, if a certain view of this matter was taken, the sum of Rs. 12,302 would have to be apportioned in order to discover how much of it was in fact received on or before February 15, 1938. The question referred to us is as follows: "Whether, in the circumstances of the case, the outstanding professional fees which were realised by the assessee during the year under assessment are taxable as part of his income for that year?" This question is misleading, as the expression "the year under assessment" is used not in the sense of the assessment year, which was 1939-40, long before which the business had been discontinued and in which no part of Rs. 12,302 was r....
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....ses, which have come before the Judicial Committee and to which we have been referred, are concerned with the 1922 Act as amended from time to time, but before the 1939 amendments came into operation. Section 3 provides that " where any Act of the Central Legislature enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or members of the association individually. " " Total income " is defined by sub-section 2(15) of the Act as follows : " ' Total income ' means total amount of income, profits and gains referred to in sub-section (1) of Section 4 computed in the manner laid down in this Act. " Turning to sub-section 4(1), it is in these terms : " Subject to the provisions of this Act, t....
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.... so as to cover " business, profession or vocation. " The other relevant sections are : Section 13, which makes the method by which accounts are kept of a business, profession or vocation of material importance ; Section 24, which provides for the setoff of losses under one head of Section 6 against gains under one of the other heads ; Section 25, which is permissive and provides what may be done when a business or profession is discontinued. Section 10 is as follows : " (1) The tax shall be payable by an assessee under the head ' Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely : There follow, set out in numbered sub-paragraphs, a number of items of disbursement, such as rent, repairs, interest on capital borrowed for the purposes of business, premiums on insurance and depreciation, implemented by provisos and explanations. Section 12 is as follows : " (1) The tax shall be payable by an assessee under the head ' Income from other sources ' in respect of income, profi....
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.... sub-section, the Income-tax Officer may direct that a sum shall be recovered from him by way of penalty not exceeding the amount of tax subsequently assessed on him in respect of any income, profits or gains of the business, profession or vocation up to the date of its discontinuance:" Sub-section (3) deals with the discontinuance of business, profession or vocation which was charged under the provisions of the Indian Income-tax Act, 1918, and it provides that, except in the case of a succession, no tax shall be payable in respect of the income, profits and gains of the period between the end of the previous year and the date of such discontinuance, and also provides that the assessee may further claim that the income, profits and gains of the previous year shall be deemed to have been the income, profits and gains of the said period. No regard has been paid to this section in the assessment of the assessee to tax. No assessment has been made under it for the fraction of the year January 1 to February 15, 1938 (both inclusive). No reliance has been placed upon its operation by the Commissioner of Income-ta....
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....ctions to be made under each head, so that the truncated total of gross receipts remaining is the taxable balance. The correct method of approach in my judgment is to treat nothing as being charged to tax until by the process of computation laid down by the Act, the status of income, profits and gains emerges. If this be the correct approach, then what is taxable under the Act if something capable of being processed by the machinery of computation laid down by the Act for inclusion in what the Act describes as the total amount of income, profits and gains. The fees outstanding from time to time of a professional man, who admittedly keeps his books on a cash basis, must, for the purpose of being processed to income, profits and gains, come either under head (iv) " Profits and gains of business, profession or vocation, " dealt with by Section 10, or under head (v) " Income from other sources, " dealt with by Section 12. Section 13 is mandatory : income, profits and gains shall be computed, for the purposes of Sections 10 and 12, in accordance with the method of accounting regularly employed by the assesseein this case the cash basis. The nexus between it and sub-section 2 (15) is ....
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....ection 10. The Act itself has solved the problem of professions which are discontinued by Section 25. Why advantage of that section was not taken in this case by the Income-tax authorities it is difficult to understand except on the ground that the Crown was not satisfied with tax on that portion of the fees received between January 1 and February 15 (both inclusive), which under Section 25 could clearly have been assessed to tax and which were receipts of the profession while the profession was still being carried on. Turning then to Section 12, are the outstanding fees when received " income from other sources ? " In order to be so, it would mean that some new source of income, profits or gains sprang up either on January 1 or on February 16, 1938, composed of the fees then outstanding. So far as the fees received on and between January 1 and February 15 are concerned, this clearly is not the case. The profession was then being carried on and these receipts, less the proper allowances, could, and, in my opinion, should have been assessed by the conjoint operation of Sections 10 and 25. On February 15 the profession ceased and according to the assessee's method of accountin....
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.... that the purpose of Section 3 is to charge income tax at the current rate for the time being, and that the purpose of Section 4 is [by sub-section (1)] to confine the tax to income actually or artificially accruing or arising or received in British India, and [by sub-section (3)] to exempt specified classes of income from tax. Although Chapter I is entitled ' Charge of income-tax, ' the real charging section would appear to be Section 6, which occurs in Chapter III. " Having stated that the income of a zamindar would not be chargeable under the head " property, " and that if chargeable it would be under the head " other sources, " his Lordship continued : " Section 12 deals with that head, and requires close attention. Section 12, sub-section (1), provides that the tax shall be payable by an assessee under that head ' in respect of income, profits and gains of every kind and from every source to which this Act applies (if not included under any of the preceding heads). ' These words appear to their Lordships clear and emphatic, and expressly framed so as to make the sixth head mentioned in Section 6 describe a true residuary group embracing within it all sour....
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....arity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something which is often loosely spoken of as ' capital. ' But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production. " Having referred to and quoted Section 6 of the Act, his Lordship continued : " The claim of the taxing authorities is that the sum in question is chargeable under head (iv) business. By Section 2, sub-section (4), business ' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. ' The words used are no doubt wide, but underlying each of them is the fundamental idea of the continuous exercise of an activity. Under Section 10 the tax is to be payable by an assessee under the head business ' in respect of the ....
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.... was properly assessed. " Later in the judgment their Lordships point out that their decision did not cover cases where undrawn profits had, with the consent of all parties, been invested in the business so as to increase the capital account ; nor had they had to consider any special provisions of the partnership articles which might affect the matter. The next case is Commissioner of Income-tax, Bombay Presidency and Aden v. Chunilal B. Mehta (1938) L. R. 65 I. A. 332 ; 6 I. T. R. 521). In that case the assessee, who carried on business as a broker in Bombay, entered into certain future delivery contracts for the purchase and sale of commodities in various foreign markets from parties outside British India. No delivery was either given or taken, and the profits of such contracts were not received in British India. Sir George Rankin delivering the judgment of the Board said (pages 347-348) : " Their Lordships do not consider that the Indian Income-tax Act is patent of this construction. They will first deal with the argument based on Sections 4 and 6, that the respondent's business is the source o....
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....or the view that, having regard to the sixth head in Section 6, the words ' from whatever source derived ' are surplusage : even so, they are not there as a guide to the place where profits accrue or arise, but to make clear that for another purpose source is irrelevant. There is every presumption that in such a section in an Indian Act the legislature intends the exact language of the section to be the test of liability. To answer the question, ' Do these profits accrue or arise in British India ? ' by asking another, ' What in the sense of Section 6 is the source of these profits, and is it situate in British India ? ' is to divert attention from that to which the statute points and to devote attention to what it discards. " Though the last two cases to which I desire to refer are both reported in the 1943 volume of the Income Tax Reports, they both deal with the position before the 1939 Amending Act. The first of those cases is Indian Iron & Steel Co., Ltd. v. Commissioner of Income-tax, Bengal (1943) 11 I. T. R. 328). The assessee-company agreed to acquire and take over the whole of the property of another company as existing on the date of transfe....
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....tances, though similar in some respects, may be different in others. Thus the profit realised on a sale of shares may be capital if the seller is an ordinary investor changing his securities, but in some instances at any rate it may be income if the seller of the shares is an investment or an insurance company. Income is not necessarily the recurrent return from a definite source, though it is generally of that character. Income again may consist of a series of separate receipts, as it generally does in the case of professional earnings. The multiplicity of forms which ' income ' may assume is beyond enumeration. Generally, however, the mere fact that the income flows from some capital assets, of which the simplest illustration is the purchase of an annuity for a lump sum, does not prevent it from being income, though in some analogous cases the true view may be that the payments, though spread over a period, are not income, but instalments payable at specified future dates of a purchase price ". The arguments and submissions of counsel have in large measure ranged round these cases in endeavours to show that one or some of them are decisive of the case before us. But wh....
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....cter, " shows that there may be exceptions to any comprehensive definition of " taxable income " which may be attempted. Indeed, that case makes it clear that what may be taxable income when received by one man would be a capital receipt in the hands of another. It is the circumstances of each case which must be examined in the light of the general scheme and the specific provisions of the Indian Income-tax Act. Various cases decided in the High Courts in India were referred to in the arguments before us. South Indian Industrials, Ltd., Madras v. Commissioner of Income-tax, Madras (1935) 3 I. T. R. 11 ; 58 Mad. 433) and B. C. G. A. (Punjab) Ltd. v. Commissioner of Income-tax, Punjab (1937) 5 I. T. R. 279), are in favour of the view which I take of this problem. On the other hand, a Full Bench decision in Calcutta, Behari Lal Mullick, In re (1927) 54 Cal. 630), is to the contrary. Having regard to the decisions in the Privy Council already referred to, I do not think it would be profitable to enter into any exhaustive discussion on the Indian decisions. In my judgment the answer to the question referred to us in this case is that that portion of these outstanding fees which was r....
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.... the business in the next year for which in the normal course the assessment would be made and in respect of which tax would be due.................." Except, therefore, for the special provisions found in sub-section 26(2), which deals with cases of succession, the relevant year is the assessment year and not the accounting year. In my opinion, in the case of the discontinuance of a business, profession or vocation the same result would follow but for the provisions of Section 25. Accordingly, for the reasons stated above, it is my opinion that the question referred to us ought to be answered in the negative. KANIA, J.- I had an opportunity of reading the judgment just delivered by the learned Chief Justice. After giving it anxious consideration I regret I am unable to agree with his view. This is a reference made under Section 66(2) of the Indian Income-tax Act, 1922, by the Commissioner. The relevant facts are that the assessee was the sole proprietor of a business run in the name of "Kamdar Karyalaya" and was also carrying on the profession of a consulting civil engineer in Bombay. The business of "Kamdar Karyalaya" was converted into a limited company, styled Ka....
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....ollows: "Under those circumstances, the question is whether, during this year of assessment ending April, 1927, they were trading. If they were not trading they could not be assessed any more than a retired professional man can be assessed if after he retires he receives fees from clients or patients according to what his profession is-and, if you like, also pays arrears of rent for the premises in which he formerly carried on his business." Counsel for the assessee very strongly relied on Commissioner of Income-tax v. Shaw Wallace & Co. ([1932] 53 I.A. 206) In that case the respondent company carried on business at Calcutta as merchants and agents of various companies and had branch offices in different parts of India, For a number of years prior to 1928 they acted as distributing agents in India of the Burma Oil Co., Ltd., and the Angle-Persian Oil Co., Ltd., but had no formal agreements with either company. In or about 1927 the two companies joined and decided to make other arrangements for distribution of their products. The respondents' agency with the Burma Oil Co. was accordi....
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....ch follows.... "Following the line of reasoning above indicated, the sums which the appellant seeks to charge can, in their Lordships' opinion, only be taxable if they are the produce, or the result, of carrying on the agencies of the oil companies in the year in which they were received by the respondents. But when once it is admitted that they were sums received, not for carrying on this business, but as some sort of solatium for its compulsory cessation, the answer seems fairly plain." Towards the close of the judgment it was observed as follows (page 215): "Their Lordships will only add that the reasoning of this judgment would apply equally if the appellant based his claim on head (vi) 'other Relying on these observations it was argued that in order to constitute "income" the sum must flow or grow out of a source in existence in the accounting year. In this connection the provisions of Section 24 of the Act were also relied upon. It was pointed out that unless the business was carried on in the accounting year, the loss of the previous year, which was carried over and permitted to be set ....
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....ed at the end of the year, there remained nothing to tax in the next year when the source did not exist. In respect of Section 4(1)(a) it was contended that the same applied Co receipts by non-residents only and not to all persons. All were taxed alike on accrual basis as under the English Income Tax Act of 1918. Against this it was contended on behalf of the Commissioner that the English law was different in material respects from the Indian Income-tax Act and observations found in the English cases should not be considered relevant. It was urged that Section 4 was the charging section and the only relevant question wan whether the amount could be included in the expression "total income" under that section. Once an amount was classified as "income," it did not alter its character because it was received later. As regards the allowance and set-off permitted under Section 10 and 24 respectively it was argued that the same were permitted as provided in those sections, and Section 10(2) was wide enough to cover expenditure laid out for business or profession even though it had ceased to be carried on in the accounting year. Our attention has not been drawn to any decision on th....
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....wing heads of income, profits and gains shall be chargeable to income-tax in the manner hereinafter appearing, namely: (i) Salaries. (ii) Interest on securities. (iii) Property. (iv) Business. (v) Professional earnings. (vi) Other sources." Section 10, sub-section (1), provided as follows: "The tax shall be payable by an assessee under the head 'Business' in respect of the profits or gains of any business earned on by him." Sub-section (2) provided: "Such profits or gains shall be computed after making the following allowances namely:........" Section 11, sub-section (1), provided as follows: "The tax shall be payable by an assessee under the head "Professional earnings" in respect of the profits or gains of any profession or vocation followed by him." Sub-section (2) provided: "Such profits or gains shall be computed after making the following allowances, namely:-(i) any expenditure (not being in the nature of capital expenditure) incurred solely for the purposes of such profession or vocation, and not being personal expenses of the assessee...." Section 12, sub-section (1) provided as follows: "The tax shall be p....
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...., profession or vocation" all put together and head 5 is omitted. Section 10 was also correspondingly amended and runs as follows: "10. (1) The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely: * * * * (xii) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation;" Section 11 is deleted by the Act of 1939. Section 12 remains un. changed. Section 13 remains as before, after omitting all reference to Section 11. The whole contention of the assessee is based on the argument that as the source of income, viz., the practice of profession had ceased in the year 1938, the receipts after February 15 wore not income and not liab....
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....t dealing with the said amount, it cannot be said to be "received" as income on that occasion. Section 4(1)(b) is not limited only to income accrued to the person in the previous year. Clause (iii) covers income received in foreign country between April 1, 1934, and the beginning of the previous year, but brought into British India in the previous year. Moreover, the words in the main body of the section do not refer to any period during which the income profits or gains have been derived. There appears no justification for reading "in the previous year" in the main body of the section. The limitation of time is found in appropriate words in each of the clauses. According to Section 4 therefore two questions arise: (1) whether the amount in question is income, profits and gains, from whatever sources derived; and (2) whether such income falls within the words found in sub-section (a), (b) or (c). If the answer to these questions is in the affirmative, the next process is to ascertain if such income is excluded under Section 4(3) from tax. This is material because the heading of this section is "Applicability of the Act ". Section 4 itself excludes certain income, like agricultural ....
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.... fallen under any of the other beads but was included in the expression "total income". Because of the generality of that head the deductions permissible under Section 12 are necessarily generally worded, so as to achieve the result of finding out the net income of the assessee under that head. In my opinion, Section 6 to 13 are thus not the charging sections but are inserted in the Act for computation of the net income of the assessee. This construction is in accord with the view that under the Act income. and not several incomes, is taxed. Indeed this is the view taken by Lord Russell in Probhat Chandra Barua v. The King-Emperor ([1930] 57 I.A. 228, at p. 240), where he stated that the scheme of the Act is not to tax the gross receipts and the different heads specified in Section 6 are for the purpose of arriving at the taxable balance after the necessary deductions and allowances are made from gross receipts. In Commissioner of Income-tax, Bombay Presidency and Aden v. Chunilal B. Mehta ([1938] 65 I.A. 332, at p. 347; 6 I.T.R. 531), Sri George Rankin stated that the effect of Section 6 was to classify the profits and gains under different heads for the purpose of providing ap....
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....n the Act, the same is taxable under Section 3. The amendments made by the omission of Section 11 should be particularly noticed. In the body of Section 10 the words "profession or vocation" are added while in sub-section (2), where deductions are provided, clause (xii)-which was the only clause for deductions under old Section 11-is bodily included, without any change. The result is that a general head (xii) of allowances in respect of business, which did not exist before, is now included in Section 10. The contention that Section 10 is an independent section or that it controls in any way the income referred to in Section 4, sub-section (1), is, in my opinion, unsound. I concede that the two sections have to be read together, but the process is to approach Section 4 (I) first, and, thereafter, for the purpose of computation [as provided in the definition in Section 2(15)], the other sections of the Act have to be referred to. If the department seeks to bring a portion of income [as referred to in Section 4(1)] to charge under the head "Business, etc.," the same should be computed according to the rules found in Section 10 read along with Section 13. The amount of the total inc....
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....ed so as to make the sixth head mentioned in Section 6 describe a true residuary group embracing within it all sources of income, profits and gains provided the Act applies to them, i.e., provided that they accrue or arise or are received in British India or are deemed to accrue or arise or to be received in British India, as provided by Section 4, sub-section (1), and are not exempted by virtue of Section 4, sub-section (3)." According to these observations it is therefore clear that all income which was covered by Section 4(1), and was not exempted by virtue of Section 4(3), was to be charged under one or the other of the heads separately mentioned in Section 6; and if it was found not to fall within the words of a particular bead, it was embraced by the residuary group, viz., the last head, "Other sources." The observation' that although Chapter I is intituled "Charge of Income-tax" the real charging section would appear to be Section 6 which occurred in Chapter III, in my opinion, was due to the express reference to Section 6 in Section 4(1) of the Act of 1922. The income, profits and gains, to which that Act applied, therefore, were as described or comprised in Section ....
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....cannot be called income in any sense of the word. It is on that ground that the Court rejected the contention of the taxing authority. The emphasis on the words "carried on" in Section 10 was to point out that the amount was not received for carrying on, but for not carrying on the business. To argue that the Privy Council bad held is that case that unless the source was in existence in the year of assessment it should not be considered income at all, is a misreading of the judgment. The case isnot an authority and does not purport to state that if the payments were in respect of their commission earned when the agencies subsisted, they were not income under Section 10 because the receipts were after the termination of the agencies. Every case is an authority only for the proposition it lays down. The Board was not concerned in that case with the question, "If the receipts were income of the agencies would it make any difference if they were received later on?" In my opinion that case while defining pictorially the word "income" does not lay down the proposition urged by the assessee. In Gopal Saran Narain Singh v. Commissioner of Income-tax Bihar and Orissa ([1935] 3 I.T.R. 237....
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....shall be charge able... in the manner hereinafter appearing.' One of the heads is 'Business,' which as a head of income stands alongside Salaries, Interest on securities, "Professional earnings, and Other sources. True, the classification of income is according to the character of the source, and it has been held that 'income, profits and gains' as distinct from casual receipts and from other forms of receipt or enrichment, involve the idea of a periodical money return from a definite source....But the list of 'heads' in Section 6 is a list of sources not in the sense of attributing the income to one property rather than another, one business rather than another, but only in the sense of attributing it to property as distinct from employment, or business as distinct from investment, Sections 4 and 6, taken together, say of business profits that they are taxable on certain conditions stated, in Section 4 and in a manner to be laid down in a later section.... What is to be learnt from an examination of the language of sub-section (1) of Section 4... is that Section 6 is intended as describing different kinds of profit and that, if the condition 'accrui....
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....3): "Income is not necessarily the recurrent return from a definite source, though it is generally of chat character. Income, again, may consist of a series of separate receipts, as it generally does in the case of professional earnings. The multiplicity of forms which 'income' may assume is beyond enumeration". None of these decisions in my view support the contention that the source must be in existence at the time of receipt. In fact Section 4(1)(b)(iii) shows that income may have accrued in England in 1934, and although the source may have ceased in 1938, if the same was brought in British India is 1940, it was taxable. If the existence of the source is immaterial for this sub-clause, I see no reason why in should be considered malarial for the construction of the avoids in the main part of Section 4(1). The opening words of Section 4(1) "Subject to the provisions of this Act .........." are inserted only to find out if any income, which is referred to in Section 4(1), is exempted under the same section or another section of the Act. As in my opinion Sections 6 to 12 are not sections defining or limiting the word "income," the above quoted words in Section 4 do not s....
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....e Income-tax Act dealt with businesses that were being carried on and not with businesses which had ceased to exist, and further that the losses were capital losses and not revenue losses." It was emphasised that in order to claim a set-off the condition precedent was that both businesses should be alive during the current year. Dead business's losses cannot be set off against living business's gains. These observations must be read with the facts of the case. If it is appreciated that the accounts are kept on mercantile basis, the question of receipts does nut come in; at the end of each year the total profits or loss on the basis of accrual are assessed and taxed. During the last year of business, when it was closed, all its profits and losses computed in the manner permitted by the Act were assessed and taxed. Thereafter, there can remain nothing to accrue or to be taxed in respect of that business. The contention is unsound when the computation is on the receipt basis, and, in my opinion, those observations are inapplicable when the mercantile basis was not the method of accounting. Counsel for the assessee strongly relied on the two English cases mentioned at the....
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....s year" was received from the property but in the year of assessment the property was sold by the mortgagee. Relying on the principles of Brown v. National Provident Institution: Ogston V. Provident Mutual Life Association ([1931] 2 A.C. 222) and Whelan v. Henning ([1926] A.C. 293), it was contended that as the assessee had no income from the property in the year of assessment no income-tax was due from him, notwithstanding that in the previous year he derived income from that source. The next question of law on which the Court was asked to give its opinion was on the basis that while in the "previous year" the assessee received an income from groundrent, he had, in the year of assessment, derived no income from that source. The Court held that the Indian Act of 1918 was framed on the model of the English Act. It was pointed out that under the English Act the assessment in any particular year was made on the income which the Legislature deemed the assessee to have received in the year of assessment. The Legislature imputed statutory income to the assessee for computation of income for the year of assessment. A reference to the previous year's income, under the English Act, was ....
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....is important to remember that the income-tax is one tax as Section 3 shows it to be". In numerous cases the Privy Council has repeatedly cautioned the Indian Courts not to rely on English cases which are based on technical rules and provisions of English law of taxation. The observations of Rowlatt, J., in Bennett v. Ogston themselves show why the receipts should not be considered income if the profession or vocation had ceased in the assessment year. The learned Judge observe page 378): "....they are the receipts of the business while it lasted, they are arrears of that business..., and are taken to be covered by the assessment made during the life of the business, whether that assessment was made on the basis of bookings or on the basis of receipts". On the principle that in England the current year's income in assessed and taxed, while the business is going on during that year, the income is taken to be covered by the assessment and there can arise no question of taxing it again at any later date. This emphasises the distinct principle of taxation under the English Act. The observations in Hillerns and Fowler v. Murray are also explicable on the same footing. On the ot....
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....the same amount, as argued on behalf of the assessee. Clauses (a), (b) and (c) of sub-section (1) are connected by the word "or" and not "and". The result is that in the previous year's income, which is to be included in the "total income'' the amount can be entered if it falls under (a), or (b) or (c). It must be recognised that if a particular amount is assessed and taxed under (a), or (b) or (c), the same amount cannot be taxed under a different heading either in the same year or in a different year. It is therefore futile to contend that the result of the construction suggested above makes the same income liable to tax under two heads. The contention that under the Indian Act the method of accrual only is accepted as the method of taxation is unsound, because Section 4(1)(a) expressly makes the receipts of income, from whatever source derived, taxable if it is received in the "previous year". The words there used clearly mean the income received for the first time, if the method of accounting is not mercantile basis. On that amount the assessee wilt not be taxed on the accrual basis under Section 4(1)(b), but the taxation will be under Section 4(1)(a) only. As point....
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....d under Section 10, in view of the fact that the method of accounting regularly employed by the assesses was the cash receipts basis. CHAGLA, J.- The question for our determination in this reference is whether the receipts from a business or profession which has been discontinued are income liable to tax under the Indian Income-tax Act. It has been contended by the assessee that the profits or gains of a business or profession are only taxable provided the business or profession was carried on at the time the profits or gains were received. It has been further contended that the whole scheme of the Income-tax Act is to tax income only so long as the source from which the income was derived is in existence. If the income is received from a defunct source, then that income is not liable to tax. In order to understand and appreciate this contention of the assessee, it is necessary to consider the scheme of the taxing statute, Section 3 of the Act provides that the tax shall be charged at the rate mentioned in the Finance Act. Section A, which defines the applicability of the Act, lays down the conditions of chargeability. It states what the total income of the assessee in any....
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.... it is perhaps impossible to define it in any precise general formula, but he says that it is a word of the broadest connotation. He rather disapproves of Sir George Lowndes pictorial language and sounds a note of warning against using picturesque similes to limit the true character of income in general. He gives several instances of what "income" might be, and it is rather pertinent to note that he considers a series of separate receipts in the case of professional earnings as income. The first question then is: are the outstanding professional fees were realized by the assesses during the year under assessment income within the meaning of Section 4 of the Act? It has not been disputed and it cannot be disputed that these professional fees would have undoubtedly been "income" if the assessee had been-carrying on his profession as a consulting civil engineer in the accounting year. It is also admitted that when these fees accrued to the assessee they were income, but he was not taxed with regard to these fees because he was maintaing his accounts on a cash basis and not a mercantile basis, which right is given to him under Section 13 of the Act. It is difficult to see how or why....
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....ion 4. Whereas Section 4 lays down the conditions of chargeability, Section 6 deals with the manner of chargeability; and to use the language of their Lordships of the Privy Council in Commissioner of Income-tax, Bombay Presidency and Aden v. Chunilal B. Mehta ([1938] 65 I.A. 332, at p. 347; 6 I.T.R. 521, at p. 529), "The effect of Section 6 is to classify profits and gains under different heads for the purpose of providing for each appropriate rules for computing the amount." Therefore once it is ascerained that the amount is income under Section 4, the next step is to classify it under one of the heads mentioned in Section 6. This classification is solely for the purpose of computing the amount of income. Sections 6 to 12 provide a machinery for computation for every species of income which is made chargeable under Section 4. In the first instance, there are four specific heads under Section 6; and even if a particular kind of income does not fall under any of these four specific heads, it Would fall under the wide residual head provided under Section 12. As pointed out by Lord Russell of Killowen deliver....
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....g, or received in British India, or deemed under the provisions of this Act to accrue, or arise, or to be received in British India." Under the present section reference to Section 6 has been removed, and we have the phrase "Subject to the provisions of this Act." It is true that even under the present section "Subject to the provisions of this Act" would necessarily include the provisions of Section 6. But as under the old Act the income referred to in Section 4 was specifically confined to that described or comprised in Section 6, it is quite understandable why Lord Russell should refer to Section 6 as the true charging section as it was given that high place of honour in Section 4. Not only was Section 4 amended by the Act of 1939 but also Section 13. Under the old Act the other sources were in respect of income, profits and gains of every hind and from every source to which the Act applied. Under the amended Act income, profits and gains of every kind which may be included in the total income and are not included under any of the specific beads mentioned in Section 6 may be included under this head. While it is true that the amendments I have just referred to do not in any w....
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.... the residuary head under Section 13. This head, as I have already pointed out, refers to income, profits and gains of every kind and the only condition required is that it cannot be included under any of the preceding heads referred to in Sections 7 to 10. It is possible to dispose of this reference on the short point that as the profession was carried on by the assessee in the year under assessment, the profits and gains of that profession are liable to tax As the matter was debated at great length and as we have had the advantage of listening to very learned arguments from counsel on both sides, I should like to add that in my opinion, even if the business or the profession bad been discontinued prior to the accounting year, I see no reason why the profits and gains of such discontinued business or profession should not fall under the residuary head under Section 12, if in fact they were received during the year under assessment. It has been contended that what the assessee received was gross receipts and these do not constitute profits and gains of a business or profession. It has got to be remembered that as this assessee had adopted the cash basis as his method of accou....
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....r; and as the actual income of the current year must to a large extent be estimated by reference to various considerations and sot to the actual income earned in that year, income in England has to be computed on an accrual and not on a receipt basis. In the well known case of Behari Lal Mullick. In re(1). Sir George Rankin, Chief Justice, explains why in England the source of the income has to be in existence in the year of assessment. At page 636 he says: "If in the year of assessment the assessee had derived some income from a particular source the amount for purposes of taxation might have to be computed at least provisionally by reference to his income from that source in one or more of the years immediately preceding. If, however, the assessee in the year of assessment derived no income from a source which in the previous years had yielded income the statutory rules as to computation of the present and future by reference to the past did not apply so as to impute to the year of assessment an income which did not exist at all. The basis and subject-matter of the tax was the income in the year of assessment. As a matter of law this in true because it is the true construction of....