TMI Blog1945 (3) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... l. 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 share of income from the estate of Mr. M. M. Kamdar 6,060 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment, the assessee was in GO way debarred from 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 the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployed 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 Act. Under the scheme of the Act all income, profits and ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 received, but the previous year, that is to say, the acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which (a) are received or are de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, profits and gains of every kind which may be included in his total income (if not included under any of the preceding heads). (2) Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains provided that no allowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-tax. Indeed there is nothing to show whether tax was charged on the profession under the provisions of the Indian Income-tax Act, 1918, or not. Looking at the scheme of the early sections, the salient features of the 1939 Act are, as it seems to me, that under Section 3 tax is to be charged for any particular assessment year in respect of the total income of the previous year, which, by the conjoint effect of sub-section 2(15) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not unimportant. Under Section 10 the profits and gains must be from a business, profession or vocation carried on by the assessee, and from these profits or gains certain stated allowances are to be deducted. Do the words carried on by him mean carried on by the assessee in the assessment year or the accounting year, or do they mean carried on by the assessee at any time ? If the latter, it would be difficult to find a termi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion 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 accounting there was left over a list of book-debts owed by debtors who were in arrear in the payment of their fees. In my opinion, having regard to the method of accounting employed by the assessee, these debts when collected are not income from other sources. There is nothing continuous about them and they are incapable of repetition, and the very fact that Section 25 is wholly silent with regard to them, though it deals with the situation in which they arise, negatives, in my opinion, their a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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). Dealing with the incidence of taxation, his Lordship observed : The tax is upon ' income, profits and gains. ' It is not a tax on gross receipts. With this fact in view, each section which deals with one of the first five ' heads ' specified in Section 6 contains, where proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 profits or gains of any business carried on by him. ' Again, their Lordships think, the same central idea : the words italicised are an essential constituent of that which is to produce the taxable income : it is to be the profit earned by a process of production. And this is borne out by the provision for allowances which follows. They include rent paid for the premises where the business is carried on ; the cost of current repairs in respect of such premises ; interest on money borrowed for carrying on the business, etc. And later his Lordship observed : Their Lordships will only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the profits, and that the sections require that the situation of the source should determine the place where the profits arise. This, in their Lordships' view, is a straining of the sections. 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 ; its language is ' shall be chargeable . . . . 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 rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses 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 transfer, which was December 2, 1936, and the assessee-company continued the business which it purchased in conjunction with its own existing business. Both companies had to their respective credit large sums of unabsorbed depreciation allowance which, under the Act, they could set off against future profits. December 2, 1936, came within the accounting period, which was from April 1, 1936, to March 31 following, and it was held that the purchaser-company was not entitled to have the depreciation allowance of the vendor-company computed on the original cost of the assets of the vendor-company for the whole of the previous year but only up to the date of succession. Lord Porter delivering the judgment of the Board said (page 336) : Indian income-tax is assessed and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 when all has been said, the basic question is, whether the receipt of these outstanding fees after the profession has been discontinued are taxable income. It seems to me that the view I take is consistent with these authorities. In the language used by Lord Russell of Killowen in delivering the Judgment in Probhat Chandra Barua v. The King-Emperor (1930) 57 I. A. 228), it is not a tax on gross receipts, and the sum of Rs. 12,302 in the case before us is unquestionably made up of gross receipts ; it is not a taxable balance . Even if the pictorial simile to be found in the judgment in the case of Commissioner of Income-tax v. Shaw Wallace Co (1932) 59 I. A. 206). is to be discarded, the Rs. 12,302 can be tested in the light of the observations in that case. It does not comply with the fundamental idea of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 received from January 1 to February 15 (both inclusive) ought to have been assessed under Section 25 of the Act, and, had they been, they would have been liable to income-tax and that the balance being that portion received on and from February 16 till the end of the calendar year is not assessable to income-tax. In deference to the able arguments that have been addressed to us, there are two further aspects of the matter which I desire to mention. Although in my judgment, the primary answer to the question in this case is, that outstanding fees which come in after the determination of the profession which earned them are not receipts capable of computation as income, profits or gains within the meaning of the Act, the question can also be answered by saying that having regard to the terms of Section 13 tax has notionally already been paid in respect of the outstanding fees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax 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 Kamdar Ltd., on February 16, 1938, and the assessee was appointed the managing member of the company. The business of Kamdar Karyalaya was transferred to the limited company. The question before us does not relate to that part of the transaction. After February 15, 1938, the assesses did not carry on the profession of a consulting civil engineer as before. The accounting year of the assessee was 1938. In respect of his professional earnings he kept accounts on the basis of receipts and his income of the previous years was computed on that footing, In respect of his income in 1938, the assessee contended that as he had ceased to carry on the profession of a consulting civil engineer in 1938 he was not liable to be assessed in respect of his fees for that year. In the alternative, it was urged that, in any event., after February 15, 1938, such outstanding (professional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 accordingly terminated on December 31, 1927, and that of the Anglo-Persian Co. on June 30, 1928. Sometime in the first half of 1928 the Burma Oil Co. paid to the respondents Rs. 12,00,000 ''as full compensation for cessation of the agency and in August of the same year the Anglo-Persian Oil Co. paid to them a sum of Rs. 3,25,000 as compensation for the loss of your office as agents of the company. These expressions were accepted as correctly describing the nature of the transactions. On behalf of the Commissioner it was sought to be argued that these payments were income in 1928 and liable to be taxed. The contention was negatived by the High Court at Calcutta and also by the Privy Council. Sir George Lowndes in his judgment observed as follows (pages 212-214:): The object of the Indian Act is to tax 'income,' a term which it does not define. It is expanded, no doubt, into 'income', profits and gains,' but the expansion is more a matter of words than of substance, Income, their L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us year, which was carried over and permitted to be set off, could not be set off. Section 24 permitted such set-off only when the same business was continued. It was urged that while Sections 3 and 4 were charging sections, Chapter III commencing with Section 6 dealt with taxable income. Under Section 6 it was provided that income shall be shown under five heads and the fourth head was profits and gains of business, profession or vocation. Income under that head was dealt with in Section 10. That runs as follows: 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. It was urged that the very idea of income postulates the existence of source in the year in which it is taxed. Unless the source existed it could not be stated that it was income of the business or profession carried on by the assessee. Contending that the allowances provided by Section 10 were all in respect of a source which existed in the accounting year, it was argued that if no machinery was provided for allowances to be given on the footing of rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Our attention has not been drawn to any decision on the construction of Section 4 after its amendment in 1939. Therefore it is desirable first to look at the provisions of the Income-tax Act in force in the assessment year. It is common ground that the Act as amended in 1939 is applicable to the case before us. In order to appreciate the rival contentions of the parties it is necessary to notice the relevant provisions of the Act of 1922 and consider the same with the amended provisions of the Act of 1939. This is material because several decisons of the Privy Council which have been relied on were pronounced on the wording of the sections of the Act of 1922. The Act of 1932 was an Act to consolidate and amend the law relating to income-tax and super-tax. In Section 2(16) the expression 'total income' was defined as follows: 'Total income' means total amount of income, profits and gains from all sources to which this Act applies computed in the manner laid down in Section 16, Section 3 provided that the rate applicable to the total income of the assessee would be the rate prescribed in the Act of the Central Legislature from time to time. Section 4, sub-sections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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). Sub-section (2) provided: Such income, profits and gains shall be computed after making allowances for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains, provided that no allowance shall be made on account of any personal expenses of the assessee. The relevant part of Section 13 was: Income, profits and gains shall be computed for the purpose of Sections 10, 11 and 12 in accordance with the method of accounting regularly employed by the assessee. Section 16 dealt with certain general exceptions which are not material. The rest of the sections are not material to the present discussion. In the amended Act of 1939 - Total income is defined in Section 2(15) in these terms: '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. For the present discussion there was no material change in Section 3 Section 4 was recast and the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from February 15, 1938. Therefore, the utmost which could be urged is that the source ceased to exist on February 15, 1938. The question then arises if in respect of the fees earned for work done and completed in 1937 and up to February 16, 1938, there is a difference, if the receipt was on or before February 14 or after February 16. The argument urged by the assessed would make a difference in the amount liable to tax, according to the dates of receipt in the accounting year. The scheme of the amended Act of 1939 appears to be this: Chap ter I, in which Sections 3 and 4 are found, is headed, Charge of Income-tax . As the words total income on which the charge has to be made occur in Section 3, it is necessary first to find out what that expression means under the Act. The second question is whether it is assessable in the year in question, because the law considers it the assessee's income of the previous year. The definition of total income found in Section 2(15) shows that in respect of the amount to be included in the expression two things are essential: (1) The income, profits and gains should be referred to in Section 4, sub-section (1); and (2) it should be comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es income referred to in Section 4(1). According to Section 2(15), one has nest to compute the income in the manner laid down in other parts of the Act. Section 6 is in Chapter III which is headed Taxable Income . That section enacts that the following heads of income, profits and gains shall he chargeable to tax in the manner thereafter appearing. It is clear, therefore, that Section 6 does not attempt to define income or prescribe limitations on income. It only sets out the heads under which income, which has been referred to in Section 4(1), is chargeable. The heads which are particularly dealt with in Sections 7, 8, 9, 10 and 12 do not also attempt to define the conditions under which the income is charged. They prescribe the manner in which the charge, under each head, has to be made. That appears to me to be the scheme, because in respect of each head a different method of computation in respect of allowances is prescribed. If the Income-tax Act contained only the provisions found in Sections 2(15), 3 and 4, the gross income would be liable to tax, because there would be no provision for any deductions for expenses incurred in order to earn the income. Bearing that in min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as describing different kinds of profit and that if the condition accruing, arising or received in British India, etc. is satisfied by the profits, they will not escape the tax by reason of any quality or circumstance of the source. Again Sections 7 to 12 divide themselves into two parts. Sections 7, 8 and 9 provide for charging tax. irrespective of the manner in which the assessee keeps his books. Salaries have to be charged as earned, whether the same are received or not by the assessee in the accounting year. Interest on securities under Section 8 is to he charged to tax if it is receivable by the assessee, i.e., irrespective of the question whether it is received or not. Under Section 9 the income from property is charged on the bona fide annual letting value of the property of which the assessee is the owner, irrespective of the question whether such value as computed by Section 9(2) is received or not. This must be computed subject to the limitations and provisos found in that section. The important fact to remember is that the method of accounting adopted by the assessee is immaterial for these sections. Sections 10 and 12 stand on a different footing. In addition to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 4, it must go under the general head Other sources, because the scheme clearly is that all income referred to in Section 4(1) must come for charge under one or the other of the heads mentioned in Section 6 and dealt with in Sections 7 to 12. The Judicial Committee of the Privy Council had occasion to examine the scheme of the Indian Income-tax Act of 1923, and consider the meaning of the word income before the Act was amended in 1939. I shall therefore next consider those decisions, only with a view to ascertain their Lordships' views about the scheme of the Act. As the word income is not defined in the amending Act also, those observations still hold good. In Probhat Chandru Barua v. The EmgEmperor ([1930] 57 I.A. 240), the question arose about the assessment to tax the income of a zamindari. In the course of its judgment the Board considered the scheme of the Act of 1922 and noticed that it was an Act to consolidate and amend the law relating to tax. Sections 3 and 4 in Chapter which was headed Charge of Income-tax were considered and it was observed although Chapter I is entitled 'Charge of Income-tax,' the real charging section would appear to be Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding Act of 1939: (1) All reference to Section 6 is omitted in Section 4, and (2) in the definition of Section 2(15) there is an express reference to Section 4(1). It should also be noticed that the division of Section 4(1) into three clauses is new and makes a vital change in answering the first question What income is to be included in the expression 'Total income' in Section 3? This decision therefore supports the view that to ascertain the total income the first approach is to Section 4(1), nest to Section 4(3) and then to allocate it under one or other of the heads described in Section 6. The argument advanced on behalf of the assessee that this construction will result in a tax on gross receipts was also disposed of at page 240 in the following terms: The tax is upon 'income, profits and gains.' It is not a tax on gross receipts. With this fact in view, each section which deals with one of the first five 'heads' specified in Section 6 contains, where pro. per, specific provisions for the necessary deductions and allowances to be made for the purpose of arriving at the taxable balance. Section 12, which deals with the general residuary group, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare in an estate conveyed the greater portion of that estate to X who owned the remaining seven annas. The consideration of the transfer was (1) payment, of the assessee's debts amounting to Rs. 10,26,937, (2) a cash payment of Rs. 4,73,063, and (3) an annual payment of Rs. 2,40,000, to the assessee for life. The contention which was ultimately argued before the Privy Council was whether the annual payment of Rs. 2,40,000 was liable to tax as income. In delivering judgment Lord Russell at page 242 observed as follows: The word 'income' is not limited by the words 'profits' and 'gains.' Anything which can properly be described as income, is taxable under the Act unless expressly exempted. In their Lordships' view the life annuity in the present case is 'income' within the words used in the judgment of this Board which was delivered in the case of Commissioner of Income-tax v. Shaw Wallace Co.(2) According to that judgment therefore the Court had first to find whether the amount in question was income and if it was not exempted under the Act, it was liable to tax. The Board approved of the definition of the word income given in Shaw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lature 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 , However that may be, the profits of each particular business are to the computed wherever and by whomsoever the business is? carried on, but only on condition that they are profits 'accruing, or arising or received in British India'.... (The italics are mine). These observation clearly emphasise that white Section 6 is intended as describing different kinds of profits, reference must be made to the words in Section 4 to ascertain what is income under the Act. In Kamakshya Narain Singh v. Commissioner of Income-tax ([1943] 11 I.T.R. 513), the Board had to consider whether royalty paid in respect of a mining lease under certain conditions was liable to tax. The contention that profits and gains of business only were liable to tax and the word income was limited by those words was r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion relating to each individual head found in the said sections. Having regard to the scheme of the Act the questions to be considered are: (1) Whether it is income referred to in Section 4(1). (2) If so, whether it is exempted under Section 4 or any other section of the Act. The next step is to divide the income so arrived at under the heads mentioned in Section 6 and compute the same in the manner laid down in those sections. In respect of business and other sources the provisions contained in Section 13 have also to be applied, The result is the total income on which tax is to be levied as preacribed by Section 3 of the Act. This method of approach does not leave any difficulty in the plain reading of the Act. Counsel for the assessee also relied on B.C.G.A. (Punjab), Ltd. v. Commissioner of Income-tax, Punjab ([1917] I.T.R. 279). In that case the assessee had kept his accounts on the mercantile system under Section 13. A question arose in respect of certain debts which bad become time-barred. It was contended that they had become time-barred in the year in question and therefore became bad debts for which the assessee claimed deductions. The taxing authorities rejecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reon. After the death of the money-lender certain bonds were discharged by the debtors by payment. It was argued on behalf of the estate of the deceased that this was not income as the trade had come to an end. The contention was rejected because it was pointed out that the repayment was of interest on capital which had remained advanced even after the death of the trader, and therefore Was income. In discussing the liability of such receipts to tax Rowlatt, J., observed that the source must be in existence at the time of the receipt of the income, and if the trade or profession had ceased, the receipts were not chargeable to tax. In Hillerns and Fowler v. Murray ([1932] 17 Tax Cas. 77), on facts, it was found that the firm was trading when the amount was received, and, therefore, the question whether the income was received after the source bad come to an end did not arise. In discussing the question of liability if the trade had stopped, Rowlatt, J., made observations similar to what he had made in the former case. In my opinion those cases are not relevant for the present discussion. The scheme of the English Act is entirely different from the scheme of the Indian Act. Under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment, though the amount is often measurd by the results of the previous years- were, under the English Act, appropriate. The Court nest rejected the contention of the Crown that the Indian Income-tax Act, 1932 (which was applicable to the case), maintained the general scheme of the English Act of putting tax upon income derived during the year of assessment. It was pointed out that the tax under the Indian Act of 1922 was on the income of the previous year and it was not a standand by which the next year's income was to be computed. It was pointed out that this fundamental distinction made a complete change in the manner of assessment under the Indian Act of 1922. The Court relied on the rules under which adjustments were permissible under the Indian Act of 1918, but which were dropped in the Act of 1922. It was held that while Sections 6 to 12 stated the beads of income, which are chargeable, and which authorised specific allowances or exclusions, the tax was one on the total income of the assessee. The tax was not paid on each of tile heads. It was pointed out that there may be difficulties in computing income and the allowances permitted may not work ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has nothing to do with the time of its receipt. The question of receipt is material only for the purpose of determining whether on that amount tax is to be levied under the Act in the year of assessment. The question of receipt may be material, not for the purpose of determining whether it is income or not, but for computing it in the assessment year. If the assessee, in respect of his business or income from other sources, keeps his accounts on the mercantile basis, his income is computed on the footing of accrual. If on the other hand, he keeps his accounts on the footing of receipts, his income is computed in that manner. There is no difficulty in reading Sections 10, 12 and 13 together for the purpose of computation. The allowances permitted under Sections 10 and 12, if the method of accounting is the mercantile method, will have to be computed according to that method. If, however, the computation is on the method of receipts, all those allowances must be allowed in the year of disbursements, irrespective of the question when the liability to pay the same arose. Any other construction will result in a hopeless confusion. If the method of accounting is receipts, on the credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justified and reconciled. In 1939 the Act was again amended. One of the principal objects of the amendment of the various sections was to tax the foreign income of a resident or the foreign income of a nonresident brought into British India. We are not directly concerned with the motives of the Legislature but we are bound, by the effects of the amendments. The amendments made by that Act further emphasise the view that under the Indian Act 'accrual' is not the only basis for computation and taxation. There appears no justification for the contention that Section 4(1)(a) is limited to receipts by nonresidents only. If that was the intention of the Legislature, clause (a) should be after Section 4(1)(c) and not where it is placed. The Separate scheme of computation found in Sections 7 to 9 on the one hand, and Sections 10 to 12 read with Section 13 on the other hand, also negatives that contention. Again the fact that Section 4 (1)(b) is confined to persona ordinarily resident and Section 4(1)(c) is confined to persona not ordinarily resident emphasises the construction that Section 4(1)(a) is of general application and not limited Neither side relied on Section 26 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax in the case of every person, the section then proceeds to deal with accrual of income and in clause (b) it deals with accrual in the case of a resident in British India and in clause (e) in the case of a non-resident in British India. Then under sub-section (3) it provides various exceptions which need not be included in the total income of the assessee. Therefore, in the first instance, it is necessary to ascertain whether what is sought to be charged as income under Section 4 satisfies the conditions of chargeability laid down in that section. Income is nowhere defined in the Act. Even the plain natural meaning of income is so full of connotations that it is not always easy to say with precision what exactly income means. Even so high a tribunal as the Privy Council when it has launched upon the adventurous task of defining income has found itself confronted with serious difficulties. In Commissioner of Income-tax v. Shaw Wallace Co.([1932] 59 I.A. 206), Sir George Lowndes delivering the judgment of the Privy Council defined income as a periodical monetary return comming in with some sort of regularity, or expected regularity, from definite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income and it must be received in British India during the previous year. In this case it is not disputed that the assessee received the amount in question in British India during the previous year and it was an amount derived from a particular source, namely, his profession, although that source had ceased to exist at the time when the amount was received. A rather ingenious construction of Section 4 was suggested by Sir Jamshedji Kanga on behalf of the assessee. He argued that sub-clause (a) of Section 4 only applied to persona not resident in British India and that in the case of persons resident in British India the only income chargeable was that which accrued or arose or was deemed to accrue or arise in British India during the previous year. It was therefore suggested that in India as in England all assessment of residents in this country was on the accrual basis and the cash basis permitted under Section 13 was merely a method of arriving at the income. It was therefore contended that the assessee could only be assessed with regard to income which accrued to him, and as his business had come to an end, there could be no accrual of income from that source. Such a constr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chargeability laid down in Section 4 of the Act. In the first place, as I have already pointed out, these sections merely provide various heads under which different income is to be classified for the purpose of computation, and the definition of a head cannot possibly control the meaning of income as referred to in Section 4 of the Act. Further the very presence of a true residuary head under Section 12 makes it impossible for any income which falls under Section 4 to escape from falling under one of the heads under Section 6. Unfortunately the language used by the Privy Council in Probhat Chandra Barua v. The King-Emperor ([1930] 57 I.A. 228, p. 239) has afforded some basis to Sir-Jamshedji Kanga to raise an argument that Section 6 is the real charging section and that it is only that income which satisfies the conditions laid down in Sections 6 to 12 which is liable to tax under the Act. In that case their Lordships said that although Chapter I of the Act was entitled Charge of Income-tax, the real charging section was Section 6 which occurred in Chapter III. As I have already pointed out, in a later Privy Council case, Commissioner of Incometax, Bombay v. Chunilal B. Meht ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be carried on at or up to a particular point of time. Three possible constructions have been suggested at the bar: first, that the expression carried on by him merely connects the assessee with the business or, in other words, it is merely a paraphrase of his business, profession or vocation ; second, that it must be carried on at any time during the year of assessment; and, third, that it must becarried on at the time the profits or gains of the business or profession were received. It is rather difficult to accept the first construction because an assessee cannot carry on the business of anyone else except his own, and if the only object of the Legislature was to refer to, his business, the language used seems to be particularly inapt. But I see no reason to read in the expression carried on by him the words at the time the income, profits and gains are received. All that is required is that it must be a business which is carried on by the assessee in the previous year-the year under assessment. In this case, the business was carried on by the assessee in the previous year up to February 15, 1938. It is true that subsequent to February 15, 1938, for the rest of the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontentions of the assessee have received considerable support from the observations of Mr. Justice Rowlatt reported in two English cases, Bennett v. Ogston and Hillerns and Fowler v. Murray, and from the fact that in England the outstandings remaining to be collected by a professional man, after he has ceased to practise that profession, are not assessable to income-tax. The Privy Council has often sounded a note of warning against relying on English cases based on English income-tax statutes for the purpose of construing our own statute. As stated by their Lordships in Commissioner of Income-tax v. Shaw Wallace Co., the Indian Act is not in pan materia. English decisions are only helpful when they enunciate a principle which is wide enough to be applicable both here and in England notwithstanding the fact that the taxing statutes of the two countries are entirely different and are based upon technical rules which have very little in common. The reason why outstanding fees of a profession collected after its discontinuance are not taxed in England is that they are taken to be covered by the assessment made during the life of the profession as pointed out by Mr. Justice Rowlatt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent income, profits or gains within the meaning of the Act and liable to tax. It is not permissible in my opinion to extend the effect of this decision to mean that even if these two sums had been received as a result of the carrying on of the assessees' business still they would not have been liable to tax merely because that business had ceased at the time when these two sums were received. Strong reliance was placed by Sir Jamshedji Kanga on a judgment of Mr. Justice Din Mohammad of the Punjab High Court in B.C.G.A. (Punjab) Ltd., v. Commissioner of Income-tax, Punjab ([1937] 5 I.T.R. 279). In that case the assessee closed his business in 1931 as be suffered heavy losses. He accepted bonds in respect of moneys outstanding from some of the debtors. These bonds became time-barred in the accounting year, and the assessee claimed to set off those losses against the profits of another business which he was still carrying on. Mr. Justice Din Mohammad held that the assessee could not do so as he could not set off the losses of a discontinued business against the profits and gains of a current business inasmuch as Section 10 of the Income-tax Act dealt with businesses that were b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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