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TMI Blog1964 (7) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to the benefit of the exemption claimed. The order of the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner. The Income-tax Appellate Tribunal, however, reversed the order and held that the firm was entitled to the benefit of the exemption in respect of the entire income of the business including income from securities in the year in which the business was discontinued. At the instance of the Commissioner, the Tribunal referred under section 66(1) of the Act a question, which, when reframed by the High Court of Bombay, read as follows : " Whether the assessee is entitled to the benefit of section 25(3) in respect of the interest on securities ? " It is common ground that the principal business of the assessee was as a dealer in securities. Securities held by the assessee were its stock-in-trade and interest on those securities was received from time to time, and this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 appropriate Finance Act, resulting in double taxation in respect of the income for that year. But with a view to make the number of assessments equal to the number of years during which the business was carried on, the legislature enacted the exemption prescribed by section 25(3). This benefit was however restricted only to the income, profits and gains of business, profession or vocation on which tax had been charged under the provisions of the Indian Income-tax Act, 1918. By enacting section 25(3) the legislature intended to exempt the income, profits and gains resulting from the activity styled business, profession or vocation from tax when the business, profession or vocation is discontinued if tax was charged in respect thereof under the Act of 1918. That much is clear. But that is not the whole problem. What is to be regarded as income, profits and gains of business, profession or vocation within the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 8, which is a distinct head, it could not be brought under section 10, whether the securities were trading assets or capital assets. It must, therefore, be held that even if an item of income is earned in the course of carrying on a business, it will not necessarily fall within the head " profits and gains of business " within the meaning of section 10 read with section 6(iv). If securities constitute stock-in-trade of the business of an assessee, interest received from those securities will for the purpose of determining the taxable income be shown under the head " interest on securities " under section 8 read with section 6(ii) of the Act. Similarly, dividends from shares will be shown under section 12(1A) and not under section 10. If an assessee carries on business of purchasing and selling buildings, the profits and gains earned by transactions in buildings will be shown under section 10, but income rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 legislature intended to refer to a specific head of taxation under section 6 of the Act as a condition for imposing an obligation or claiming a right, the legislature has in terms referred to such a head. For instance, by section 18(2) liability is imposed upon any person responsible for paying any income chargeable under the head " salaries " to deduct income-tax and super-tax on the amount payable. Similarly, under section 18(3) the person responsible for paying income-tax under the head " interest on securities " is liable to deduct income-tax and super-tax at the prescribed rates on the amount of interest payable. Section 24 enables set-off in respect of loss sustained under any of the heads mentioned in section 6 against income, profits and gains from any other head in that year. These are some of the provisions in which reference is made to specific heads of taxation. But the exemption under section 25(3) is g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion 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, penalty for an amount not exceeding the tax assessed in respect of any income, profits or gains of the business may be imposed. There is no logical reason for restricting the penalty to the amount of tax assessed on profits and gains determined for the purpose of section 10. It has also to be noticed that prior to the insertion of sub-section (1A) of section 12 by section 9 of the Finance Act, 1955, with effect from April 1, 1955 income from dividends was chargeable not under section 12 but under section 10, if the shares from which such income was received were the stock-in-trade of the assesse. The result of the insertion of section 12(1A) is that in respect of a business in shares dividends received from the shares were till March 31, 1955, regarded as profits and gains of business assessable to tax under section 10. After the enactment of the Finance Act of 1955, dividends became chargeable under section 12( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 Commissioner that for the year 1921-22 interest on securities could not be charged to tax twice over. Under the Income-tax Act (7 of 1918), by section 14(2), tax was levied in respect of the year beginning from April 1, 1918, in respect of each subsequent year, upon every assessee on his taxable income in that year at the rate specified in Schedule I. Section 5 of that Act classified the income chargeable to income-tax, and " interest on securities was charged under section 7 read with section 5(ii). In respect of interest on securities by section 14(1) the aggregate amount of the assessee's income chargeable under each of the heads mentioned in sections 6 to 11 became taxable in the year in which it was received. Act 7 of 1918 undoubtedly made a provision in section 19 for adjustment of liability to tax when the actual income was ascertained. Our attention has not been invited to any provision in the Income-tax Act (7 of 191 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in such previous year were entitled to receive the same. If the tax assessed upon a partner cannot be recovered from him it may be recovered from the firm as constituted at the time of making the assessment. This provision deals with the machinery of assessment and not with computation of income, nor with exemption from liability to tax. Sub-section (2) of section 26 deals with cases of succession to any person carrying on any business, profession or vocation by another person carrying on business, profession or vocation in such capacity, and provides that the person succeeding is, subject to the provisions of sub-section (4) of section 25, liable to be assessed in respect of his actual share of the income, profits and gains of the previous year. But the proviso enacts that if the person succeeded in the business, profession or vocation cannot be found, the assessment of the profits of the year in which succession took ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 the previous year in which the sale, etc., took place. This deeming clause does not lift the capital gains from the 6th head in section 6 and place it under the 4th head. It only introduced a limited fiction, namely, that capital gains accrued will be deemed to be income of the previous year in which the sale was effected. The fiction does not make them the profits or gains of the business. It is well settled that a legal fiction is limited to the purpose for which it is created and should not be extended beyond its legitimate field. Sub-sections (2A) and (2B) of section 24 provide for the setting off of the loss falling under the head ' capital gains ' against any capital gains falling under the same head. Such loss cannot be set off against an income falling under any different head. These three sections indicate beyond any doubt that the capital gains are separately computed in accordance with the said provisions and th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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