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Income‑tax Reference No. 128 of 1950, decided on 9th March 1961.
S. 2(11) (a), (c) (before amend ment in 1952)---Previous year‑Business newly set up‑First accounting year ending after March 31‑Option of assessee Assessment year how determined‑Reference‑High Court‑Power to reframe question based on provision of law.
Where the assessee firm set up a business on July 16, 1942, and the accounts were made up to July 4, 1943, even though the business was discontinued on March 13, 1943, and filed a return of income in respect of the period July 16, 1942, to July 4, 1943 :
Held, that the assessee had the right to exercise its option under section 2(11)(c) of the Income‑tax Act, 1922, to elect the period ending on July 4, 1943, as its previous year and had so elected when it submitted the return and there was no previous year at all for the assessment year 1943‑44. But the section was silent as to the assessment year for which the account ing year ending on July 4, 1943, would be appropriately the previous year. In such circumstances recourse should be had to section 2(11)(a) under which the assessment year would be 1944 -45. In the assessment year 1944‑45 it could not be said that the business was newly set up and should be treated as an ordinary old business. The previous year of the assessee for the assess ment year 1944‑45 should be taken to be the period from July 16, 1942, to July 4, 1943.
Where the Tribunal commits an obvious error in framing the questions stated to the Court by tying them up to a provision of law not applicable to the case the Court should reframe the question deleting the reference to the law not applicable, and answer the substantial question of law that does arise by reference to the law applicable.
R. S. Pathak and G. S. Pathak for the Assessee.
Gopal Behari for the Commissioner.
‑The following four questions of law have been referred by the Income‑tax Appellate Tribunal for our opinion
(1) Whether there is any material for the finding of the Tribunal that the business were carried on by a firm consisting of all the members of the family as from July 16, 1942
(2) Whether there is any material for the finding of the Tribunal that the business were discontinued by the firm on March 12, 1943
(3) Whether the firm having discontinued its business on March 12, 1943, had the option to elect the period from the date of the starting of the business July 16, 1942, to the date when the accounts were closed to profit (July 4, 1943), as its previous year under section 2 (11) (i) (c) of the Act
(4) Whether the previous year of the assessee should be taken as the period July 16, 1942, to July 4, 1943, or July 16, 1942, to March 12, 1943, under section 2 (11) (i),(c) of the Act in the circumstances of the case "
The Tribunal in the statement of the case has summarised the relevant findings of fact recorded at the time of the decision of the appeal and has numbered those findings of facts which has been very convenient to us in deciding this reference. On the first question the findings recorded by the Tribunal were : (1) that there was a partial partition of the business between the members of the family ; (2) that the coparcenary business had ceased to exist with effect from the date of the partial partition, viz., July 15, 1942, and (3) that subsequent to that date the business was being carried on by a firm consisting of all the members of the family. The materials on which these findings of fact were recorded by the Tribunal are also mentioned: in the statement of the case and it has not been possible for Mr. Pathak appearing on behalf of the assessee to show that any of these findings of fact were recorded without any material of suffered from any other legal defect. The findings of fact mentioned above clearly show that the business which was previously carried on by the Hindu undivided family ceased to be carried on by it with effect from July 16, 1942, after, there‑was a partition of the coparcenary business on July 15, 1942. There is the further finding that with effect from July 16, 1942, the business was being carried on by a firm consisting of all‑the members of the family. This last finding is really in itself an answer to the first question. The order of the Tribunal shows that this finding is based on the statement given on behalf of the assessee firm itself, particularly the statement of Dwarka Das which has been made an Annexure to the statement of the case. In that statement, Dwarka Das had stated that the business of the Hindu undivided family was carried on after July 15, 1942, in the status of a partnership in which five members had equal shares., This clear statement made by Dwarka Das fully supports he finding recorded by the Tribunal and therefore the first question is answered in the affirmative.
On the second question the findings recorded by the Tribunal were
(1) The accounts of the firm had been made up up to July 4, 1943.
(2) The assessee firm had filed a return of income is respect of its income from July 16, 1942, to July 4, 1943.
(3) On November 8, 1942, the stock which was in hand was divided between the partners.
(4) There were, however, some forward delivery contracts on April 23, 1942, under which deliveries of bales of dhotis were taken by the firm between July 8, 1942 and March 12, 1943.
[These deliveries were taken on November 25, 1942 December 16, 1942, January 15, 1943, January 27, 1943 and March 12, 1943.]
(5) In the books of account amounts were debited in the cloth account under the forward contract dated April 23, 1942, in respect of the amounts paid for these goods of which delivery was taken.
(6) The cloth received, after November 8, 1942, was transferred to Jagdish Prasad and the sale proceeds were credited to the cloth account on various‑dates between December 21, 1942 and March 12, 1943.
(7) The sales to Jagdish Prasad were made at the market rate and at a profit:
(8) The profit derived on these sales was taken into account in the accounts of the firm and was included in the profit of Rs. 20,734 and odd shown in the profit and loss account for the year.
(9) No transaction of purchase and sale took place after March 12, 1943, but only adjustment entries had been made of realisations of outstandings.
These nine facts found by the Tribunal are all based on the evidence provided by the account books and by the evidence which was tendered on behalf of the assessee firm. These findings make it clear that, even after November 8, 1942, when the existing stocks of the firm had been divided, deliveries of further goods were, taken in pursuance of a forward contract previously entered into by the firm. On taking the deliveries, these goods were not divided between the partners at divisible assets ; on the other hand, they were actually sold and these sales were at market rates and at a profit. This indicates clearly that the business of taking delivery of the goods and. selling them at the market rates so as to make profits was continued up to March 12, 1943. Further the material shows that there was no such business after March 12, 1943, and thereafter there, were merely adjustment entries of realisations, of outstandings. Clearly; therefore, on these facts the second question has to be answered in the affirmative as the discontinuance of the business by the firm took place on March 12, 1943.
So far as the 3rd and 4th questions are concerned, we have felt some difficulty in answering them in this case as in both the questions the tribunal has asked for answers with reference to the provisions. of section 2(11)(i)(c) of the Act. The reference relates to the assessment year 1944‑45, which was‑ a year prior to the amendment of section 2 (11) by the amending Act of 1952 It was only after the amendment of 1952, that this provision of law came to have a provision which could be describes as section 2 (11) (i) (c) of the Act. Prior to the amendment in 1952, section 2 (11) had three clauses (a), (b) and (c). After the amend ment of 1952 section 2(11) came to have two sub‑clauses (i) and (ii) and sub‑clause (i) had three sub‑clauses (a), (b) and (c). It appears, therefore, that the Tribunal in deciding the appeal, in preparing the statement of the case and in framing the questions for reference to us, referred to section 2 (11) as it stood after the amendment of 1952. This was clearly incorrect as the amended section could not apply to this case where the proceedings related to the assessment year 1944‑45. If these questions referred to us by the Tribunal are to be answered in the form in which they have been framed, it is quite clear that they would have to be answered against the assessee 'as section 2(11)(i)(c) of the Act as it now stands makes it clear that the assessee had the option to elect the period from July 16, 1942, to July 4, 1943, as the previous year and it would be the previous year for the assessment year 1944‑45. Under the amended Act, if a business is newly set up in a financial year preceding the year for which assessment is to be made, it is the option of the assessee to choose as his previous year the period beginning on the date when the business was newly set up and up to the date up to which the accounts are made up, but under the proviso this period would not be the previous year for that assessment year in case the previous year ends on a date which falls after the 31st of March next succeeding the date of setting up of the business and on the other hand it would be the previous year for the succeeding assessment year. In the present case the business was set up on July 4, 1942, which fell in the financial year preceding the year of assessment 1943‑44. The accounts were made up to July 4, 1943, which is a date falling after March 31, 1943. On application of sub‑clause (e) together with the proviso the assessee could exercise the option of treating the period from July 16, 1942, to July 4, 1943, as his previous year but it would not be the previous year for assessment year 194344 and would be the previous year for the assessment year 1944‑45. This is exactly what the Tribunal has held and consequently, on both the questions the answer would be against the assessee.
We, however, consider that, when answering these questions, we should not hold that we are tied down to the form in which these questions have been framed by the Tribunal. The Tribunal has committed an obvious error in framing the questions by tying them up to a provision of law which was not applicable and we think that we should reframe the questions so as to take out that reference and answer the substantial question of law that arises and which should be answered by reference to the correct applicable law. Questions Nos. 3 and 4 should, therefore, be read after amendment as follows :
"(3) Whether the firm having discontinued its business on March 12, 1943, had the option to elect the period from the date of the starting of the business July 16, 1942, to the date when the accounts were closed to profit July 4, 1943, as its previous year
(4) Whether the previous year of tote assessee should be taken as the period July 16, 1942, to July 4, 1943, or July 16, 1942, to March 12, 1943, in the circumstances of the case "
It will be noticed that all we have done in amending the questions is to take out the reference to the inapplicable law by omitting the expression "under section 2(11)(i)(c) of the Act" from both the questions. The questions refrained in this manner have to be answered with reference to section 2 (11) of the Income‑tax Act as it stood at the relevant time and we think that in answering the questions we should not be confined to clause (c) and we should answer the questions by taking into account even clauses (a) and (b). Section 2(11)(c) of the Act as it was at the relevant time contained a proviso, the effect, of which was that, in any case where a business is newly setup in a financial year and the accounts of the business are made up to a date which falls after the 31st of March next succeeding the date of setting up of the business and the assessee exercises the option of choosing as his previous year the period beginning on the date of setting up of the new business and the date of the closing of the business which falls after the 31st of March next succeeding the setting up of the business, there will be no previous year for the assessment year for which the financial year in which the business was newly set up would ordinarily be the previous year. In case the business was set up on July 16, 1942, and the accounts were made up up to July 4, 1943, for the assessment year 1943‑44 under section 2(11)(c) of the Act as it stood at that time there would be no previous year at all. This provision further, after laying down that there will be no previous year for such an assessment year, is silent as to the assessment year for which this period would be appropriately the previous year. It appears to us that in these circumstances recourse would have to be had to section 2 (11) (a) of the Act as it then stood. That provision would apply with reference to the succeeding assess ment year which in our case means the assessment year 1944‑45. In that assessment year it could not be said that the business of the assessee was a business newly set up, as it was not newly set up in the financial year preceding the assessment year 1944‑45. It would, therefore, be treated as an ordinary old business and, in the case of such a business, the previous year of the assessee has to be determined in accordance with section 2 (11) (a) of the Act as it then stood. Under that provision, the assessee had the option of choosing this period from July 16, 1942, to July 4, 1943, as his previous year for the assessment year 1944‑45. This option the assessee, as appears from the facts already mentioned above, did exercise when he filed the return. In addition Dwarka Das in his evidence also stated that the accounts begun on July 16, 1942, were to be closed on July 4, 1943, according to the agreement between the partners. This was actually done and this was the previous year for purposes of making out the returns which were filed by the assessee. In this view, also, therefore, it has to be held on the 3rd question that the assessee had the right to exercise the option under section 2 (11) (a) of the Act as it stood at that time and in answer to question No. 4 that the assessee's ; previous year for the assessment year 1944‑45 must be taken to be the period from July 16, 1942, to July 4, 1943. Applying, the correct law, therefore, we answer both the questions against the assessee and in the affirmative.
Since all the questions have been answered against the assessee we direct that the assessee shall pay the costs of the opposite‑party which we fix at Rs. 200 representing fee of learned counsel for the department.
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