TMI Blog1920 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... for the petitioners. Lord Selborne's income signifies what comes in is the tersest, and at the same time sufficiently indicates that the taxation of interest which has not come in is not within the scope of an Income-tax Act. The use of the word income in Section 3 of the present Act, on which some reliance is placed in the reference, also seems to me to be entirely in accordance with this view. That section, which appears under the head of Taxable income, provides in effect that the income which is to be taxed under the Act is income from whatever source derived if it accrues or arises or if it is received in British India, that is to say, income which accrues or arises in British India is taxable even if it is received elsewhere as in England, while income which is received in India is taxable even if it accrued or arose out of British India. With this may be compared the more stringent provisions of Schedule D of the English Income-tax Act, 1918, which make residents in the United Kingdom liable in respect of annual profits or gains accruing or arising from any trade or business, whether the same be carried on in the United Kingdom or elsewhere. 3. What we are conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm construction placed by the Courts on this provision, occurring as it does in an Act, the general scope of which is to impose a tax on annual income, which, as already pointed out, means annual receipts, has been that it refers to the difference between the amount of the receipts of the business for three years and the expenditure incurred in earning them. This interpretation has been accepted by the legislature, which left this somewhat old-fashioned phraseology unaltered for so many years with a full knowledge of the interpretation placed upon it by the Courts, and has even reproduced it without material alteration in the new consolidating Act of 1918. Fully accepting the view that the tax is to be assessed on the basis of the receipts for three years, the legislature has confined itself to legislating as to the deductions which are allowable on the other side of the account in order to arrive at the taxable income; and, as will be seen, the Indian Legislature in the corresponding Section 9 of the present Act has followed exactly the same course. 7. It would be endless to cite all the cases in which the profits and gains on which the tax is computed under the schedule have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income in future years, against which the partners might be justified in borrowing. Lord Moulton's method of calculating profit or loss for a particular period in In re Spanish Prospecting Company, Limited [1911] l Ch., 92, as the difference between the valuation of the total assets at the beginning and end of the particular period, was not made with reference to the Income-tax Acts and could not be applied to them consistently with the authorities to which I have referred. The learned Advocate-General relied upon the decision of the House of Lords in Colquhoun v. Brooks (1889) 14 App. Cas., 493, but the only question in that case was whether a resident in Great Britain was liable under the language of the English Income-tax Acts to be assessed on the profits of a business which arose or accrued in Australia and were not received by him in the United Kingdom. It was held that ho was not liable to pay any income-tax on such profits, and no question arose as to the amount at which they were to be assessed. The respondent was apparently willing to pay, if liable, upon a sum of 9,000 odd which probably was not very different from the sum which he would have been liable to pay if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ason for including it in the profits or receipts of an earlier year. If the present Act is found to admit of extensive evasion in India, the remedy, in my opinion, is to be found in an alteration of the law. 16. Since this opinion was written, the report of the recent decision of the Court of Appeal in National Provident Institution v. Brown [1920] 3 K.B., 35 has become available. It was there held that the words in Schedule D, profits on discounts and profits on interest, in the Income-tax Act must mean profits arising from discounts received on discounting transactions and profits arising from interest received on securities bearing interest, and Lord Stendale, Mr., observed: The amount received is, in my opinion, to be taxed in the year in which it is received. Although it may be accruing over several years it only becomes taxable income in the year in which it is received. 17. These words, in my opinion, supply an answer to the reference. Ayling, J. 18. The question referred to us is whether interest which became due to a money-lending firm in the year of account but was not, realized in cash or by adjustment in the accounts is liable to income-tax under Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in British India within the meaning of Section 3(1) of the Income-tax Act (VII of 1918). 23. Section 3(1) uses four verbs in the clause to all income from whatever source it is (1) derived, if it (2) accrues or (3) arises or (4) is received in British India. The Board of Revenue assumes in its letter that because in its opinion the income in question was not realized (a fifth verb) the income was not received within the meaning of the fourth verb is received. As regards the verbs accrues and arises, they are both interpreted in the Board's letter as meaning becomes the subject of a right to receive. (The word accrues seems to be the more appropriate word to be used in connexion with a periodically recurring right to receive an income which is usually definite in amount, while arises seems to be used more appropriately and frequently in connexion with a business in which rights arise to receive income of a more fluctuating kind and at more uncertain intervals.) 24. Very learned and subtle arguments were advanced before us on both sides based on the various shades of meaning in which the six verbs derive, accrue, arise, receive, earn, and realiz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so ascertained for the year 1885 as to be legitimately the subject of taxation here. It is only put that the profits due to him would if realized amount to 9,219--a sum 'arrived at by an estimate and valuation' on stock-taking on some particular day (not stated), and 'deducting therefrom the estimate and valuation of the preceding year' (also made on a day not stated), 'but as a matter of fact only a portion of the amount had been actually realized'--what the meaning of the word 'realized' there is I do not know. 26. Lord Herschell and Lord Macnaghten and Lord Halsbury (Lord Chancellor) have not in their judgments in this case expressed dissent from the above observations of Lord Fitzgerald. The decision itself depended on the answer to the question whether the profits or gains arising from the Melbourne business of Brooks fell under the fifth case of Schedule D of the English Income-tax Act, 5 6 Vic., ch. 35, Section 100, whose language is somewhat peculiar and special and which speaks of sums actually received in Great Britain. It was held by all the Law lords that mere arising or accruing of the profits in England will not do, that they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its (whether the derivation is by way of accruing, arising or being received) should be calculated on the basis of the usual annual profit and loss account (subject of course to the special provisions of the Income tax Acts which usually impose limitations on the deductions allowable for repairs of business premises and damage or destruction of building, machinery and plant, depreciation and soon) and that such income is liable to tax as received in the commercial sense, If the opinion of Fletcher Moulton, L.J., is to be followed, a business might have made no profits at all in the popular sense in a particular year (or might have even incurred loss), but because the commercial value of some items on the assets side, say, the business premises and the plant, had risen in price, income-tax might become leviable on profits shown on paper in the Profit and Loss account. I do not think, having regard to the rule that fiscal statutes should be construed strictly in favour of the subject, that the legislature should be hold to have intended to levy income-tax even in such a case in the absence of unequivocal language to that effect. 30. However, even having regard to this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st thereon from the date of its accrual, or if the assessee could at any time draw upon the customer for that money and obtain actual receipt of that sum in due course of business, I think that such interest-income has accrued and arisen in that year in such a manner that the legal effect is the same as if it had been received by him, and that it is liable to be charged income-tax thereon. It is well known that deposits of moneys carrying interest are made with a Nattukkottai Chetti firm not only by other Nattuktottai Chetti firms but by gentlemen earning rich incomes in other professions. Take a case where ₹ 10,000 a year is the year's interest-income from such an investment with A, a Nattukkottai Chetti firm, by B, another Nattukkottai Chetti firm, or a rich professional gentleman who has retired from his profession. A at the end of that year adds ₹ 10,000 to the credit of B in his accounts but B makes no entry in his accounts of the receipt of that money. B has some lands which yield him sufficient for the maintenance of his family and allows the interest to accumulate with the A Chetti, drawing only ₹ 500 or ₹ 1,000 out of the interest annually eit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apply to all income from whatever source it is derived fit accrues or arises or is received in British India, etc. 36. Section 5 is the next section: The following classes of income shall be chargeable to income-tax in the manner hereinafter appearing. 37. Sub-section (4): Income derived from business. 38. The next section is Section 9: The tax shall be payable by an assessee under the head of Income derived from business' in respect of the profits of any business carried on by him. 39. Clause (2): such profits shall be computed after making the following allowances in respect of sums paid or, in the case of depreciation, debited, namely 40. and the payments and debits allowed are set out in nine sub paragraphs. Then comes Section 14: The aggregate amount of an assessee's income chargeable under each of the heads mentioned in Sections 6 to 11 shall be the taxable income of the assessee. 41. Reading these sections together, it is, to my mind clear that the form in which the reference is made is incorrect. It seems to me that we are not really asked any question about income as defined in the Act. What the reference requires is a ruling from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s necessary before examining the decisions to see what the Acts provide. The Acts are the Income-tax Act of 1842 as amended by the Income-tax Act of 1853. The relevant sections of these Acts are Section 2 and Schedule D of 16 17 Vic., Ch. 34, which has been substituted for the corresponding section and schedule of 5 6 Vic., Ch. 35. One curious feature of the Acts is that though they are called Income-tax Acts, the phrase income tax is never used in any part of the Act, nor is the word income applied to the resultant to be charged, though in the Customs and Inland Revenue Act, 1888, the tax payable under Schedule D is called income-tax. What is granted to Her Majesty under these Acts are duties on profits arising from property, professions, trades and offices. Section 2 of the later Act provides that: for the purpose of classifying and distinguishing the several properties, profits and gains for and in respect of which the said duties are by this Act granted, and for purposes of the provisions for assessing, raising, levying and collecting such duties, respectively the said duties shall be deemed to be granted and made payable yearly for and in respect of the several p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst case , and in respect of professions in what is called Second case. The first rule in the first case is as follows: The duty to be charged in respect thereof shall be computed on a sum not less than the full amount of the balance of the profits or gains of such trade on a average of three years. 49. The third rule is: In estimating the balance of profits and gains chargeable under Schedule D, or for the purpose of assessing the duty thereon, no sum shall be set against or deducted from or allowed to be set against, or deducted from, such profits or gains, on account of any sum expended (for various purposes set out), nor on account of any capital withdrawn, nor on account of, or under pretence of, any interest which might have been made on sums if laid out for interest, nor for any debts except bad debts (nor for certain other matters set out in the rule). 50. It is to be noted that the method of computing profits here is the exact opposite of that employed in the Indian Act. Section 9 of the latter, as already pointed out, provides what may be debited for the purpose of computing profits, whereas this rule under Section 100 of the English Act provides what ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard of Revenue, in their reference, say: The question to be decided is whether the interest in question accrued or arose in British India, and go on: the words 'accrued' or 'arose' have nowhere been defined in the Act but in the Judgement of Fry. L.J. in Colquhoun v. Books (1888) 21 Q.B.D., 52 these words were interpreted as general words descriptive of a right to receive. 54. It is true that the decision in this case, which eventually went to the House of Lords, did turn on the question as to whether a certain income accrued or arose in the United Kingdom. But that is not the point in this case at all, as I have already said, and the view of Fry, L.J., on the construction of the words accrued or arose has no bearing whatever on this question. The words which the Court was construing were words of Schedule D, arising or accruing to any person , etc., and with reference to these words, Fry, L.J., said: the tax is in respect of 'profit or gains arising or accruing. I cannot read those words as meaning 'received by'... I think that the words 'arising or accruing' are general words descriptive of a right to receive profits. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but receipts or incomings to be put on the credit side. So far then for the income-tax cases. The decisions appear to me to be all based on the assumption that an assessee should prepare a statement of receipts or incomings setting against them the outgoings necessary for earning receipts including also depreciation to the extent permitted by the Act, and that this account should be annually prepared and be the basis on which the taxable income should be ascertained. 58. It was suggested, however, by the learned Advocate-General that such an account was not the proper method of ascertaining the profits, and he has very strongly relied on the judgment of Fletcher Moulton, L.J., in In re Spanish Prospecting Co., Ltd. [1911] 1 Ch., 92. In this case, two persons agreed to serve the company at a fixed salary which they were not to be entitled to draw except out of the profits. The question was what were the profits. It arose in liquidation, and the dispute was with regard to certain debentures which had been included in the yearly balance sheets of the company as unvalued assets. In liquidation the debentures realized a sum of over three thousand pounds and the claimants contended th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovides that: once at least in every year the directors shall lay before the company in general meeting a profit and loss account for the period since the preceding account and it is common knowledge that this account is an account of the actual transactions of the company during the preceding year. Article 97 provides that: no dividend shall be paid otherwise than out of profits; and the learned author of Buckley's Law and Practice under the Companies Acts states the law to be as follows: The 'profits of a business are the excess of revenue receipts over expenses properly chargeable to revenue account. For the purpose of ascertaining profit available for the dividend, capital account and revenue account are to be treated as separate accounts. The credit balance of a revenue account is applicable for dividend. 60. This language very nearly reproduces the words used by the learned Lords in the income-tax cases above referred to and the learned author relies strongly on the case of Lee v. Neuchatel Asphalts Company (1889) 41 Ch.D., 1. That was a decision of the Court of Appeal, and the Court, held there that there was nothing in the Companies Act to proh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actical difference between the receipts or incomings after deducting the necessary out-goings without which profits could not be earned or received or after deducting the expenses of earning and obtaining them , and the excess of revenue receipts over expenses properly chargeable to revenue account , as stated by the learned author, to be the profits of a business under the Companies Acts. 64. The net result of all these cases is that on the credit side must be put receipts or incomings and it only remains to consider what these words cover. 65. That actual cash need not be received is of course obvious. The receipt of any form of negotiable security would of course be receipt. But the more difficult question is whether any, and if so, what form of constructive receipt is a receipt for the purposes of the Act. In Gresham Life Assurance Society v. Bishop [1902] A.C., 287, this very question was dealt with by Lord Lindley. He states as follows, at page 296: First, let us consider what is meant by the receipt of a sum of money. My Lords, I agree with the Court of Appeal that a sum of money may be received in more ways than one e.g., by (he transfer of a coin or a negotiable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duo upon shares be evidence only in support of a plea of accord and satisfaction, this section would prevent their being a good defence; but that if they would support a plea of payment, then the 25th section did not prevent their being a good defence. He then continues. Nothing is clearer than that if parties account with each other, and sums are stated to be due on one side, and sums to an equal amount due on the other side on that account, and those accounts are settled by both parties, it is exactly the same thing as if the sums due on both sides had been paid. Indeed, it is a general rule of law, that in every case whore a transaction resolves itself into paying money by A. to B, and then handing it back again by B to A, if the parties meet together and agree to set one demand against the other, they need not go through the form and ceremony of handing the money backwards and forwards. 68. This form of constructive receipt is therefore clearly permissible. So, if a person entitled to receive money agrees with his debtor to let the money stand in the hands of the debtor, either by way of deposit or as a fresh loan or investment, that would, in my opinion, amount to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate-General tried to persuade us to read the clause as implying that an income becomes liable to taxation as soon as it has accrued in British India and contended that it was not necessary that it should be received by the assessee at all to create the liability. I think his argument is untenable as it entirely ignores the governing word in the clause, income, Till a sum of money can be said to have become an 'income' it is clear to me that the Act will not apply to it. 72. I fully agree that the words 'accrues or arises' do not imply a receipt at all but only a right to receive as pointed out by Fry, L.J., in Colquhoun v. Brooks (1888) 21 Q.B.D., 52 at 59. The two words seem to denote the same idea but one is perhaps more appropriate than the other in particular cases. Their meaning is, as observed by the Full Bench in Board of Revenue v. Ramanadhun Chetty (1920) I.L.R., 43 Mad., 75 (F.B.) at 90, to become a present or enforceable right to demand. In fact the words are used in contradistinction to the words is received in the clause itself. Though this is so, it is clear from the section that before the Act can apply what has so accrued or arisen must hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of profits of any business carried on by him apply to it. The Advocate-General argued that whatever implication there might be in the term income the term profits as used in Section 9 included earned or estimated but unrealized profits as well, and in the case of a money-lending business it included interest accrued due but unrealized; and he relied strongly on Colquhoun v. Brooks H.L. (1889) 14 App. Cas., 493 and In re Spanish Prospecting Company Limited [1911] 1 Ch., 92, in support of his argument. 79. Before considering the cases cited, I may observe that as by Section 3 the Act is made applicable only to incomes and as that term implies, as I think, a realization of the sum due it is difficult to hold that by the use of the expression profits in Section 9 the legislature has extended the scope of the Act to unrealized sums as well in the case of business ventures, which would be the result of accepting the Advocate-General's argument. No doubt the term profits is not a term of very precise and definite significance. It is used in different meanings in different connexions. The profits of a business are ascertained in various ways for various purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case are set out by Naher, J., and the relevant passages by Sadasiva Ayyar, J., and I need not repeat them. Lord Fitzgerald was dealing with the income of Mr. Brooks and not with that of his firm. Though the firm had not apparently realized the profits, it would appear from the judgment that it had taken such profits into consideration in ascertaining the profits due to each partner, and so far as Mr. Brooks was concerned his share of the profits had been actually ascertained and fixed at 9,219 and the amount was apparently entered in the book of the firm to his credit, so that, as his Lordship observes; It was so completely tinder his control that by an act of his will he could have it actually transferred to his bankers here (in England). 83. Apparently, his Lordship treated the money as received in Melbourne and was at first sight inclined to treat it as received in England also, as Mr. Brooks could have it transferred to England at his will and pleasure, but ultimately his Lordship held with the other learned Lords that the sum could not be treated as received in England. That I understand to be the effect of his judgment; 1 do not understand his Lordship to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een referred to by the learned Chief Justice and I think it unnecessary for me to refer to them again. 86. In the course of the argument I put to the Advocate-General an extreme case to test his contention and to see how far he was prepared to go. It was this: A invested a lakh of rupees in a money-lending business and lent out the whole amount in the first year at 12 per cent interest. At the end of the year ₹ 12,000 accrued to him as interest but none of his debtors paid him anything. The next year he unfortunately lost the whole of the capital and his interest, by his debtors becoming unable to pay. Is A liable to pay income-tax to the Government on ₹ 12,000 or not? The Advocate-General had to contend, and did contend, that A was liable to pay, even though he had not realized any profit at all from his venture but had actually lost the whole of his capital. It seems to me that very clear and definite language in a taxing act is necessary to make us hold that a person is liable under such circumstances. The Income-tax Act being a fiscal enactment has to be construed strictly against the Crown, and I can see no provision in. our Act to make a person liable to pay ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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