TMI Blog1950 (1) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... 938, or 30th June, 1939. The assessee contends that it is the former, while the Income-tax Commissioner maintains that it is the latter. There is no decided case on the point and the question has to be settled by an interpretation of the relevant provisions of the Act. The relevant facts are not in controversy and lie in a short compass. The assessee is the registered firm of Messrs. K. Srinivasan and K. Gopalan, Proprietors of The Hindu a daily newspaper at Madras. They were last assessed to tax in the year 1939-40 in respect of the profits of the previous year , the accounting year from 1st July, 1937, to 30th June, 1938. On 1st March, 1940, i.e., during the assessment year 1939-40, the assessee made over the newspaper business as a going concern to a private limited company incorporated under the Indian Companies Act, 1913, and styled Messrs. Kasturi and Sons Ltd. The company succeeded to the business of the firm on 1st March, 1940. When required by notice under Section 22(2) of the Indian Income- tax Act to submit a return of its income for the assessment year 1940-41, the assessee claimed that the firm was not liable to pay any tax on the income of the business of Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city by another person and, therefore, under sub-section (2) of Section 26 of the Act, the predecessor and the successor are, subject to the provisions of sub-section (4) of Section 25, liable to be assessed in respect of his actual share of the income of the previous year. Normally speaking, income-tax is assessable on the income of a period of 12 months. Under the Indian Income-tax Act, 1918, the basis of assessment was the income of the year of assessment and since that income could not be definitely known till the expiry of the year, the assessment was made on the basis of the income of the previous year and after the termination of the year when the actual income was known and ascertained, a final assessment was made on the actual figures and thereafter the consequential adjustments were made in the tax collected from the assessee. This system was altered by the Act of 1922. The final assessment is made under the Act on the income of a fixed period called the previous year , which is normally a period of 12 months ending on 31st March. The year of assessment is usually called the assessment year , and generally corresponds to the financial year . During the transitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (Third Edition), pp. 340 and 341]. The words previous year in Section 25(1) refer to the previous year of assessment in which the discontinuance occurs. This is made clear beyond dispute by the language of the clause. It states: Where any business, profession or vocation to which sub-section (3) is not applicable is discontinued in any year, an assessment may be made in that year on the basis of the income, profits or gains of the period between the end of the previous year and the date of such discontinuance in addition to the assessment, if any, made on the basis of the income, profits or gains of the previous year. The expression that year clearly means the year in which the business was discontinued. Under this clause the Income-tax authorities are empowered to add to the income of the previous year the income of the period between the end of the previous year and the date of such discontinuance and assess the total income. In other words, the normal rule of assessing for a period of 12 months is departed from and a cumulative assessment is authorised by the sub-clause of this section. In order to elucidate the meaning of this sub-clause an illustration may be given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lauses must receive a uniform construction. The normal rule of assessing the income of one year has no application to sub-clauses (1), (3) and (4) of Section 25, as these sub-clauses are intended to make a final settlement between the assessee and the Crown in cases where the business is either discontinued, or there is a succession to a business and it is for that reason a special period is provided in the three sub-clauses. On a consideration, therefore, of the scheme underlying the section and the object of enacting sub-section (4), I am inclined to hold that the previous year in sub-clause (4) is the previous year of the assessment year in which the succession had occurred, and, in the present case, it is the year ending on 30th June, 1938. It is not disputed that this was the view which obtained in the department, as is evidenced by the Income-tax Manual in force in the previous years, though the Manual was subsequently altered. I do not for a moment say that if the department wrongly interpreted the section in the first instance, it was not open to them to correct it later, but it is merely an indication as to how it was understood at the time the section was enacted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that is to say, its year of account, was a period of twelve months ending with the 30th June each year. In respect of the profits of the year of account ending with 30th June, 1938, the firm had been charged to income-tax for the assessment year 1939-40. On 1st March, 1940, a private limited company under the name and style of Kasturi Sons, Limited , formed by the partners, succeeded to the business as owners, the partnership having ceased to exist on that date. From 1st March, 1940, the same business has been carried on by the private limited company and its income has been assessed in the hands of the company. For the assessment year 1940-41 the Income-tax Officer charged to income- tax the profits of the firm earned during the previous year ending with 30th June, 1939. He decided that the profits from 30th June, 1939, to 1st March, 1940, were exempt from tax and he also treated, as required by the assessees, the profits of the period from 30th June, 1939, to 1st March, 1940, as the profits of the previous year ending with 30th June, 1939, on which, he held, that tax was payable. The Income-tax Officer purported to apply the provisions of Section 25(4) of the Act to the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 417. In order to arrive at a correct interpretation of Section 25 of the Act which has been amended by the legislature in view of the rulings of courts, it is legitimate to consider its history. Under the Act of 1918 income-tax was levied on the income of the current year, i.e., the year of assessment, taking the income of the previous year as a tentative measure. After the actual figures of profits were ascertained at the end of the year, adjustments were made in the next year's assessment and the excess tax was refunded or the deficiency collected as the case might be. The Act of 1922 introduced a change in this respect. Under Section 3 of that Act the income of the previous year is actually made the subject of the charge and the tax is levied retrospectively on the income of the previous year. Under the Act of 1922, a final assessment is made once and for all for every year on the income of a fixed period called the previous year . On the passing of the Act of 1922, the previous system of assessment was kept alive for one year by Section 68 of that Act, since repealed. The result was that for the year 1922-23, there were two assessments, one under the Act of 1922 on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India, that the expression discontinuance meant only a total cessation or extinction of the business and did not include the case of discontinuance of the business by the person formerly carrying it on as the result of a transfer or assignment of that business to another person who thereafter carried it on. See Meyyappa Chettiar v. Commissioner of Incometax [1943] 11 I.T.R. 247; I.L.R. 1944 Mad. 166 and Commissioner of Income-tax v. Polson [1945] 13 I.T.R. 384; L.R. 72 I.A. 196 (P.C.). With reference to cases of succession to a business it was provided by Section 26(2) of the Act as originally enacted in 1922, that the successor was liable to be assessed on the income of the previous year as if he had been carrying on the business throughout the previous year. In other words, the relief given by Section 25(3) in cases of discontinuance was not extended to cases of succession. In 1939 the legislature considered it desirable to extend the relief granted in the case of discontinuance, also to cases of succession, and with this object Section 26(2) was amended and Section 25(4) was added by the Amending Act of 1939. The result of the amendment of Section 26(2) and the introduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o cases, the assessee wants further relief by way of a substitution of the profits of the broken period of the year of discontinuance or succession in the place of the profits of the next previous year, and a consequent reduction of the tax, he has to give the revenue authority notice under Section 25(5) of this claim for further relief within the expiry of one year from the date of discontinuance or succession, as the case might be. It is significant that the notice under Section 25(5) is allowed to be given within one year of the discontinuance or succession in the case of a business whose profits had been charged under the Act of 1918, unlike the notice under Section 25(2) which is required to be given within 15 days of the discontinuance. The reason obviously is that in cases coming under Section 25(3), (4) and (5) the income of the broken period between the end of the previous year and the date of discontinuance or succession is not liable to tax at all. Both in cases coming under Section 25(1) and Section 25(3) and (4) the income of the previous year would be liable to tax in the normal course of assessment. In cases coming within Section 25(1) and (2) the profits of the brok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is with reference to a year of assessment that the previous year has to be understood and the definition in Section 2 (11)(a) correlates the previous year to the year of assessment. In the present case, the assessee was duly assessed to tax for the year of assessment which is the financial year 1939-40 on the income of his previous year ending with 30th June, 1938. The next assessment year was 1940-41 for which the previous year of the assessee would be the year ending 30th June, 1939. The assessee firm was carrying on business and earning profits during this previous year ending 30th June, 1939, and would normally be assessable to tax in the assessment year 1940-41 on those profits. The tax on the profits of the previous year is nowhere exempted. The firm was in existence and carrying on business from 30th June, 1939, till 1st March, 1940, when it ceased to exist and its business was transferred to a limited company. The profits of the year commencing from 30th June, 1939, and ending with 1st March, 1940, would be assessable to tax in the normal course of things for the assessment year 1941-42 but for the exemption in Section 25(4). There having been a succession, Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year in which the discontinuance or succession took place; and that the statutory definition of previous year in Section 2(11)(a) stands displaced in the context of Section 25(1), (3) and (4). He further argued that the provisions of Section 25(3) and (4) were exemptions from the liability imposed by Section 25(1) of the Act and the scope of the exemptions must be co-extensive with the ambit of the charging provisions found in Section 25, clause (1). Having considered the argument with the respect due to the learned advocate, I am of opinion that it should not prevail. In my view, though clauses (1), (3) and (4) are all found as parts of Section 25, they deal with different situations and must be construed according to the plain meaning of their respective enacted words. Section 25(1) deals only with a business whose profits had not been assessed to tax under the Act of 1918, while Section 25(3) and (4) deal with a business assessed to such tax. Section 25(1) has no application to a case of succession while Section 25(4) deals only with succession to a business. Section 25(3) is mainly concerned with the business, profession or vocation while Section 25(4) is conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of business and an accelerated assessment might well be taken to be the calendar year , consistently with the definition of the word year in Section 3(59) of the General Clauses Act. Section 25(1) makes a departure from the normal course of assessment and authorises an assessment without waiting for the advent of the normal assessment year in respect of the income of a discontinued business. The words previous year in Section 25(1) mean the year of account preceding the date of discontinuance. There is no need to read the words as meaning the year of account preceding the assessment year in which there was discontinuance or as meaning the previous year the profits of which have been assessed to tax . The words in addition to the assessment, if any, made on the basis of the income, profits or gains of the previous year in Section 25(1) would be meaningless unless separate assessments for each of the previous years before the date of discontinuance and the broken period from the end of the last previous year to the date of discontinuance were contemplated. The income of the previous year or years would be assessable under Section 3 subject to the limitation found in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of discontinuance or succession and there is nothing either in the object with which Section 25, clauses (3) and (4), were enacted or in the context of those provisions to convey a different interpretation of the words previous year or to warrant my reading the words previous year as the last previous year the profits of which have been assessed to tax as the Tribunal has done. The legislature used the expression the period from the expiry of the last previous year of which the income has been assessed in Section 24A and the same expression would have been used in Section 25 (1), (3) and (4) also, if the intention was to enact a provision having the same meaning and effect. The interpretation sought to be put upon Section 25(3) and (4) by the assessee would lead to anomalous results and give a different measure of relief to persons falling within the same category according as their assessments are delayed or brought up to date. If, for instance, the business profits of a person who had been assessed to tax under the Act of 1918 had not been assessed for two years prior to the date of discontinuance or succession, and the assessee thereafter discontinues the business or t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
