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Civil Reference No. 136 of 1960, decided on 18th January 1963.
Ss. 25 (4) & 10-Succession- Relief -Claim admissible in respect of income, profits and gains assessable under S. 10 only.
Anibalal Himatlal v. Commissioner of Income-tax and Excess
S
Profils Tax, Bombay North 20 I T R 280 rel.
In the matter of Commercial Properties, Ltd. A I R 1928 Cal. 456 and Commissioner of Income-tax, Bombay v. Chugandas 38 I T R 241 ref.
Noor Muhammad for Applicant.
Noorul Arifin for Respondent.
Dates of hearing : 3rd, 6th and 7th January 1963:
The Income-tax Appellate Tribunal, Karachi, has under section 66 (1) of the Income-tax referred the following question for the opinion of this Court
"Did the following sources of income-
(1) Interest on securities,
(2) Dividends, and
(3) Income from property amount to the income of the business of a bank and whether accordingly the assessee applicant was entitled to relief under section 25 (4) of the Income-tax Act, 1922 in the circumstances of the case "
2. The applicant before the Tribunal was the Imperial Bank of India which had a branch at Karachi which functioned till the 30th of June 1955, when it was succeeded by the State Bank of India. The account year of the bank was the calendar year. A claim was made by the Imperial Bank of India under section 25 (4) of the Income-tax Act that its income in the calendar year 1955, i.e., from 1st January 1955, to 30th June 1955, may be substituted for the income of the previous account year, i.e., from 1st January 1954 to 31st December 1954. This claim was made not only in respect of the profits and gains of business but also in respect of the income derived from interest.. on securi ties, dividends and immovable property. The Department did not contest the claim of the applicant in regard to substitution but contended that the substitution permissible was only in respect of the income from profits and gains of business which was taxable under section 10 of the Act. It thus excluded for the purposes of substitution the income from property, dividends and from securities by way of interest which are taxable under different sections of the Income-tax Act. This position was maintained by the Income-tax Officer, the Appellate Commis sioner and the Tribunal.
3. In order to appreciate the contention of the parties it would be necessary now to refer to the relevant provisions of the Income-tax Act. Section 25 (4) reads as follows
"25 (4) Where the person who was at the commencement of Indian Income-tax (Amendment) Act, 1939, (VII of 1939) carrying on any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income-tax Act, 1918 (VII of 1918), ,is succeeded in such capacity by another person, the change not being merely a change in the constitution of partnership, no tax shall, be payable by the first-mentioned person in respect of the income, profits and gains of the period between the end of the previous year and the date of such succession, and such person may further claim that the income; profits and gains of the previous year shall be deemed to have been the income, profits pind gains of the said period. Where any such claim is made, and assess ment shall be made on the basis of the income, profits and gains of the said period, and if an amount of tax has already been paid in respect of the income, profits and gains of the previous year exceeding the amount payable on the basis of such assessment, a refund shall be given of the difference :
Provided that subsections (3) and (4) shall not apply-
(a) to Super-tax except where the income, profits and gains of the business, profession or vocation were assessed to super -tax for the first time either for the year beginning on the 1st day of April 1920, or for the year beginning on the 1st day of April 1921
(b) to a business, profession or vocation on which income -tax was at any time charged in the hands of a company under the Indian Income-tax Act, 1886 (II of 1886) or on which income-tax would have been charged in the hands of a company for the assessment year ending on the 31st day of March 1918, if the company having been in existence in that year, had also been in existence in the year ending on the 31st day of March 1917."
The next section to be referred to is section 6 which sets down the various heads of income chargeable to income-tax. These are
(i) Salaries,
(ii) Interest on securities,
(iii) Income from property,
(iv) profits and gains of business, profession or vocation,
(v) Income from other sources, and
(vi) Capital gains.
Then section 7 deals with the taxability of salary, section 8 with interest on securities, section 9 with property, section 10 with profits and gains of business, profession or vocation carried on by the assessee and section 12 with income from other sources.
4. Section 25 (4) was enacted as a result of the change in law brought about by the Income-tax Act, 1922. Under the Income-tax Act of 1918 it was the income of the current year which was liable to taxation. This was altered by the Act of 1922 which provided by section 3 thereof that the charge shall be in respect of the income of the previous year. This led to the result that for the accounting year 1921-22, the income had already been subjected to tax under the Act of 1918 and was again so subjected, under the Act of 1922 as the income for the assessment year 1922-23. Thus the income for one accounting year had been subjected to tax twice over and the object of section 25 (4) was to give relief in respect of this double taxation. The limit of such relief, however, was provided by the section itself. The relief provided was two-fold. Firstly, that upon such a succession no tax was to be payable by the person (who had been succeeded) in respect of the income, profits and gains of the business for the period between the end of the previous year and the date of such succession. Secondly, that such person was entitled to further claim that the income, profits and gains of the previous year shall be deemed to have been the income, profits and gains of the business of the said period. The effect of the exercise of such an option would be that assessment would be made on the basis of the profits and gains of the said period and in any amount of tax paid in respect of the previous year, if it exceeded the tax levied in respect of the said period would have to be refunded. In the present case, the assessment year is 1955-56, which is equivalent to the account year which is calendar year 1954 and the said period would be the period between the 1st of January 1955 and 30th June 1955, which would be assessment year 1956-57. The Imperial Bank would thus not be liable to any tax in respect of the assessment year 1956-57 and having exercised tile option would be entitled to substitute the income of its business for the said year 1956-57, which was only of 6 months for the previous year. The question is whether the applicant can claim such relief in respect of the income from interest on securities, dividends and property besides the income from profits and gains of business.
5. Mr. Noor Muhammad, the learned counsel for the applicant-Bank, contended that though it was true that his client's business was that of banking and that the profits and gains of that business was taxable under section 10 of the Act, yet interest on securities, dividends and income from immovable property was such which arose to the bank from the nature of its business, and notwithstanding the fact that these were taxable under separate heads, they were still the income of the assessee who is charged on the totality of the income. He explained that the fact that income was taxable under separate heads made no difference to his claim for relief under section 25 (4), because though the profits and gains were shown under four different heads by his client, it represented the total income from one business entity. He claimed that the three items besides the item of profits and gains of business constituted the trading assets of the assessee and should not be excluded for the purposes of the relief claimed by him. After anxious consideration we have come to the con clusion that the contention of the learned counsel cannot be accepted.
6. It has to be remembered that the relief claimed by the assessee is under a specific provision of the law viz., section 25 (4) of the Income-tax Act and, therefore, the expression "income, profits and gains of the business" must be construed in the sense in which it has been used therein and it is not permissible to give it a wider scope. Subsection (4) deals with the case only of a person who is carrying on any business profession or vocation. This is expressly stated in the earlier part of this subsection. It does not speak of a person who earns income by receiving interest on securities or rent from immovable property or income from other sources. For the purposes of the subsection it is not enough that the person was, at the commencement of the Income-tax (Amendment) Act, 1939, carrying on any business, profession or vocation but tax on it must have been charged on such business, profession or vocation under the provisions of the Income-tax Act, 1918. It is only when these two conditions are fulfilled that the question of giving relief under the latter provision of the subsection arises and this relief is in respect of the income, profits and gains which must necessarily be interpreted to be those which accrue from the business, profession or vocation. Now business, profession or vocation is a distinct head under the Income-tax Act and has been made taxable under section 10,1 subsection (1) of which reads as follows :
"10 (1) The tax shall be payable by the assessee under the head profits and gains of business, profession or vocation' in respect of the profits and gains of any business, profession or vocation carried on by him."
This section runs into several pages detailing the method by which profits and gains of business etc., have to be assessed and the various factors which have to be taken into consideration into that process. From the fact that section 25 (4) expressly uses the expression "business, profession or vocation" and the profits and gains thereof, it must follow that it was intended to limit the benefit of this section to that head of income and not others which are separately mentioned in section 6. Admittedly, the business of the applicant is that of banking. It is not their case that they are dealers in securities or immovable properties. The mere fact that they choose to buy certain securities or invest some money in immovable properties, does not render them dealers in securities or in immovable properties. Their business must be treated as the business of banking and they have themselves tabulated the profits and gains of that business separately. An argument was then raised that in so far as the word income' has been used in subsection (4) of section 25 along with the words "profits and gains" it was intended that the total income of the person was to be taken into consideration for the purposes of providing relief notwithstanding the fact that such income might have been derived from different heads as provided by section 6. We cannot agree. The words "business, profession or vocation" having been expressly mentioned in the earlier part of the subsection the words "income, profits and gains" which occur later must be interpreted to relate to the business, profession or vocation of the person concerned. This becomes perfectly clear when we refer to the proviso to subsections (3) and (4) (a) and (b) wherein the words "income, profits and gains are used in relation only to business, profession or vocation. We are, therefore, of the opinion that the relief contemplated in section 25 (4) is only with regard to the income of the business, profession or vocation of the person concerned, and in the circumstances of the case the applicant .whose business is that of banking cannot claim the application of this subsection with regard to its income from properties, dividends and interest on securities. In the case of Ambalal Himatlal v. Commissioner of Income-tax and Excess Profits Tax Bombay North (20 I T R 280), decided by a Bench of the Bombay High Court consisting of Chagla, C. J., and Tendplkar, J., it was held that the expression "income, profits and gains" in subsection (4) of section 25 of the Indian Income-tax Act, 1922, means the profits and gains of the business, profession or vocation contemplated by section 10 and not the total income of the assessee.
7. Mr. Noorul Arifin, the learned counsel for the Depart ment strongly relied on a passage from the judgment of
Rankin, C. J., in a Full Bench case In the matter of Commercial Properties Ltd. (A I R 1928 Cal. 456). This is what the learned Judge observed
"In my judgment the words of section 6 and section 9 and section 10 must be read so as to give some effect to the contrast that is there made between income, profits and gain from property' and from business' and I entirely refuse my assent to the proposition that because it happens that the owner of a property is a company which has been incorporated for the purpose of owning such property, therefore, the income derived from property' must be regarded as income derived from business'. In my judgment, income derived from property' is a more specific category applicable to the present case."
8. Reliance was placed by Mr. Noor Muhammad upon a judgment of the Bombay High Court in the case of Commissioner of Income-tax, Bombay v. Chugandas (38 I T R 241). This case was first heard by a Bench consisting of Tendolkar and S. T. Desai, JJ. Upon a difference of opinion between them the case was placed before a third Judge and it was on his Judgment that Mr. Noor Muhammad relied. The case is reported in 38 I T R p. 241. We may, however, state that the opinion of the learned Judge appears to have been considerably influenced by the fact that in that case the assessee was a dealer in securities and the learned Judge has repeatedly stressed the fact that the securities were the stock-in-trade of the assessee and that, therefore, the income from securities must be included in the expression income' as contained in section 25 (3) of the Act. That was a case of discontinuance of business. There are, however, expressions in the judgment of the learned Judge which would support the contention raised by Mr. Noor Muhammad. Tendolkar, J., in a very elaborate judgment took the view which is in accord with the view taken by us in this case and to which we adhere for the reasons given by us. Our answer, therefore, to the reference is in the negative. The parties to bear their own costs.
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