TMI Blog1964 (7) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... Judge(s) : K. SUBBA RAO., J. C. SHAH., S. M. SIKRI JUDGMENT The judgment of the court was delivered by SHAH J.--- Messrs. Chugandas and Co---a firm dealing in securities---received in the year 1946 Rs. 4,13,992 as interest on securities held by it. In 1947, it received Rs. 1,01,229 as interest from the same source. On June 30, 1947, the firm discontinued its business. In proceedings for assessment for 1947-48 and 1948-49 the firm, relying upon section 25(3) of the Indian Income-tax Act, 1922, claimed exemption from payment of tax on income earned in the relevant previous year, on the plea that the firm was carrying on business before the Indian Income-tax Act, 1922, was enacted, and on that business tax had been charged under the provisions of the Indian Income-tax Act (7 of 1918) in respect of the business done immediately before that Act was repealed. The firm also applied to substitute the income earned in the year 1947, for the income of the previous year. The Income-tax Officer held that the interest earned by the firm on securities being " liable to be assessed to tax " under section 8 and not under section 10 of the Income-tax Act, the firm was not entitled t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Act, 1918, and the business is discontinued---there being no succession by virtue of which the provisions of sub-section (4) of section 25 have been rendered applicable. Section 25(3), however, applies even if the person assessed under the Income-tax Act, 1918, was different from the person who claims relief under that section provided the former was the predecessor-in-interest of such person qua the business. The reason for enacting section 25(3) was that under the Indian Income-tax Act (7 of 1918), income-tax was levied by-virtue of section 14(2) of Act 7 of 1918, on the income of the year of assessment. Tax was, therefore, levied in the financial year 1921-22 on the income of that year. By the Indian Income-tax Act (II of 1922) the basis of taxation was altered and by section 3 of that Act, charge for tax was imposed upon the income of the previous year. When Act II of 1922 was brought into force on April 1, 1922, two assessments in respect of the same income for the year 1921-22 had to be made. The income for 1921-22 was accordingly charged to tax twice ; it was charged under Act 7 of 1918 and it was also charged to tax under section 3 of Act II of 1922 read with the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the various heads of income, profits and gains enumerated in section 6 are mutually exclusive, each head being specific to cover the item arising from a particular source and, consequently, interest on securities ', which is specifically made chargeable to tax under section 8 as a distinct head, falls under that section and cannot be brought under section 10, whether the securities are held as trading assets or capital assets. " In the United Commercial Bank case, the Income-tax Officer split up the income of a banking company in the course of assessment into two heads, " interest on securities " and " business income ", and set off the business loss against the income from securities in the year of assessment, but did not allow the business loss of a previous year to be set off under section 24(2) against that income. This view was approved by the High Court of Calcutta. The High Court held that the several heads under section 6 of the Income-tax Act are mutually exclusive, and an item falling under an exclusive bead cannot be charged under another head. This view was affirmed by this court, and it was held that " interest on securities ", being specifically charged under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y business. If that condition be fulfilled in respect of the income of the business under the Act of 1918, the owner or his successor-in-interest qua the business, will be entitled to get the benefit of the exemption under it if the business is discontinued. The section in terms refers to tax charged on any business, i.e., tax charged on any person in respect of income earned by carrying on the business. Undoubtedly, it is not all income earned by a person who conducted any business, which is exempt under sub-section (3) of section 25 : non-business income will certainly not qualify for the privilege. But there is no reason to restrict the condition of the applicability of the exemption only to income on which the tax was payable under the head " profits and gains of business, profession or vocation. " The legislature has made no such express reservation and there is no warrant for reading into sub-section (3) such a restricted meaning. Sub-section (3) it may be noticed does not refer to chargeability of income to tax under a particular head as a condition of obtaining the benefit of the exemption. Diverse other provisions of the Act lend strong support to that view. Where the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness which is discontinued, profits and gains which fall within section 10 only are taken into account. The revenue authorities, it is true, may get a complete picture of the liability of the assessee to taxation only on final assessment. This is not to say that a mere possibility of two assessments is decisive of the intention of the legislature, for if that be the test, every person who has income received from business, profession or vocation and income from other source would still have to be subject, after an accelerated assessment under section 25(1), to a final assessment in respect of the non-business income to determine his overall liability. But the possibility of two assessments in respect of the same business for the same year, one of which serves no useful purpose, must be taken into account in ascertaining the meaning to be attributed to the expression " income, profits and gains of business, profession or vocation " which is discontinued. The phraseology of section 25(2) also supports the view that the income, profits and gains of business are not restricted to profits and gains chargeable under section 10. For failure to give notice of discontinuance of business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he United Commercial Bank Ltd.'s case, that business income is broken up under different heads only for the purpose of computation of the total income : by that break up the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by the Indian Income-tax Act for computation of income. It cannot be gainsaid that there was on the part of the legislature a desire by enacting section 25(3) to give relief to two classes of income subjected to double taxation for the income of the year 1921-22. That this benefit was restricted to income paid by assessees who paid tax on income derived from business and professional earnings under the earlier Act and was not available in respect of other income, will not, in our judgment, be a ground for giving a restricted meaning to the expression " income, profits and gains of business, profession or vocation " occurring in sub-section (3) of section 25. An intention to grant a partial exemption to income, profits and gains of a business, profession or vocation may not be lightly attributed to the legislature. There is no force in the contention raised by counsel for the Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etation whether the exemption which is admittedly given by section 25(3) operates in respect of the entirety of the business income for the year in question in the course of which the business is discontinued or whether it applies only to that class of income which is taxable under the head " profits and gains of business " carried on by the assessee in that year. Section 26 on which reliance was placed by counsel for the Commissioner also may be noticed in this connection. That section provides for a scheme of assessment when there is change in the constitution of a firm, or succession to a business. The section applies not to discontinuance of business, but to changes in the constitution of the assessee-firm and to succession to business. Under sub-section (1) if at the time of making an assessment it be found by the Income-tax Officer that a change has occurred in the constitution of a firm or that a firm has been newly constituted, the firm as constituted at the time of making the assessment has to be assessed. But the income, profits and gains for the previous year for the purpose of inclusion in the total income of the partners must be apportioned between the partners who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. We may briefly refer to the decision of this court in Commissioner of Income-tax v. Express Newspapers Limited. In that case Free Press Limited, a private company, transferred its business on August 31, 1946, to the assessee, the Express Newspapers Ltd., and thereafter resolved to wind up its business voluntarily. An amount of Rs. 2,14,000 was assessed in the relevant year of assessment as business profit of the transferor company taxable under section 10(2)(vii) and Rs. 3,94,576 taxable as capital gains. The business profit was held to be not taxable because it accrued in a winding-up sale and not in a trading venture. Liability of the second amount to tax as capital gains was not canvassed, but it was contended by the Express Newspapers Ltd. that as successor to the Free Press Ltd. it was not liable to be assessed under section 26(2). In examining the scheme of section 12B, it was observed : " Under that section the tax shall be payable by the assessee under the head capital gains in respect of any profits or gains arising from the sale of a capital asset effected during the prescribed period. It says further that such profits or gains shall be deemed to be income of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income of the person succeeded is the criterion for separate assessment under sub-section (2) and for assessment and realisation under the proviso is on the assumption that sub-section (2) and the proviso deal with all the heads mentioned in section 6 of the Act. But if, as we have held, the scope of sub-section (2) of section 26 is only limited to the income from the business, the share under sub-section (2) and the assessment and realisation under the proviso can only relate to the income from the business. The argument is really begging the question itself. " It is obvious that the court in that case held having regard to the special nature of " capital gains, " which are not in truth income, but are deemed income for the purpose of taxation and the phraseology used, that the liability of the successor under the proviso to section 26(2) is only in respect of tax on income, profits and gains of the business strictly so-called, to be computed under section 10 read with section 6(iv) and not in respect of all receipts which may be regarded as income of the business. The schemes of section 25(3) and section 26(2), proviso, are different. The first grants an exemption because ..... X X X X Extracts X X X X X X X X Extracts X X X X
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