TMI Blog1976 (2) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... ars under reference?" In Income-tax Reference No. 168 of 1974 the following two questions have been referred to us for our opinion: "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the deduction of municipal taxes should be allowed while computing the income from self occupied property ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 16,634 received from Prabha Mills was not includible in the taxable income of the assessee under section 41(4) of the Act ?" Both these questions in this reference have been referred to us at the instance of the revenue. It is common ground that the point of law raised by question No. (1) in Income-tax Reference No. 168 of 1974 is covered by the decision of this High Court in Commissioner of Income-tax v. Arvind Narottam (Income-tax Reference No. 52 of 1974, decided on October 6, 1975). There it was held that while calculating the annual letting value of the property in question in the occupation of the owner for the purpose of his residence, municipal taxes have to be deducted. The Tribunal had t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 41(4) of the Act. It was contended that the provisions of section 41(4) are applicable in respect of those debts only which are allowed under section 36(1)(vii) of the Act and not to the bad debts allowed under section 10(2)(xi) of the Act of 1922. It was contended that the provisions of section 10(2)(xi) of the Act of 1922 and section 36(1)(vii) of the Act of 1961 were not in pari materia inasmuch as under the old Act there was no provision for taxing the amount received out of the bad debt if the business was discontinued before the year of recovery, whereas section 41(4) of the Act of 1961 specifically laid down that the debt recovered should be assessed as income of the previous year in which the recovery was made irrespective of the fact whether the business was in existence in that year or not. The Tribunal held that the fiction created by section 41(4) must operate within its limited sphere and cannot be extended beyond the language of the section by which it was created, or by importing another fiction. The Tribunal found that it was difficult to equate the provisions of section 36(1)(vii) of the Act of 1961 with those of section 10(2)(xi) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputing the income referred to in section 28- (vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year." Section 36(2) provides that in making any deduction for a bad debt or part thereof, the provisions of the different clauses of that section shall apply. The conditions are- "(i) no such deduction shall be allowed unless such debt or part thereof- (a) has been taken into account in computing the income of the assessee of that previous year, or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee, and (b) has been written off as irrecoverable in the accounts of the assessee for that previous year." Secondly, if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made. Any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be deemed to have been made or granted under the provisions of section 36(1)(vii) and hence the provisions of section 41(4) of the Act of 1961 would apply. In the alternative, he contended that the case is covered by the provisions of section 24 of the General Clauses Act, 1897, and the order must be deemed to have been made under section 36(1)(vii) of the Act which is the provision of law corresponding to section 10(2)(xi) and, therefore, since the Act of 1922 is repealed and re-enacted by the Act of 1961 the provisions of section 24 would apply. His third contention which is also in the further alternative was that the words occurring in section 41(4) "or under the corresponding provisions of the Act of 1922" should be read in section 41(4) immediately after the words "of sub-section (1) of section 36" in section 41(4) in order to avoid results which could never have been contemplated by the legislature and in order to make the machinery workable. In the last alternative he contended that the word "under" occurring in section 41(4) of the Act of 1961 immediately in the context of the words "under the provisions of clause (vii) of sub-section (1) of section 36" should be read w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court, observed immediately after setting out the passage : "It is clear that, when proceedings are taken for rectification of assessment to tax either under section 35(1) or section 35(5) of the Act of 1922, those proceedings must be held to be proceedings for assessment. In proceeding under those provisions, what the Income-tax Officer does is to correct errors in, or rectify orders of assessment made by him, and orders making such corrections or rectifications are, therefore, clearly part of the proceedings for assessment." In Income-tax Officer (Third) v. M. Damodar Bhat the Supreme Court held in connection with the applicability of section 6 of the General Clauses Act to a case covered by section 297(2)(j) as follows: "In other words, the procedure of the new Act will apply to the cases contemplated by section 297(2)(j) of the new Act mutatis mutandis. In this connection it is relevant to refer to the decision of this court in Kalawati Devi Harlalka v. Commission of Income-tax in which it was pointed out that section 6 of the General Clauses Act will not apply in respect of those matters where Parliament had clearly expressed its intention to the contrary by mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement entered into, appointment made, approval given, recognition granted, direction, instruction, notification, order or rule issued under any provision of the repealed Act. The verb in the past perfect participle "made" in section 297 occurs only in the context of appointment and not in the context of any order made. So far as an order referred to in section 297(2)(k) is concerned, it is only an order issued under the provisions of the repealed Act. Now, it is well-settled law that whenever there is any assessment proceeding, every stage of the assessment proceeding and different aspects of the assessment proceedings are all independent orders with are being passed by the Income-tax Officer in connection with different aspects of the assessment, for example, when the Income-tax Officer allows or disallows a particular expenditure, he makes a decision allowing or disallowing, as the case may be, and that decision is equivalent to an order. In Karsandas Bhagwandas Patel v. G. V. Shah, Income-tax Officer, a Division Bench of this court has observed at page 264 in the context of the powers of the Appellate Tribunal : "Every decision recorded by the Income-tax Officer in ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act or Regulation made after the commencement of the General Clauses Act, repeals any enactment hitherto made or hereafter to be made, then, unless a different intention appears, the repeal shall not affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder; or affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed; nor affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such penalty, forfeiture or punishment may be imposed as if the repealing Act or Regulation had not been passed. If Mr. J. P. Shah's contention regarding the applicability of section 6 is to prevail, then it would mean that in respect of a bad debt which was written off, the provisions of section 10(2)(xi) of the Act of 1922 would still continue to apply and not the provisions of the 1961 Act. It is common ground that the business of the assessee, Hindu undivided family, had ceased to exist prior to the commenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or in part, the debtor's personal account should be debited and Bad Debts Account credited, the cash received then being credited to the debtor's account. This is preferable to posting the amount recovered direct from the Cash Book to the credit of the Bad Debts Account without making any entry in the debtor's personal account, since it is desirable, for future reference, that this account should contain a full history of the occurrence." Really speaking, the provision for writing off bad debts and showing the recovery of debts which were written off on an earlier occasion as bad debts as receipt for the year in which the amount is received is a necessary concomitant of the system of commercial account keeping. As is well-known, when accounts are kept on mercantile basis, the entries are made on the basis of accrual of the right to receive a particular amount or incurring of a liability to pay a particular sum. It is not the actual date of receipt of the money or the actual payment which is the relevant date in this system of account keeping but the date of accrual of the right to receive or the date of incurring the liability to pay which are material dates. If a right accrue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquired, accrued or incurred under any enactment so repealed, could not be invoked. Again when the amount is actually received in the relevant assessment year under reference, there is no question of any investigation, legal proceeding or remedy in respect of any right, privilege, obligation, liability, penalty, forfeiture or punishment mentioned in the rest of the provisions of section 6 and, therefore, there is no question of any investigation or legal proceeding or remedy being instituted, continued or enforced by virtue of the provisions of section 6. It is, therefore, clear that by the very phraseology of section 6 there is no scope for applying section 6 of the General Clauses Act to the case before us. Though as a matter of general principle of account keeping when the amount, whether in whole or in part, received in respect of a bad debt written off in the past is to be treated as a trading receipt, it is in the event of anything being received as against the bad debt written off in the past that the question would at all arise and until that eventuality occurs, there is no right or obligation or liability in respect of any debt so written off. Under these circumstances th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of objects and reasons was in connection with the enactment of section 24 of the General Clauses Act as it was originally enacted in 1897. At that time the words, "appointment, notification" were not set out in the General Clauses Act in section 24 and the word "made" was not used in connection with orders, schemes, rules, form or bye-laws. Therefore, the statement of objects and reasons for enacting section 24 of the General Clauses Act cannot help us in deciding what is meant by an order made under a repealed Act as used in section 24 of the General Clauses Act. Mr. J.P. Shah contended that section 24 of the General Clauses Act only applies to statutory orders, etc., which are made as delegated legislation and he contended that the collocation of the words in which the word "order" occurs in section 24 indicates that the word "order" merely refers to statutory orders in the shape of notifications, etc., or orders made by a Government in exercise of the powers conferred by statute and not any ordinary orders made in exercise of the functions of a particular Government Officer. He also contended that section 24 applies to orders like those statutory orders which are necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the proviso to section 10(2)(xi) of the Act of 1922 applied only when the amount of a bad debt written off in an earlier year was received later on when the business was still running, so far as section 41(4) is concerned, it applies whether the business in respect of which the bad debt was written off in the previous year has ceased to exist or not. There is this much modification between the provisions of section 41(4) of the 1961 Act read with section 36(1)(vii) and section 36(2) as compared with section 10(2)(xi) of the Act of 1922 read with the proviso thereto. Section 24 of the General Clauses Act contemplates that so far as, there is substantial re-enactment after the repeal even though there may be some modification in the previous provisions, still an order made under the repealed Act or regulation shall, so far as it is not inconsistent, continue in force and be deemed to have been made under the provisions so re-enacted. We fail to see how it can be said that there is any inconsistency between the provisions of section 10(2)(xi) and the proviso thereto of the 1922 Act on the one hand and the provisions of section 36(1)(vii) read with section 36(2) and section 41(4) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under a repealed Act and what is meant by the word "order"; all that it was dealing with was the effect of repeal of statutory rules and regulations made or issued under a repealed Act. Therefore, this decision of the Supreme Court is of not much assistance to us in coming to the conclusion as to whether an order made under the Act of 1922 regarding the writing off of a bad debt can be said to have been made under the corresponding provisions of the Act of 1961. It may be pointed out that in Brihan Maharashtra Sugar Syndicate Ltd. v. Janardan Ramchandra Kulkarni, the effect of section 24 of the General Clauses Act, 1897, on a notification issued under a repealed Act came up for consideration. The question was whether a notification issued under the relevant section of the Companies Act, 1913, giving power to the District judge, Poona, to hear applications under section 153C of the Act of 1913 can be said to have been continued under the Companies Act of 1956 and the Supreme Court observed at page 472: "Section 24 does not however purport to put an end to any notification. It is not intended to terminate any notification; all it does is to continue a notification in force in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion or1923. None of the decisions of the Supreme Court to which our attention has been drawn and to which we have referred above deals with the question of an order but we fail to see why a notification issued to deal with a specific situation under the provisions of a repealed statute can continue to be in force by virtue of the operation of section 24 of the General Clauses Act and an order made under the provisions of the Indian Income-tax Act, 1922, allowing a deduction in respect of a bad debt written off, cannot be deemed to have been made under the provisions of section 36(1)(vii) of the Act of 1961. In our opinion, it would be restricting the use of the word "order" which is not warranted by the language of section 36. if we were to interpret the word "order" merely as a statutory order made by the delegated legislation or administrative orders only. The entire argument of Mr. J.P. Shah for the assessee overlooks an important point, namely, that whatever may have been the original position when section 24 was enacted only with the word "issued" occurring in connection with orders, scheme, rule, form or bye-law, after the insertion of the word "made" by Act I of 1903, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those bad debts so written off in the past, such recovered amounts should be treated as trading receipts. Not to do so would be contrary to all principles of accountancy. To attribute such an intention to the legislature would be contrary to the basic scheme of the provisions regarding such writing off of bad debts. But the main question is, whether it is permissible to us to read the provisions of section 41(4) in this liberal manner and to read these words "under the corresponding provisions of the Act of 1922" in section 41(4) immediately after the reference to clause (vii) of sub-section (1) of section 36. In support of this contention Mr. Kaji has relied upon the decision of the Supreme Court in Gursahai Saigal v. Commissioner of Income-tax and the observations of Chandrachud J. in Murarilal Mahabir Prasad v. B. R. Vad. The principle laid down in these two cases is that the rule of construction regarding strict interpretation of a taxing statute does not apply to all the provisions of a taxing statute. This rule of strict construction applies only to the charging or the taxing sections and not to the machinery provisions or provisions for procedure for the collection of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he previous year of every assessee; under section 6, one of the heads of taxable income is 'profits and gains of business, profession or vocation'; under section 10(1), the tax under that head is payable in respect of profits or gains of any business carried on by the assessee during the accounting year. The main condition which attracts all the other sub-sections and clauses of the section is that the tax shall be payable by an assessee in respect of the profits or gains of business, etc., carried on by him. The crucial words are 'business carried on by him'. If the profits or gains were not earned when the business was being carried on by the assessee during the accounting year, they would fall outside the provision of section 10(1)." It is, therefore, clear that it was only because the computation was found not to be done in accordance with and subject to the provisions of section 10(1) that it was held that the charge created by section 3 would not apply but it did not mean that by using the word 'in accordance with and subject to the provisions of the Act' any other provision of the Act was being set up or was being treated as a taxing provision. The same principle was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught to tax, by virtue of the provisions contained in the different sub-sections of section 41 in respect of certain items of income covered by these sub-sections such income can be brought to tax. The words "whether the business or profession ...... is in existence" or not in the year of receipt or accrual of the income contemplated by the different sub-sections of section 41 occur in each of these sub-sections either by the deeming fiction created by the Explanation to sub-sections (2) and (3) of section 41 or by making provision in the main body of the sub-sections (10) and (4). The concept that the different items of receipts mentioned in sub-sections (1), (2), (3) and (4) of section 41 can be brought to tax irrespective of the question whether the business had ceased to exist or not has been clearly indicated and provision has been made to bring all such items to tax irrespective of the question whether the business or profession has ceased to exist or not. To that extent there is a departure from the Act of 1922. Mr. Shah is, therefore, right when he contends that whereas under the Act of 1922 the item of bad debt written off in the past when recovered after the business had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The fourth alternative submission of Mr. Kaji that the word "under" used in section 41(4) in the phrase "under the provisions of clause (vii) of sub-section (1) of section 36" in section 41(4) must be read as "as contemplated by" is sought to be supported by the decision of the judicial Committee of the Privy Council in Free Lanka Insurance Co. Ltd. v. A. M. Ranasinghe. In that case the facts were that by section 133 of the Motor Car Ordinance, 1938, of Ceylon : If after a certificate of insurance has been issued under section 128(4) to the person by whom a policy has been effected, a decree in respect of any such liability as is required to be covered by a policy of insurance is obtained against any person insured by the policy the insurer shall pay to the persons entitled to the benefit of the decree any sum payable thereunder in respect of that liability. By section 6 of the Ceylon Interpretation Ordinance, 1900 : Whenever any written law repeals either in whole or in part a former written law, such repeal shall not, in the absence of any express provision to that effect, affect or be deemed to have affected any right acquired or incurred under the repealed written law. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 100(4)'. The latter sub-section, however, does no more (as did not the corresponding sub-section (4) of section 128 of the 1938 Ordinance) than require the issue of a certificate in 'the prescribed form'. As already stated, there appear never to have been any regulations under either piece of legislation prescribing the form to be used. It may therefore well be said that the words 'under section 100(4)' should be construed as meaning no more than 'as contemplated by' that sub-section and, if so, that the relevant certificate issued by the appellants in 1948 satisfied the statutory requirement under the Act of 1951. Indeed, unless it were so, the remarkable result would seem to flow from the coming into force of the Act of 1951 that all motor car users would be instantly disqualified by virtue of section 99 of the Act from using their motor cars because there was not in force a policy of insurance in respect of third party risks in conformity with the requirements 'of this Part' of the Act. But in the circumstances it is unnecessary for their Lordships to express a final conclusion upon this point." (Emphasis supplied). Therefore, it is obvious that in order to eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obvious that the bad debts written off in the assessment year 1959-60, so far as the present assessee is concerned, would be required to be treated as written off as contemplated by the provisions of clause (vii) of sub-section (1) of section 36 and, therefore, when recovered back, these items of bad debts would be treated as receipts under the provisions of section 41(4) of the Act of 1961. The concept of liberal interpretation even of a charging section does not arise in the instant case. We are not reading into these words anything which is contrary to the provisions of a charging section even if it is a charging section. In connection with this controversy regarding the canon of construction to be applied even to the charging section, we may point out that in Banarsi Debi v. Income-tax Officer, the Supreme Court has observed as follows : "Before construing the section (section 34(1)(a) of the Act of 1922), it will be useful to notice the relevant rules of construction of a fiscal statute. In Oriental Bank Corporation v. Wright, the judicial Committee held that if a statute professed to impose a charge, the intention to impose a charge on the subject must be shown by clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Amending Act could not be described as a provision laying down the machinery for the calculation of tax. In substance it enabled the Income-tax Officer to reassess a person's income which had escaped assessment, though the time within which he could have so assessed had expired under the Act before the amendment of 1959. It resuscitated a barred claim. Therefore, the same stringent rules of construction appropriate to a charging section should also apply to such a provision. Even in that context the Supreme Court observed at page 105: "If the construction sought to be placed by the learned counsel for the appellants be accepted, it would defeat the purpose of the amendment in some cases. If the words were clear and exclude the class of cases where the notices were sent before 8 years from the date of assessment, but served thereafter, this court has to give them the said meaning." At page 108 the Supreme Court observed: "To summarize: The clear intention of the legislature is to save the validity of the notice as well as the assessment from an attack on the ground that the notice was given beyond the prescribed period. That intention would be effectuated if the wider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by section 24 of the General Clauses Act. 1897, and, therefore, the deductions allowed and the decisions taken under the Act of 1922 regarding the bad debts must be deemed to have been made under the corresponding provisions of section 36(1)(vii) of the Act: of 1961 and, therefore, the whole of the provisions of section 41(4) would apply. In the alternative, our conclusion is that the word "under" occurring in section 41(4) should be given the meaning "as contemplated by" and hence also the orders passed under section 10(2)(xi) of the Act of 1922, which was equivalent to section 36(1)(vii) of the Act of 1961, would be covered by the words of section 41(4). In view of either of these conclusions or as a result of the combined effect of the two, it would necessarily follow that in the instant case the partial recovery of bad debts made in the respective years under reference from Prabha Mills would be covered by section 41(4) of the Act of 1961. Under these circumstances the Tribunal erred in law in holding that the sums of Rs. 19,961 recovered in assessment year 1964-65, of Rs. 1,091 recovered from Prabha Mills in assessment year 1965-66 and of Rs. 16,634 recovered from Prabha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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