TMI Blog1964 (9) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... s in this venture during the years 1948, 1949 and 1950. Its share of loss was from time to time debited to the account of the assessee-company in the books of Messrs. Chinubhai Jesingbhai and corresponding credit entries were made in the books of account of the assessee-company in favour of Messrs. Chinubhai Jesingbhai. The business of disposal of cloth ceased in 1950 and at the end of 1951, the amount payable by the assessee-company to Messrs. Chinubhai Jesingbhai came to ₹ 58,624. Thereafter, interest amounts were credited to this account from time to time and some payments also were made. In 1956, the assessee- company gave a cheque for ₹ 5,000 in full settlement of the claim of Messrs. Chinubhai Jesingbhai. That cheque, however, was not cashed and ultimately in February, 1958, the assessee-company paid ₹ 5,000 in full settlement of the debt due by it and thereafter the balance of ₹ 54,172 was transferred to its profit and loss account. On these facts, the Income- tax Officer, relying on sub-section (2A) of section 10, brought to tax a sum of ₹ 18,401 as deemed profits of business, having accrued or arisen to the assessee-company in the year 1958. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arisen during the previous year. Now, no profit from business can accrue or arise during a period unless the business is carried on during that period. The deeming of accrual, therefore, necessarily presupposes the deeming of the business being carried on during the year. The question whether the amount of ₹ 18,401 brought to tax was rightly assessed or not turns on the construction of sub-section (2A) of section 10. Section 10 provides 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:.... (2A) Where for the purpose of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and, subsequently during any previous year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Lords in British Mexican Petroleum Company Ltd. v. Jackson [1932] 16 Tax Cas. 570, where Lord Macmillan observed that he could not conceive how the extent to which a debt was forgiven could become a credit item in the trading account for the period within which the concession was made. Sub-section (2A), however, does away with this principle and provides that the amount of remission or cessation should be taxed as profits of the year when such remission or cessation is made. But the sub-section applies only if, (1) an allowance or deduction has been made in the computation of profits and gains in the assessment of any year, and (2) subsequently, during any previous year, the assessee has obtained some benefit in respect of trading liability by way of remission or cessation. By the use of the words the amount received by him or the value of the benefit accruing to him shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year , the sub-section enacts a fiction where under the amount received by an assessee or the value of the benefit from remission or cessation is to be regarded as profits or gains of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits must be profits arising from business which was carried on by the assessee during that previous year or at least part of that year. he also contended that the only fiction that was enacted by sub-section (2A) is that the remitted amount is to be deemed as profits or gains and that such remitted amount is to be deemed as arising or accruing from such business during the year of remission or cessation. But, according to him, the fiction does no more than that and does not create a further fiction that the business was in existence or is to be deemed to have continued during that year. In support of his contention, Mr. Kaji urged that as the legislature had not extended this fiction, it had to provide while enacting section 41(1) of the 1961 Act that the remitted amount is to be treated as profits, whether the business in respect of which the allowance or deduction has been made is in existence in that year or not. According to Mr. Kaji, this clearly shows that the deeming provision in sub-section (2A) did not extend to a further fiction that the business must be deemed to be in existence and that the language of sub-section (2A) does not permit such extension. As a second bra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he terms and conditions relating thereto, or any person holding an agency in the taxable territories for any part of the activities relating to the business of any other person, at or in connection with the termination of his agency or the modification of the terms and conditions relating thereto is to be deemed to be profits and gains of a business carried on by the managing agent, manager or other person, as the case may be, and shall be liable to tax accordingly. He argued that, unlike sub-section (2A), the legislature has extended here the fiction by making compensation as deemed profits and also by that fiction laid down that such profits or gains shall be regarded as profits and gains of a business carried on by such person during the previous year when such compensation is paid. The learned Advocate-General, on the other hand, countered these arguments by arguing that what sub-section (2A) provides is that where an allowance or deduction has been made in the assessment of any year in respect of any expenditure or trading liability for computing profits or gains under this section and subsequently during any previous year the assessee has received any amount in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der clause (vii) in respect of them and the second proviso to that clause also did not come into operation. He referred to us the passage in that judgment at pages 272 to 273 where the Supreme Court has observed that under section 10 tax was payable by an assessee in respect of the profits or gains of any business, profession or vocation carried on by him . Business was defined by section 2, sub-section (4), as including any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture , and that the fundamental idea underlying each of those words was the continuous exercise of an activity and the same central idea was implicit in the words carried on by him occurring in section 10(1) and those critical words were an essential constituent of that which was to produce the taxable income. Therefore, tax was payable only in respect of profits or gains of the business which was carried on by the assessee. As regards proviso (2) to clause (vii) of sub-section (2), the Supreme Court observed that that proviso made the excess of sale proceeds over the written down value of any such machinery or plant to be deemed to be profits of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the course of winding up of the assessee's business after the business had been stopped. On these facts, the Supreme Court held that on the assumption that the assessee's business closed down on August 28, 1945, all the conditions necessary for the allowance under clause (vii) were fulfilled and the assessee was entitled to the allowance claimed, the business was carried on by the assessee in accordance with sub-section (1), the machinery or the plant had been used for the purposes of the business as provided for in clause (iv) of sub-section (2), the sale took place during the year of account and the loss was brought into the books of the assessee and written off as provided by the first proviso to clause (vii) of sub-section (2). There was no other condition to be found in the section or in the Act which remained to be complied with. The Supreme Court held that there was nothing to show that the business of the assessee should have been carried on for the whole year or that the machinery or plant should have been used for the whole of the accounting year or that if the assessee worked only for a part of the year and then sold out, the loss that he incurred was not a bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly, i.e., as profits of a business. He stressed in particular the expression a business in the deeming clause, and contended that the words a business were significant because there could be no business carried on by persons in clauses (b) and (c) at any rate and, therefore, the sub-section had to have a notional business in respect of which compensation is deemed to be profits. The notional business thus has no relation with any factual business as there can be no factual business by persons falling in categories (b) and (c) and, therefore, the requirement of sub-section (1) which envisages an actual business can have no application. In our view, the entire question really turns on the extent of the fiction enacted in sub-section (2A). Since there is no direct authority on sub-section (2A), we have to turn to the language of the sub-section and ascertain what the sub-section deems. Section 10 provides for computation of tax 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 an assessee. It is clear from this language that in order that the section may apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that it accrued during the year of remission or cessation, it cannot be taxed for that particular year. But it would seem that beyond these two fictions, the sub-section does not go further and provide that in a case where the business is discontinued before the commencement of that previous year, i.e., the year of remission or cessation, it shall be deemed to have continued during that year notwithstanding its discontinuance. In ascertaining the scope and the meaning of the deeming provision in sub-section (2A), some guidance can no doubt be had from the other clauses of the section. As already stated, clause (vii) of sub-section (2) provides for allowance where, in the case of a building, machinery or plant which has been sold, the amount by which its written down value exceeds the amount for which it is sold. The second proviso of that clause, however, lays down a deeming provision whereby it is provided that where the amount at which such building is sold, whether during the continuance or after the cessation of the business, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess was under liquidation, it would not be appropriate to hold that the profits or gains earned by the sale were in respect of the business that was being carried on by the assessee. The second condition that attracts the second proviso is implicit in the adjective such preceding the building, machinery or plant sold . That adjective such refers back to clauses (iv), (v), (vi) and (vii) of section 10(2). Under clause (iv), an allowance is allowed in regard to any premium paid in respect of insurance against risk of damage or destruction of buildings, machinery, plant, etc., used for the purposes of the business. Similarly, clauses (v), (vi) and (vii) refer to such buildings, machinery, plant, etc., that is to say, such buildings, machinery and plant used for the purposes of the business. The result, therefore, is that the second proviso would only apply to sale of such machinery which was used for the purposes of the business during the accounting year. At page 257 of the report, the Supreme Court referred to its earlier decision in Commissioner of Income-tax v. West Coast Chemicals and Industries Ltd. [1962] 46 I.T.R. 135 (S.C.) and stated that though that case did not turn u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the paramount requirement of sub-section (1), namely, the necessity of an assessee having carried on business during the previous year, in the present case the year of remission or cessation of the trading liability. That decision as also the decision of the Madras High Court explain the scope of the fiction and though they are decisions under clause (vii) of sub-section (2), the language of the fiction in the second proviso to that clause being similar, they would assist in construing the deeming provision in sub-section (2A). In our view, the deeming provision merely lays down that the value of the benefit derived as a result of the remission or cessation is deemed to be profits and such profits are deemed to have accrued in that previous year. But there is no further deeming provision therein which lays down that though the business is discontinued, it shall be deemed to have been carried on during such previous year. As regards the submission made by the learned Advocate-General on sub-section (5A), it is possible to agree with him to the extent that clauses (a) to (d) therein seeks to assess four different units and two at least of them in clauses (b) and (c) would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-section (5A), had to use the words a business carried on by the managing agent, etc. Sub- section (5A), therefore, treats such notional business as business carried on as required by sub-section (1) and, therefore, that sub-section, instead of being treated as an independent provision or as an exception, must be regarded as falling under sub-section (1) and governed by the paramount requirement therein provided, namely, of a business having been carried on during the accounting year. In the view that we are inclined to take, sub-section (2A) has to be read as governed by the condition laid down in sub-section (1). We find some support for this conclusion from sub-section (1) of section 41 of the 1961 Act, which provides that the amount obtained by an assessee or the value of the benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. Section 41(1) includes two changes from the old sub-section (2A), (1) it introduces chargeability, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous year means in respect of any separate source of income, profits and gains, the twelve months ending on the 31st day of March next preceding the year for which the assessment is to be made, or, if the accounts of the assessee have been made up to a date within the said twelve months in respect of a year ending on any date other than the said 31st day of March, then, at the option of the assessee, the year ending on the date to which his accounts have been so made up. We find from the returns filed by the assessee-company that the company had in fact exercised its option and had fixed the previous year ending on December 31, 1958, in other words, it had already exercised the option, while filling in the returns, for its previous year, namely, the calendar year 1958. That being the position, the proper assessment year would be 1959-60. But the original returns as also the revised returns were not made part of the statement of the case, but Mr. Kaji agreed that they can be brought on record, and by consent of the parties have been made part of the statement of the case. We find from the original returns filed by the assessee-company on October 5, 1959, that the company had ..... X X X X Extracts X X X X X X X X Extracts X X X X
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