Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: COMMISSIONER OF INCOME-TAX, BOMBAY CITY I VS Respondent: CHUGANDAS & CO. (SECURITIES)Honorable Justice TENDOLKAR
1960 P T D 646
1960 P T D 646
[Bombay (India)]
Before Tendolkar and S. T. Desai, JJ
(On a difference of opinion K. T. Desai J)
COMMISSIONER OF INCOME‑TAX, BOMBAY CITY I
Versus
CHUGANDAS & CO. (SECURITIES)
I. T. R. No. 27/X of 1954, decided on 18th December 1958.
Income‑tax Act (XI of 1922), Ss. 8, 10, 25 (3)‑Business- Discontinuance‑Business charged under Act VII of 1918‑Exemp tionfrom payment of tax‑Concession whether available in respect of income from securities.
The assessee was a registered firm which carried on business as a dealer in securities and as such the securities constituted the stock‑in‑trade of its business. The firm had paid tax in connection with this business under the provisions of the Income‑tax Act, 1918. On June 30, 1947, the firm was dissolved and it claimed the benefit of the provisions of section 25 (3) of the Income -tax Act, 1922. The question was whether the interest received on securities held by the assessee formed part of the assessee's business income for the purpose of claiming relief under section 25 (3):
Held, [by S T. Desai and K. T. Desai, JJ., (Tendolkar, J. dissenting)] that interest on securities which formed part of the stock -in‑trade of the assessee's business was part of income, profits and gains of that business within the meaning of section 25 (3) and the assessee was entitled to exemption from tax in respect thereof under that subsection.
Per S. T. Desai, J.‑No tax is to be charged in a case falling under section (2) (3), and Chapter III which deals with heads of income does not enter in to the scheme or meaning of section 26(3). Sections 7 to 17 in that Chapter are computing sections. They deal with the mode or manner of computation or ascertainment of the quantum of tax under various heads and come into operation only when tax has to be charged as enjoined by sections 3 and 4. Therefore, in a section which lays down that no tax is to be charged in respect of the income, profits and gains of a discontinued business in respect of the terminal period, it is not permissible to implant either the concept or the language and meaning of any of the sections 6 to 17.
Per K. T. Desai, J.‑The expression "business" in section 25(3) can only refer to the activity which is styled business. What has to be discontinued is that activity before the section can apply. If what is to be discontinued is that activity business, the tax which is referred to in connection with that activity business must of necessity refer to the tax payable in connection with the income; profits and gains derived from that activity business irrespective of the head or heads under which such income, profits and gains are required to be shown under the provisions contained in the Income‑tax Act, 1918. The expression "business on which tax was at any time charged" on a plain reading of the section must refer to the tax charged under any of the heads under which the income, profits and gains made as a result of such activity may have been entered. If such income, profits and gains included interest on securities which constituted the stock‑in‑trade of that business, the tax paid under the head "Interest on securities" would be covered. There is no warrant for confining the tax to only one head. When the Legislature thereafter uses the words "no tax shall be payable in respect of the income, profits and gains" the Legislature is referring to the tax otherwise payable in respect of the income, profits and gains derived from the activity business referred to earlier. Reading section 25 as a whole the words "income, profits and gains" appearing in subsection (3) refer to the income, profits and gains made in connection with business under whatever head the same may have to be shown.
Per Tendolkar, J. (contra).‑So far as section 25 (3) is con cerned, there is absolutely no doubt that the words "income, profits and gains" are used in relation to business, profession or vocation as synonymous with profits and gains only.
Ambalal-Himatlal v. Commissioner of Income-tax (1951) 20 I T R 280 ; Chatturam v. Commissioner of Income‑tax (1947) 15 I T R 302 ; Chatturam Horilram Ltd. v. Commissioner of Income‑tax (1955) 27 I T R 709 ; Commissioner of Income‑tax v. Ahmuty & Co. Ltd. (1955) 27 I T R 63 ; Commissioner of Income‑tax v. P. E. Poison (1945) 13 I T R 384 ; Commissioner of Agricultural Income‑tax v. Raja Jagadish Chandra Deo (1949) 17 I T R 426 ; Commissioner of Income‑tax v. Shaw Wallace & Co. (1932) 59 I A 206 ; Commissioner of Income‑tax v. Srinivasan and Gopalan (1953) 23 I T R 87 ; Executors of the Estate of J. K. Dubash v. Commis sioner of Income‑tax (1951) 19 I T R 182 ; Gopi Mohan & Sons v. Commissinner of Income‑tax (1947) 15 I T R 220 ; Indian Iron and Steel Co. Ltd. v. Commissioner of Income‑tax (1943) 11 I T R 328 ; Kamakshya Narain. Singh v. Commissioner of Income‑tax (1943) 11 I T R 513 ; Kamdar, In re (1946) 14 I T R 10 ; Kameshwar Singh v. Commissioner of Income‑tax (1954) 26 I T R 121 ; Maharajkumar Gopal Saran v. Commissioner of Income‑tax (1935) 3 I T R 237 ; United Commercial Bank of Calcutta v. Com missioner of Income‑tax (1957) 32 I T R 688 ; Wallace Brothers & Co. Ltd. v. Commissioner of Income‑tax (1948) 16 I T R 240 and Whitney v. Commissioners of Inland Revenue (1926) A C 37 ref.
STATEMENT OF CASE
By these two applications, which are consolidated as they raise the same question, the Commissioner of Income‑tax, Bombay City I, requires the Tribunal to state a case to the High Court of Bombay on a question of law which is said to arise out of the order of the Tribunal in I. T. A. Nos. 3889 and 2819 of 1952‑53. inasmuch as a question of law does arise cut of the aforesaid order of the Tribunal, we hereby draw up a statement of the case and refer it to the high Court of Judicature at Bombay under section 66 (1) of the Indian Income‑tax Act.
2. The assessee received Rs. 4,13,992 in the assessment year 1947‑48 and Rs. 1,01,229 in the assessment year 1948‑49 as interest on securities. It is common ground that the assessee is a dealer in securities and the securities on which interest is received are the stock‑in‑trade of the assessee's business in securities. It has been held by the Department that the assessee is entitled to the benefits of the provisions of section 25 (3). If, therefore, interest on securities forms part of the business income, the assessee would be entitled to the benefits of section 25 (3) in respect of this income also. If, on the other hand, interest on securities is not treated as business income, exemption claimed cannot be allowed under the law.
3. There was a difference of opinion between the two Members constituting the Bench which heard the appeals. The Accountant Member held that in the case of the assessee the receipt of interest formed part of the revenue receipt of the assessee's business in securities. The Judicial Member, however, held a different view. In his opinion, income from securities could only be taxed under section 8 and further it could not form part of the assessee's business income. The following point of difference was, therefore, referred to the President under section 5‑A (7) of the Income‑tax Act:
"Whether on the facts and circumstances of the case interest received on securities held by the assessee formed part of the assessee's business income for the purpose of claiming relief under section 25 (3) of the Indian Income‑tax Act."
The President decided that the interest on securities formed part of the profits and gains of the assessee's business. The order of the Tribunal is annexure 'A' and forms part of the case.
4. The following question of law arises:
"Whether on the facts and circumstances of the case interest received on securities held by the assessee formed part of the assessee's business income for the purpose of claiming relief under section 25 (3) of the Indian Income‑tax Act?"
5. The statement of the case has been finalised after hearing the parties. No suggestions are offered as to the statement of the case. . The departmental representative suggests that the following question, as framed by the Commissioner of Income‑tax, be referred:
"Whether on the facts and in the circumstances of the case, the interest on securities should be treated as income falling under the head `profits and gains of business, profession or vocation' under section 10 or as income falling under the head `interest on securities' under section 8?"
6. We think that the question referred by us is a more appropriate question. The assessee wants that the assessment orders in respect of the assessment years 1919‑20, 1946‑47, 1947‑48 and 1948‑49, the order of the Appellate Assistant Commissioner and the memorandum of appeal before the Tribunal should be made part of the statement of the case. We do not think that it is necessary to include the Appellate Assistant Commissioner's order or the memorandum of appeal before the Tribunal in the statement of the case. The above‑mentioned four orders of the Income‑tax Officer are, however, made to form part of the state ment of the case and are annexures B', 'C', `D' and 'E' respec tively.
G. N. Joshi with Sunkersett for the Commissioner.
N. A. Palkhivala with Jamshedji Kanga and B. A. Palkhivala for the Assessee.
JUDGMENT
TENDOLKAR, J.‑The question referred to this Court upon this reference is :
"Whether on the facts and circumstances of the case interest received on securities held by the assessee formed part of the assessee's business income for the purpose of claiming relief under section 25 (3) of the Indian Income‑tax Act ?"
The facts necessary for the purpose of determining this ques tion are few. The assessee held securities as his stock‑in‑trade, and he received interest on these securities in the assessment years 1947‑48 and 1948‑49, in the sums of Rs. 4,13,992 and Rs. 1,01,229 respectively. It was held by the Income‑tax authorities that the assessee was entitled to the benefit of the provisions of section 25(3) and if, therefore, interest on securities was within the scope of that benefit, this interest would not be taxable. If, on the other hand interest on securities is outside the scope of the benefit con ferred by section 25 (3), this interest would have to be taxed. The matter was dealt with by the Tribunal, the Members of which took different views one taking the view that interest on securities was taxable under section 10 and another that it was taxable under section 8. The matter was, therefore, referred to the President, who took the view that interest from securities was taxable under section 10 and not under section 8. The majority of Members of the Tribunal, having held that interest on securities was taxable under section 10, also held that it was exempt from taxation under section 25 (3). It is out of these orders of the Tribunal that the present reference arises.
Since the decision of the Tribunal, their Lordships of the Supreme Court, in United Commercial Bank Ltd. v. Commissioner of Income‑tax (1), decided on the 23rd of May 1957, have held that income from interest on securities which are held as the stock‑in‑trade of a business is taxable under section 8 and not under section 10. Therefore, the question as framed does not now bring out, the real contentions between the parties. The real dispute is whether, even if interest on securities is taxable under section 8, such income is entitled to the benefit conferred by section 25 (3). We would, therefore, reframe the question as follows :
"Whether the assessee is entitled to the benefit of section 25(3) in respect of the interest on securities ?"
Now, turning next to section 25 (3), it is in the following terms :
"Where any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income‑tax Act, 1918 (VII of 1918), is discontinued, then, unless there has been a succession by virtue of which the provisions of subsection (4) have been rendered applicable 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 dis continuance, and 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. Where any such claim is made, an assessment shall be made on the basis of the income, profits' and gains of the said period, and if an amount of tax has already been paid in respect of the income, profits and gains of the previous year exceeding the amount payable on the basis of such assessment, a refund shall be given of the difference."
In order to appreciate what was sought to be done by this subsection, one must look at the history of income‑tax law. Under the Income‑tax Act of 1918, what was subjected to tax was the income of the currant year under section 14, subsection (2), of that Act. This basis of taxation was altered by the Income‑tax Act, 1922; which provided by section 3 thereof that the charge shall be in respect of income of the previous year. This led to the result that for the accounting year 1921‑22 the income had already been subjected to tax under the Act of 1918, but was again subjected to tax under the Act of 1922, as the income for the assessment year 1922‑23, the year 1921‑22 being the previous year for the assessment year 1922‑23. Therefore, the income of a single year had been subjected to tax twice over and the object of section 25, subsection (3), was to give relief in respect of this double taxation of the same income to the limited extent that the section prescribes. That relief took the form in section 25, sub section (3), of providing that where a business, profession or vocation was discontinued, no tax shall be payable in respect of the period between the end of the; previous year and the date of such discontinuance, or, at the option of the assessee, the year previous to such period. But in order to earn this exemption, the essential first condition was : "Where any business, profession or vocation on which tax was at any time charged under the pro visions of the Indian Income‑tax Act, 1918 (VII of 1918), is discontinued". Therefore, the exemption could only be claimed provided there was any business, profession or vocation subjected to tax under the Income‑tax Act of 1918 and not otherwise. It follows, therefore, that in so far as a tax was levied under the Act of 1918 which did not fall within the category of a tax charged on any business, profession or vocation, no relief was granted. Under the Act of 1918, section 5 set out the classes of income chargeable to income‑tax ; they were : (i) salaries ; (ii) interest on securities ; (iii) income derived from house property ; (iv) income derived from business ; (v) professional, earnings ; and (vi) income derived from other sources. Prima facie, therefore, if any tax had been paid under (i), (ii), (iii), or (vi) of the Income tax Act 1918, no relief was granted by section 25 (3). Thus, for example, a person who had paid tax on property which was Leviable under section 8 of the Act of 1918, had to pay tax twice over and got no relief in respect thereof. This by itself is not disputed by Mr. Palkhivala for the assessee ; but what is con tended is that when section 25 (3) talks of business, profession or vocation being subjected to tax under the Act of 1918, it does not relate only to the tax levied under the heads "(iv) income derived from business and "(v) professional earnings", but it also includes any other income of the business, profession or vocation in the commercial sense or in legal sense, except in the context of the Indian Income‑tax Act, although it may be subjected to tax under some other head. The merits of this suggested interpreta tion of the condition precedent to the exemption being earned under section 25 (3) I will later consider in another context but they do not fall to be considered for the purpose of determining whether the condition precedent is satisfied in this case because it is common ground on this reference that the assessee carried on a business on which tax was charged under the provisions of the Income-tax Act of 1918. But the rival contentions with which we are concerned are in relation to the nature of the income that is exempted from tax. What is exempted from tax is "income profits and gains" of the period mentioned in the subsection ; but obviously these income, profits and gains are of the business, pro fession or vocation which had been charged to tax under the Income‑tax Act of 1918. Mr. Joshi for the Department urges that the words "income, profits and gains" of a business, profession or vocation in this subsection only include, in the context of income -tax law, income taxed under the head of income, which is "profits and gains of a business, profession or vocation"; whilst Mr. Palkhivala for the assessee contends that the income, profits and gains of a business, profession or vocation include within their scope not only income, profits and gains subjected to tax under the head "profits and gains of a business, profession or vocation", but the income, profits and gains of a business, profession or vocation under whichever head taxed, if they are in fact the profits of the business, profession or vocation in the commercial sense, or in the legal sense outside the context of the Income‑tax Act. In other words, Mr. Palkhivala's contention is that although interest on securities may be taxed under a separate head, namely interest on securities under section 8, yet from the commercial point of view they are profits of the business if the securities were the stock‑in‑trade of the business. Even from the legal standpoint, except in the context of the Income‑tax Act, the profits of a business would comprise the interest on securities held by the business as its stock‑in‑trade; and if there was, for example, an agreement to share the profits of the business, there can be little doubt that for the purposes of such an agreement the profits in a legal sense would include interest on securities. Similarly, if a business possessed immovable property, it would be taxed on its profits not under section 10, but under section 9. None the less, if the profits of that business had to be ascertained in a Court of law, undoubtedly the income from property would necessarily have to be taken into account, and so would that income be taken into account even in the commercial sense for ascertaining those profits. We have to consider which of these two rival contentions is the correct one.
Mr. Palkhivala has attempted to counter the argument of Mr. Joshi, that the income, profits and gains of a business, pro fession or vocation which are exempt under section 25 (3) are the income, profits and gains falling under the head "profits and gains of business, profession or 'vocation" being head (iv) in section 6 of the Income‑tax Act, on various grounds. His first contention is that no head is referred to in section 25 (3) at aim, and that no doubt is true but it does not follow thereform that the words "income, profits and gains" of a business, profession or vocation do not import into the section the concept of income, profits and gains under the head "profits and gains of business profession or vocation". But then Mr. Palkhivala argues that whenever the Legislature desired to refer to a tread of income, it has in terms so stated, and he drew our attention to a string of sections in the Indian Income‑tax Act strewn all over the Act where the expres sion used is "under the head . . . . " whichever the head may be. To take only one or two examples, in section 4, subsection (3), clause (xi) and (xii), there is a reference to income chargeable under the head `salaries'" and "income chargeable under the head `Income from property" respectively and his argument is that if the Legislature intended that income under the head "Profits and gains of business, profession or vocation" was to be exempted from tax under section 25 (3) the Legislature would have used the words "under the bead". No doubt, no difficulty would have arisen if such words were used ; but it does not appear to me to follow, from the fact that such words are not used in section 25 (3), that if the context so requires, the words used cannot be interpreted so as to be applicable to the profits and gains of business, profession or vocation falling within that head of income under section 6. Similarly, attention was also drawn to section 26, subsection (2), and section 44. Section 26, subsection (2), deals with succession to a business and provides that where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person, in respect of the income, profits and gains of the previous year the taxability shall be apportioned between both the persons. Here obviously the words "the income, profits and gains of the previous year" refer to the entire liability of the person carrying on any business, profession or vocation to whops there has been a succession ; and, obviously; they comprise not only tax payable by such person under the head "Profits and gains of business, profession or vocation'", but any other income of the business, profession or vocation which is taxable under another head, such as property or interest on securities. The same appears to be the position under section 44 which deals with the liability in case of a discontinued firm or association, which provides that upon discontinuance or dissolution the partners of the firm or members of the association shall be jointly and severally liable to assessment in respect of the income, profits and gains of the firm or association. Here again, obviously, the liability is in respect of the income of the firm or association which was liable to tax under whatever head the tax came to be charged. But in the case of both these sections, the result is brought about not by the mere words "income, profits and gains", but by the context in which they are used ; and it does not follow therefrom that wherever the words '`income, profits and gains" of a business, profession or vocation are referred to, they necessarily mean income, profits and gains under whichever head they are taxed.
Then Mr. Palkhivala contends that the language employed in section 25 (3) does not import any head at all ; he says that it only deals with chargeability. That, no doubt, is true and the condition precedent to earning the exemption under section 25 (3) un doubtedly is that a business, profession or vocation was charged under the provisions of the Income‑tax Act, 1915. Now, tax is charged under the income‑tax law on income and not on the source of income. Business, profession or vocation is the source of income and not income itself ; but since it is necessary to determine for the purpose of this subsection what is the source of income that was taxed, that source must be the source of income falling within one of the clauses enumerated in section 5 of the Indian Income‑tax Act of 1918, Class (i) is "Salaries" and the source, of course, is service ; class (ii) is Interest on securities" and the source is securities ; class (iii) is "Income derived from house property" and the source is house property ; class (iv) is "Income derived from business" and the source is business ; class (v) is "Professional earnings" and the source is profession, which includes a vocation by reason of section 10, subsection (1) of the Act, which provides that the tax under the head "Professional earnings" shall he in respect of the profits of any profession or vocation ; and class (vi) is "Income derived from other sources" and the source is obviously other sources. Therefore, if one were to determine the source of income on which tax was chargeable‑and that 'is what one is required to do for the purpose of ascertaining whether the condition precedent to exemption being obtained under section 25 (3) is satisfied‑then clearly tax is charged on business only under class (iv) and on profession or vocation under class (v) enumerated in section 5 of the Act. This appears to me to lead to a very important consequence. Since the object of section 25 (3) was indisputably to grant relief in respect of double taxation of the same income, the relief could only be in respect of the same class of income on which tax was charged twice, that is, income charged under the corresponding "classes" which have been renamed "heads" in section 6 of the Act of 1922 ; and the corresponding heads in section 6 of the Act of 1922 were (iv) Business and (v) Professional earnings. Therefore, when section 25, subsection (3), provides that no tax shall be paid in respect of the income, profits and gains of business, profession or vocation, it appears to me that it can only mean that no tax shall be payable on income falling under…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.