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TMI Blog1957 (9) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 conferred 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-done 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. 3. Since the decision of the Tribunal, their Lordships of the Supreme Court, in United Commercial Bank Ltd. v. Commissioner of Income Tax decided on the May 23, 1957, have held that income from interest on securities which are held as the stock-in-trade of a business is taxable under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s double taxation of the same income to the limited extent that the section prescribes. The relief took the from 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 exception, k the essential first condition was : "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". 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 charge 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 der ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the head "profits and gains of a business, profession or vocation", but the income, profits and gains of a business, profession of 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 it stock-in-trade; and if there was, for example, an agreement to share the profits of the business, there can be title doubt that for the purpose 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 44. Section 26, sub-section (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 whom 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness 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 f1922 were (iv) Business and (v) Professional earnings. Therefore, when section 25, sub-section (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 the two heads which I have just referred to. 8. Mr. Palkhivala next urges that the exemption attaches to business and is not conferred on an assessee; and from this, he seeks to argue that whatever the nature of the income of that business and under whichever head it is taxed, it attracts the exemption. Now, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpted founder section 25(3) is income falling under that head or heads. But then Mr. Palkhivala argues that, in any event, the head is "Profits and gains of business, profession or vocation" and not "Income, profits and gains of business, profession or vocation." This argument appears to me to have no substance in it, because any one familiar with the history of Income Tax law knows that the words "income, profits and gains" do not in any manner add to what is taxable under the head "income". In commissioner of Income Tax v. Show Wallace & Co. Sir gorge Landaus, delivering the judgment of the Privy council, pointed out : "The object of the Indian Act is to tax 'income', a term which is does not define. It is expended, no doubt, into 'income, profits and gains', but the expansion is more matter of words than of substance." 10. Therefore, it seems to me file to draw a distinction between "profits and gains "and" income, profits and gains." But, in any event, so far as section 25 (3) is concerned, there is absolutely no doubt that the words "income, profits and gains" are used in relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Income Tax law, the Legislature would proceed to invent a new classification of the purpose of such exemption ? In my opinion, it would be reasonable to assume that the classification would be adhered to and the exemption conferred on any class or classes of that income. However, it appears to me that strictly speaking, it would be more correct to say that the "income, profits and gains" so a business, profession or vocation which is exempt under section 25(3) is such income as understood in the Income Tax Act rather than says that it is income under the head "Profits and gains of business, profession or vocation." No doubt this would bring in the head of income but it would also bring in general exemptions such as donations to charity under section 15B. 16. The primary principle of construction of any statute is that the language used in it must be interpreted and understood in the context of that Act, and when it had meaning in that cortex which happens to be different from its normal meaning, or its commercial meaning, or its legal meaning in other contexts, the meaning in the context of the Act must not be discarded unless there are compelling reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n securities which were its stock-in-trade, they will be taxed as separate heads of income and not as profits of the business although the income from property and interest on securities would be taken into account in arriving at the profits in a commercial sense. These are illustrations of case where the profits in the Income Tax sense of a business, profession or vocation are less than the profits in the commercial or legal sense. 17. Turning next to a few illustrations where the profits under the Income Tax law are larger than the profits in the commercial sense or the legal sense, expenses incurred by a business may be disallowed in the computation of income for various reasons, for example, if a bonus was paid to the employees, it would be allowed under section 10(2)(x) only to the extent to which it is reasonable and the rest will be disallowed; whilst it the commercial sense the entire bonus would be allowed. similarly, an expenditure by a business may, in the commercial sense, by treated as revenue expenditure and debited gains the profits, whilst the Income Tax authorities may treat it as capital expenditure and not allow its debit against the profits. Similarly, bad debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He says that it we adopt that vies, what was exempt from tax at any given time may attract tax at another time of the legislature chooses to alter the law. Taking one example Mr. Palkhivala said that income from dividends from shares which were the stock-in-trade of a business were held to be taxable by a Division bench of this court in commissioner of Income Tax v. Ahmuty & Co. Ltd., under the half "profits and gains of business" and, therefore, such income would age been exempt from tax under section 25(3) so long as the law remained as laid down in that case. But by the Finance Act of 1955 Parliament has amended section 12, which is the residuary section, and specifically provided in section 12, sub-section (1A), that dividends shall be taxable under the head "other sources"; with the result that thereafter, for the application of section 25(3),income from dividends, although the shares may be held by the business as its stock-in-trade, cannot be exempted under section 25(3) if the view canvassed for by Mr. Joshi is adopted. This, no doubt, is true; but section 25(3) does not guarantee any fixity as to what shall be included, at the time when there is a disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down that section 25(3) confers a benefit in respect of the income, profits and gains which fall under the head "profits and gains of business, profession or vocation" and that is the case of Gopi Mohan & Sons v. Commissioner of Income Tax. In that case, the assessee had claimed exemption in respect of its income from property and the Income Tax authorities had held that section 25 (3) did not apply so as to confer any such exemption. In upholding this view of the Income Tax authorities, their Lordships, in their judgment, observed : "...the matter is placed beyond any doubt, if reference is made to section 6 and the following sections of the Income Tax Act. That section divides the various sources of income chargeable under the Income Tax Act under five heads enumerated in the section. 'Income from property' has been described separately and put under a different head from 'Profits and gains of business, profession or vocation'. The method of computation of income from property has been laid down in section 9, while that for the computation of income from business, profession or location has been described in section 10. From this it is clear that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits as understood in the Income Tax Act. But, as I have pointed out earlier in my judgment, there will be numerous cases in which the profits of a business, profession or vocation brought to tax will be higher than the commercial or legal profits, and in those cases the construction canvassed for by Mr. Palkhivala would in those cases the construction canvassed for by Mr. Palkhivala would only yield an exemption in respect of part of the income brought to tax and not the whole. Moreover, in the view that I take of the language of section 25(3),I am not prepared to hold that without violence to that language the section can be construed in the manner in which Mr. Palkhivala wants us to construe it. 24. The result, therefore, is that, in my opinion, the question that we have reformed should be answered in the negative. S.T. Desai, J. 25. I had the advantage of reading the judgment just delivered by my learned brother Tendolkar, J., and have given it careful consideration. It is with the greatest reluctance That am unable to agree with his view. This reference raises a rather important and interesting question as to the extent of relief that an assessee can claim where a bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade of the assessee's business interest on those securities could be considered as profits and gains of the bossiness under section 10. The further contention was that even if the income from securities help as stock-in-trade could be assessed under a separate head by virtue of section 6(iii) and section 8 as urged on behalf of the Department that distinction had no bearing when a question arose under section 25 as to what was the income, profits and gains of the discontinued business of an assessee. The Income Tax Officer and the Appellant Assistant Commissioner decided against the assessee. 27. When the case was carried in appeal to the Tribunal there was a difference of opinion between the two members constituting the Bench. The Account 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 and fell under section 10. He also stated that even if it may be held for any reason that interest on such securities had to be treated as income assessable under section 8 it would still from part of the income profits and gains of the assessee's business under section 25 (3),and the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present contention of the assessee. True they are are not made in the self-same context and thy cannot be read as directly leading to any conclusion we are asked to reach. The question of the true meaning and import of section 25(3) remains to be decided by us and I shall refer to those general observations later on in my judgment as pointers and as instructive of the true approach to the question. 30. It has been contended before us by Mr. Palkhivala, learned counsel for the assessee, that the case clearly falls under section 25(3).It is said that the assessee's business had admittedly been charged under the Act of 1918 and admittedly that business is discontinued and, therefore, no tax is payable in respect of the income, profits and gains of that Business for the period between the end of the previous year and the date of such discontinuance. Briefly stated the argument is that on a plain reading of the section the exemption granted by section 25(3) must extend to the whole income, profit an gains of the assessee's discontinued business and no notions of the mode lot method adopted for the purpose of charging Income Tax under the various heads of income enumerated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been pointed out that in the case of section 44 and 26A it is obviously not possible to give any restricted meaning to those expressions. Reliance is also placed by counsel on the rule of construction that an exemption in a taxing statute must be liberally construed. 31. It is contended on the other had by Mr. G. N. Joshi, learned counsel appearing for the Revenue, that the crucial words are the initial words of sub-section (3) : "Where any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income Tax Act, 1918" and that these words must be construed as referable to the head of "Profits and gains of business, profession or vocation" mentioned in section 6(iv) and dealt with in section 10. Reliance is also placed on the language of section 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", and section 8 : "The tax shall be payable by an assessee under the head 'Interest on securities' in respect of interest receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutes is the rule of contraction ex visceribus actus. The court is bound to see that every proviso of a statute is contoured with reference to the context and the other provisions of the statute. The court is entitled and even bound, as far as possible, to see that the interpretation it puts on a particular provision makes a consistent enactment of the whole statute. In applying these rules the court has to remember what has so often been emphasised that as far as possible nothing can be read and nothing can be implied in a thing statute. On can be read and nothing can be implied in a taxing statute. One can only look fairly at the language used. The indispensable starting point and the first step in the case of any provision of the nature before us is to examine the words of the particular provision under consideration, of course, bearing in mind that it is not a detached enactment but one forming a connected scheme. Another rule having bearing on interpretation of a provision relating to exemption with which we are concerned is that the provision must, as far as possible, be liberally construed and in favour of the assessee, provided no violence is done to the language used. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng permissive, but the purpose of it is obvious, viz., making sure of not losing the tax of a business which is closed and wound up. It the construction sought to be placed on behalf of the Revenue on sub-section (3) is to be accepted, and if the identical expressions "business, profession or vocation" and "income, profits or gains" of the discontinued business are to the given the same sense in sub-section (1) and sub-section (3), this option given to the Income Tax Officer to tax the income, profits or gains of a discontinued business in the year of discontinuance, permits him only to tax such part of the total income, profits and gains of that business as strictly fall under the head of "profits and gains of business" mentioned in section 6(iv) and section 10 and debars him during the year of discontinuance from taxing any interest on securities received by the assessee even though the securities were the stock-in-trade of his business. This sub-section, of course, does not apply to the present case, but I have made reference to it at this stage only for the purpose of showing the object and scheme of the whole section. 35. Sub-section (2) is an ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have the same meaning. In answer to me, learned counsel for the Revenue stated that the construction urged by him of the relevant expressions in sub-section (3) must be the same as that to be put upon the identical expressions used in sub-section (4). 38. To turn to the language so sub-section (3). Considerable stress has been laid by Mr. Joshi on the word "charged" in the initial part of this sub-section. The argument for the Revenue here was that the business which is exempted from Income Tax can only be a business which was "charged" to payment of Income Tax under the Act of 1918. The crucial word it was said was "charged". The scheme of the Act of 1922 is that profits and gains of a business are "charged" separately under section 10 : And these profits and gains, as has now been laid down by the Supreme Court, cannot include interest on securities which must be charged under section 8. Therefore, income, profits and gains of any discontinued business for which exemption is climbable does not mean anything more than profits and gains of that business strictly chargeable under section 10. The accent was on the word "charged" whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al sense of that expression but with the technical meaning given to it when profits and gains of a business are charged to tax under section 10 and by virtue of section 6(iv).It could not be denied and in business to learned counsel for the applicant I must add that it has not been denied that we are asked to incorporate in section 25(3) and the word "business" used in the sub-section, the concept underlying section 6 which deals with heads of income chargeable to Income Tax and the restricted meaning attributable to the words "profits and gains of any business" in section 10. But it was said that you must read section 25(3) in the context of Income Tax law and you cannot, therefore, read section 25(3) without reference to section 6 and section 8 and 10 and without bearing in mind the scheme of the whole Act. I agree that while interpreting section 25 the court must bear in mind the scheme of the Act. I also agree that the sub-section must be eras ex antecedentibus et consequentibus. 41. The scheme of the Act has been reviewed in numerous decisions. I shall refer to the latest decision of the Supreme court in United commercial Bank Ltd. v. commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argeable to Income Tax. It says as under : Section 6 : "Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to Income Tax in the manner hereinafter appearing namely :- (i) Salaries. (ii) Income on securities. (iii) Income from property. (iv) Profits and gains of business, Profession or vocation. (v) Income from other sources. (vi) Capital gains." 45. The two heads (ii) and (iv), i.e., "Interest on securities" and "Profits and gains of business", are dealt with under sections 8 and 10 of the Act respectively. According to the scheme of the Act Income Tax has to be charged in respect of the "total income" of the previous year of every assessee and "total income" is defined under section 2(15) to comprise all income, profits and gains from whatever source derived subject to certain exemptions. Chapter 3 which is entitled "taxable income" comprises sections 6 to 17 (both sections inclusive). Section 6 enumerates the various heads of income, profits and gains which are chargeable to Income Tax. Each of these heads of income, profits and gains is dealt with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion pressed before us by Mr. Palkhivala that there is no warrant for introducing in section 25(3) the concept whereby distinction has for purposes of computation of income to be made between interest on security on the one hand and profits and gains of a business on the other. Learned counsel for the assessee was right when he said that the language of the sub-section does not import any head of income chargeable to Income Tax and the sub-section deals only with exemption from chargeability. Section 10 as now held by the Supreme Court is not a charging section but deals with computation of income under the particular head. It is extremely difficult for me, therefore, to accede to the argument urged on behalf of the revenue that the meaning and scope of the expression "business" in sub-section (3) must be confined strictly to what it bears when you deal with the head of "profits and gains of business, profession or vocation" mentioned in section 6(iv) and section 10. This meaning, it was strenuously urged by Mr. Joshi, followed, if section 25(3) was not read by itself but in the context of other relevant provisions of the Act. I need not repeat the general obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us circumstances such as previous legislation and decided cases; (ii) the internal evidence derived from the statute itself. The identical expressions in section 25(3) with which we are concerned in this reference are used in sections 26 and 44. Section 26 deals with change in constitution of a firm carrying on any business. I need not set out section 26(1) but shall only observe that the income, profits and gains of a firm carrying on any business contemplated there must include the total income of the bossiness of the firm regardless of any consideration of any head of computation. That income for instance can be the aggregate of profits and gains of the business, interest on securities forming part of the stock-in-trade of the business and also income from property belonging to the business. Section 26(2) is as under : "Where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person, such person and such other person shall, subject to the provisions of sub-section (4) of section 25, each be assessee in respect of his actual share, if any, of the income, profits and gains of the previous year." 51. Prior to the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent had been succeeded in carrying on the business by the company, each of them became assessable in respect of his actual share, if any, of the income, profits and gains of the previous year." 55. The scheme of the amended sections 25 and 26 was considered by their Lordships of the Supreme Court in Executors of the Estate of J. K. Dubash v. Commissioner of Income Tax. At page 185 of the report Kania, C.J., observed : "Section 25 of the Indian Income Tax Act, 1939, gives certain concessions in respect of a business where tax had been paid by the person carrying the business under the provisions of the Indian Income Tax Act, 1918." 56. After stating the material part of sub-section (4) his Lordship observed : BCED "The scheme of section 25 read with the provisions of section 26(2) appear to be to give relief, inter alia, to persons who were carrying on business is 1921 and had been taxed on their income under the Income Tax Act of 1918. By a change effected by the Income Tax Amendment Act of 1922 they were subjected to taxation twice on the income of 1921-22. The relief is intended against this levy of tax twice over." 57. In the same case Patanjal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have gratefully referred to them as they throw considerable light on the question of construction that has arisen for our decision. 59. Now it is to be noted that the amendments in sections 25d and 26 were brought about by the same Amending Act of 1939. Sub-section (2) was added in section 26 and sub-section (4) was added in sectioned 25. Not only that but at the same time some amendment was also made in section 25(3). The Legislature must be taken not only to have been cognizant of the general character and scope of section 25 as it them stood. But also to have been fully apprised of the presence in it, and of the significance of the expressions "income, profits and gains and "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." It did not make any verbal change but on the contrary adopted the phraseology of section 25(3) in section 25(4) except that since the same relief which was granted by section 25(3) was to be given in case of succession the sub-section (4) had to bring out clearly that the exemption was given to the person whose business was succeeded. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) does not require to be stressed. It was not disputable and it has not been disputed before us that the liability of members of a firm whose business is discontinued is in respect of the total income, profits and gains of that business regardless of the heads of income chargeable to Income Tax. Considerations which apply to second 25 and 26 in the present context are also applicable to sections 25 and 44. 61. There is one more facet of this question. The heads of income chargeable to Income Tax on which so much stress is laid on behalf of the Revenue, have varied at different times since 1918. I do not deem it necessary to examine these changes in any detail and will refer only to one head of income. Prior to the amendment of section 12 by the Finance Act of 1956 income from dividend from shares which were the stock-in-trade of a business was all along held to be profits and gains of the business under section 10. By amendment made in 1955 dividends now fall under section 12(1A) as one of the "other sources" dealt with by section 12. Mr. Palkhivala has relied on this amendment in support of his arguments. In my opinion this is an additional consideration which cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject-matter of section 25(3). Section 25(4) in terms speaks of the person. Considerable support is to be derived for this proposition from the observations of the Privy Council and of Kania, C.J., which I have already quoted before. The liability of that person, natural or artificial, to pay the tax is founded on sections 3 and 4 of the Act. Therefore, when you consider a provision which exacts that the liability is exempt in case of discontinuance of the business carried on by that person in respect of the terminal period, you have to go to those sections to see what that liability was which attracts the exemption .The fundamental position was brought out in bold relief in the House of Lords case of Whitney v. Commissioners of Inland Revenue where Lord Dunedin, speaking with accredited accuracy as to these tax cases, stated : "Now, there are three stages in the imposition of a tax : there is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment, that ex hypothesi, has already been fixed. But assessment particularizes the exact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essed on behalf of the Revenue. Words of limitation are not as a rule to be read into a statute unless the subject-matter or context so requires. We are not dealing with any sweeping general words but and expression of ample legal content. We are asked to acquiesce in a non-legal constriction which limits the operation of the sub-section, so as to make the exemption given by it, not commensurate with the income, profits and gains of a business, as understood in the legal sense and as understood in other cognate provisions and provisions having interaction. It is not permissible in case of a provision of the nature under consideration, therefore, to read into it words by implication and make it smaller than what its terms express. Considerations grounded on the scheme of the Act, the scheme and object of section 25(3),the principle of cogency which requires that relevant provisions of an enactment must as far as possible be read so as to harmonize them and other considerations which I have already discussed, are in my judgment abiding grounds for construing section 25(3) as exempting the income, profits and gains of a discontinued business, without excluding from such income, profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gathered from numerous decisions. I shall quote one passage from the judgment of my Lord the Chief Justice (Chagla, J., as he then was) in In re Kamdar where reference was made to the leading cases on the point : "In commissioner of Income Tax v. Shaw Wallace & Co. Sir George Lowndes delivering the judgment of the Privy Council defined 'income' as a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources. He likened 'income' pictorially to the fruit of a tree, or the crop of a field. He further points out that the expansion of 'income' into income, profits and gains is more a matter of words than of substance. In Gopal Saran v. Commissioner of Income Tax, the Privy Council went as far as saying that anything which can properly be described as income is taxable under the Act unless expressly exempted. Lord Wright in the Judgment of the Privy Council in Kamakshya Narain Singh v. Commissioner of Income Tax, appreciates the difficulty of defining 'income' and concedes that it is perhaps impossible to define it in any precise general formula, but he says that it is word of the broa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ambit of section 25 and the words "income, profits and gains" there used must also be read to mean no more than the profits and gains of a business in the same restricted sense. How fragile this argument is, can be seen when one reads section 25(1) which says : "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." 69. It is not disputable that the income, profits and gains of discontinued business must mean the same thing in sub-section (1) and sub-section (3). As I have already pointed out an accelerated assessment may at the option of the Income Tax Officer be made in respect of the income, profits and gains of a discontinued business under sub-section (1) unless sub-section (3) is applicable. Is this assessment to be confined only to profits and gains of the business in the restricted sense of section I0 or is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r on principle land in the light of judicial pronouncements instructive of the principle but without reference to any authority on the construction of section 25(3) . I there any authority which compels me to refrain from giving effect to the conclusions at which I have come ? 72. I can find none in those that have been cited to us. The one more relied upon by Mr. Joshi was Ambalal Himatlal v. Commissioner of Income Tax. The headnote to the report is not accurate and does not going out the ratio disdained of that case. Mr. Joshi has relied on certain observation from the judgment of my Lord the Chief Justice and my learned brother Tendolkar, J., in that case. Now the way I approach any Income Tax matter is that it should be my endeavour to appreciate and respectfully follow any direct observation made by this court in another decision when I see that it was the reason which induced the court to reach a conclusion. It is true that there is one observation made in that judgment which at first blush may seem to lend some support to the contention urged on behalf of the Revenue. But when you read that observation in its context you find that it was made only in refutation of an argume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, there was really an endeavour to introduce the concept and language of Section 10 in the ambit of section 25(4). The contention was negatived as ingenious and the court declined to accept the interpretation of section 25(4) urged by the assessee which would have led to absurd results. In the course of his judgment the learned Chief Justice in examining the novel contention of the assessee, that he was exempted from payment of tax in respect of all the three distinct and separate businesses even though two of them did not even exist prior to 1922, observed at page 285 of the report : "If that was the policy of the Legislature it is difficult to understand why relief should be given to a person whose business is succeeded to in respect of not only that business but also in respect of all sources of income." 73. Then in proceeding to examine the argument which sought to introduce the concept underlying the words "any business" in section I0 and in section 25(4) the learned Chief Justice observed : "If we were satisfied that the Legislature intended to use the expression 'income, profits and gains' not only for the purpose of indicating the prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to state that I would have dutifully and respectfully founded myself on the above decision if the ration of it was as suggested on behalf of the Revenue. But that ration clearly is different as I have pointed out above. If the observations are read in the context of the submission and the line of argument followed on behalf of the assessee in that case, and they must be so read, if I may respectfully make the observation, there is nothing in that decision from which the Revenue can derive any support. The case is clearly distinguishable. 77. The other decision relied upon by Mr. Joshi was Gopi Mohan and Sons v. Commissioner of Income Tax. The facts in the reference before the Allahabad High Court were that a certain Hindu undivided family which was assessee in respect of its income from property became divided in the previous year relevant to the assessment year 1941-42. It was held that there was a partition in the family as from January 31, 1942. An application was made claiming relief under section 25(3) and it was rejected. If was not in dispute that the Hindu undivided family was assessed under the Act of 1918 but the assessment was made only in respect on income of the prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istinguishable. 79. For the reasons I have given I would answer the question in the affirmative. S.R. Tendolkar, J. 80. As my learned brother and I are not agreed as to the correct answer to the issue which we have re-framed, the case would be heard by one or more of the other Judges of the High Court as the Chief Justice may direct under the proviso to section 66A of the Income Tax Act. Costs of the reference before us will be costs in the reference to be so tried. 81. [The reference came before K. T. DESAI, J., who delivered judgment on December 17, 18, 1958.] K.T. Desai, J. 82. Messrs. Chugandas and Co., (Securities), Bombay, a registered firm, hereinafter referred to as "the assessee", was a dealer in securities. Securities constituted the stock-in-trade of its business. It received a sum of ₹ 4,13,992 as and by way of interest on securities during the accounting year 1946, the assessment year being 1947-48. The assessee firm was dissolved on June 30, 1947. It received a sum of ₹ 1,01,229 during the accounting period January 1, 1947, to June 30, 1947, the assessment year being 1948-49, as interest on securities. The business carried on by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of section 25(3), which have given rise to the controversy, run as follows : "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 sub-section (4) have been rendered applicable no tax shall be payable in respect of the income, profit and gains of the period between the end of the previous year and the date of such discontinuance, 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 on such assessment, a refund shall be given of the difference." 86. The applicant contends that when the Legislature used the words "any business, profession or vocation on high tax was at any time char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose under the present section 10. 87. Having regard to the decision of the Supreme Court in the case of United Commercial Bank Limited v. Commissioner of Income Tax the present position in law is that where an assessee derives income, profits and gains from a business carried on by him, such income, profits and gains may have to be shown under the various heads. If securities constitute the stock-in-trade of his business, interest received in connection with those securities would have to be shown separately under the head "Interest on securities" covered by section 8 of the Act of 1922. If the business consisted of purchase and sale of houses, the income derived from such houses would have to be shown separately under the head "Income from property" under section 9 of the Act of 1922. If shares of joint stock companies constitute the stock-in-trade of such business, the dividend income derived therefrom would have to be shown separately under the head "Income from other sources" under section 12 as it now stands after the amendment made in the year 1955 and it is only the residue which may remain thereafter which would have to be shown under the hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd gains of the previous year exceeding the amount payable on the basis of such assessment, a refund shall be given on the difference", the Legislature was referring to the income, profits and gains of such business liable to be shown under each one of the aforesaid four heads under the Act of 1922. 88. In order to adjudge which of these rival contentions is correct, it is necessary to look fairly at the language used by the Legislature in section 25(3) itself. That section speaks of "any business... on which tax was at any time charged under the provision of the Indian Income Tax Act, 1918." It is common ground that a business was not a unit of assessment under the Indian Income Tax Act of 1918. What the Legislature intended to convey was any business, on the income, profits and gains thereof tax was at any time charged under the Indian Income Tax Act of 1918. Section 2(4) of the Indian Income Tax Act of 1922, lays down that unless there is anything repugnant in the subject or context, the expression "business" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The expression "busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod", it refers to all the income, profits and gains made in connection with the activity styled business in that section. When the Legislature uses the further words "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 he differences", the Legislature there again is referring to all the income, profits and gains of the activity termed business in that section. It seems to be a far-fetched construction of that section to say that what the Legislature intended was not the totality of the income, profits and gains of the activity termed business but was intending what was liable only to be entered under the provisions contained in section 10. The term "business" for he purpose of discontinuance cannot have one meaning and the same term "business" for the purpose of tax cannot have another meaning. 89. Sub-section (3) of section 25 was enacted in order to mitigate the effect of double taxation levied in respect of the income, profits and gains of one accounting year having regard to the changes made in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1922. When the Legislature enacted that "the assessee may further claim that the income, profits and gains of the provision year shall be deemed to have been the income, profits and gains of the said period", the Legislature did not intend that the income, profits and gains of that business for the previous year should remain unaltered to the extent that the same are shown under the head "Interest on securities", "Income from properties" and "Income from other sources" and that only the residue thereof shown under the head referred to in section 10 alone should be substituted. When the Legislature provided for an assessment in connection with such business to be made on the basis of the income, profits and gains of the period refereed to in that sub-section, the Legislature did not contemplate to assessment to be made only under the head referred to in section 10." 93. Section 25(3) being part of section 25, it would not be out of place to consider the sense in which the Legislature has used similar words in other parts of the same section. As the marginal note to that section show, it deals with assessment in case of discontinued busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e head referred to in section I0 of the Act of 1922. In my view it would not be proper to give a truncated meaning to the expression "assessment" when the Legislature says that assessment may be made on the basis of the income, profits and gains of the period referred to in that section. When assessment has to be made in connection with the income, profits and gains of a business, you have to assess the totality of the income, profits and gains made in connection with that business under whatever head the same may be liable to be entered having regard to the provisions contained in the Income Tax Act, 1922. 96. Section 25(1) of the Indian Income Tax Act, 1922, merely authorises an accelerated assessment in the year of assessment itself. The Supreme court in the case of Commissioner of Income Tax v. K. Srinivasan and K. Gopalan, has observed at page 97 that all that the section authorises the Income Tax Officer to do is that it gives him an option to make a premature assessment on the profits earned up to the date of discontinuance in the year of discontinuance itself instead of in the usual financial year. This section does not authorise the splitting up of the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -section (1) or sub-section (3), the Income Tax Officer may serve on the person whose income, profits and gains are to be assessed, or, in the case of a firm, on any person who was member of such firm at the time of its discontinuance, or, in the case of company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22, and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section." 100. The assessment referred to in sub-section (4) is the assessment which is required to be made under sub-section (1) or sub-section (3). If assessment which is required to be made under sub-section (1) or sub-section (3) is the assessment in respect of the totality of the income, profits or gains made in connection with the activity business. The original sub-section (4) of section 25 has been re-numbered as sub-section (6) of section 25, and the words "sub-section (1) or sub-section (3)" therein have been substituted by the words "sub-section (1), sub-section (3) or sub-section (4)." I may also refer to se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in sub-section (3) refer to the income, profits and gains made in connection with business under whatever head the same may have to be shown. 104. There is another aspect of the matter to which I will now advert. Under the Act of 1918 as well as under the act of 1922, various heads of income, profits land gains are mentioned. Section 5 of the Act of 1918 provided as follows : "Save as otherwise provided by this Act, the following classes of income shall be chargeable to Income Tax in the manner hereinafter appearing namely, (i) Salaries; (ii) Interest on securities; (iii) Income derived from house property; (iv) Income derived from business; (v) Professional earnings; (vi) Income derived from other sources." 105. Section 6 of the Act of 1922 when first enacted provided as follows : "Save as otherwise provided by this Act, the following heads of income, profits and gains shall be chargeable to Income Tax in the manner hereinafter appearing, namely :- (i) Salaries. (ii) Interest on securities. (iii) Property. (iv) Business. (v) Professional earnings. (vi) Other sources." 106. Section 6 of the Indian Income Tax Act, 1922, as it now st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other that such portions of such property as he may occupy for the purpose of his business...." 109. The present section 9 provides as follows : "9. (1) The tax shall be payable by an assessee under the head 'Income from property' in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax..." 110. These different provisions in connection with property also indicate that what was liable to be included under a head has varied. Some of the heads do not include all that would ordinarily be covered by the words used in describing the head. For instance, under the head "Salaries" referred to in the present section 7 of the Act of 1922 the salary received by a servant of a foreign Government is not liable to be shown under this head. Similarly as regards the head "Interest on securities, " the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w stands. If we examine the provisions contained in section 25(3) we have the words "business" by itself did not describe any head. The head under section 9 of the Act of 11918 was "Income derived from business". The words "profession or vocation" appearing in sub-section (3) did not constitute the language of the head under section 10 of the Act of 1918. The head under section 10 of the Act of 1918 was "Professional earnings", though it included profits of any vocation. when we come to the Act of 1922 as first enacted the word "Business" represented the exact nomenclature of the head covered by section 10. As regards the words "profession or vocation" they did not represent any head under the Act of 1923 as first enacted. The head under section II as originally enacted was "professional earnings." As a result of the legislative amendments the head "Professional earnings." As a result of the legislative amendments the head "Professional earnings" has now been completely abolished. By the amending Act VII of 1939 the head under section 10 has been altered to "Profits and gains of business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source". That income prior to the amendment was liable to be shown under the head "Profits and gains of business, profession or vocation" referred to in section 10. If the assessee had paid tax in connection with such business under the Act of 1918 and discontinues the said business, could it be said that the assessee is not entitled to relief under section 25(3) in respect of income from dividends merely because it is now required to be shown under section 12 instead of under section 10 ? In my view, the Legislature when it referred to income, profits and gains in section 25 (3) in connection with business which has been discontinued, did not refer to any particular head of income with its varying content. 116. I shall now deal with the two cases referred to by Mr. Joshi one Gopi Mohan and Sons v. Commissioner of Income Tax and the other Ambala Himatlal v. Commissioner of Income Tax. The first is a judgment of a Division bench of the Allahabad High Court and the second is a judgment of a Division Bench of this Court. In none of these cases the points which have been canvassed before Judges who delivered those judgments. The facts in the case Gopi Mohan and Sons v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax had been paid, viz., the money-lending business. In the course of his judgment Chagla, C.J., observes as follows : "Therefore, the whole emphasis in sub-section (4) is not upon the assessee so much as upon the particular business. Profession or vocation which was carried on and which was subjected to tax under the Act of 1918. One might almost say that the relief contemplated to be given was not the assessee so much as to the particular business..." 119. There are observations in that case which go to show that the learned Judges considered that the Legislature in section 25(4) contemplated profits and gains of business, profession or vocation contemplated by section 10. Mr. Joshi very strongly relied upon the words in that judgment which appear at page 285 where Chagla, C.J., observes : 'What the Legislature intended by using the expression 'income, profits and gains' was the profits and gains of the business or profession contemplated by section 10 and not the total income of the assessee because when we come to the proviso to section 25, sub-section (3) and (4), it provides as follows :...." 120. Mr. Joshi further railed upon the following p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h tax was at any time charged" when read along with the provisions contained in the Indian Income Tax Act, 1918, indicated that what the Legislature was referring to was the class of income specified in section 9 of the Indian Income Tax Act of 1918. He urged that section 5 of the Act of 1918 provided for various classes of income therein set out which were chargeable to Income Tax and that the words "tax....charged under the provisions of the Indian Income Tax Act, 1918" referred to the class of income that was chargeable to Income Tax under the provisions contained in the aforesaid section 5. Mr. Joshi therefrom sought to deduce that the tax charged that is referred to in section 25(3) is the one charged in respect of the classes of income falling only under the heads "Income derived from business" and "Professional earnings." There is no reason why the tax charged should not refer to other classes of income referred to in the aforesaid section 5, if such income was derived form the activity business. 123. In the result, I answer the question as reaffirmed in the affirmative. Out of the three judges including myself, who have dealt with this re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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