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Miscellaneous Civil Case No. 281 of 1958, decided on 28th October 1960.

Income tax Act (XI of 1922)-----

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S. 2 (11) (i)(a), proviso Previous year Option of assessee Assessee in native State assessed as non resident Foreign income taken into account to ascertain total world income Whether assessment Whether option exercised-Part B State Taxation concession Dividend from company in Part B State Taxable proportion Super tax Part B States (Taxation Concessions) Order, 1950, Paras. 4, 5, 6 & 12.

The assessee was a Hindu undivided family which had its head office at 1 and branches at other places which later formed part of Part B States. Prior to 1948, it was assessed to income tax as a non resident and for the purpose of ascertaining its total world income the Diwali year was taken as the previous year for its managing and selling agency commission from a company at U outside British India. In the first assessment year 1950 51, after the Income tax Act, 1922, was extended to the Part B States, the assessee claimed that in respect of the agency commission from the company its previous year was the one ending March 31, 1950, and not the Diwali year ending October 21, 1949. The Appellate Tribunal held that it was not open to the assessee to vary the previous year which had once been adopted before 1948. On a reference

Held, (i) that an assessee could not be said to have been assessed for the purposes of the proviso to section 2(11) (i) (a) of the Income tax Act, 1922, if his income from a source of income in a non taxable territory was included in the earlier account years only for the purpose of determining his total world income and the average rate of tax applicable to the total world income. Therefore, the assessee could not be said to have been previously assessed within the meaning of the expression "has once been assessed" as used in the proviso to section 2(11) (i) (a) merely because its managing and selling agency commission income was included in its total world income for determining the rate of tax applicable to it in the assessment years before 1948 ;

(ii) that under section 2(11) (i) (a) of the Income tax Act the exercise of option in the matter of selection of the previous year must be in respect of a particular source of income, profits and gains for the purpose of assessment. The requisites essential to option or election are well settled. For the validity of an option, it is essential that the party opting should be cognizant of his rights. The party must have the knowledge of his right to opt and of those circumstances which would influence the exercise of an option. Even if an express statement before the income tax authorities to show that he had applied his mind and exercised the option given to him were not essential the exercise of option must be demonstrably plain by an express or implied act involving the utter improbability of the party adopting the other choice open to it. In this case, the assessee did not make any statement before the income tax authorities about the exercise of option, and the fact that its accounts were made on the footing of the Diwali year ending on October 21, 1949, was not by itself a circumstance conclusive of the exercise of option under section 2 (11) (i) (a). The accounting year was normally one ending on March 31, of the year in which the income was earned. The option was with the assessee to adopt any other period of account not terminating with March 31. The fact that under clause (a) the assessee could not adopt any other period unless his accounts were made up to that date on which, under his system of accounting, the year ends did not mean that if the assessee has made up his accounts on a date not terminating with March 31, he had exercised the option given to him under clause (a). In the assessment years before 1948, when the managing and selling agency commission accruing in non taxable territories was not taxable, the assessee could not have contemplated the necessity for exercising the option in the matter of 'the previous year with reference to the assessability to tax of income from this source.

Commissioner of Income tax v. Lady Kanchanbai (1962) 44 I T R 242 (M P) fol.

Bisheshwar Singh v. Commissioner of Income tax (1955) 27 I T R 376 (Pat.) ref.

In the account year relevant to the assessment year 1950-51, the assessee derived a net dividend income of Rs. 2,62,860 from a company registered in a Part B State. The dividend income attributable to Part A States was taken to be Rs. 34,468 which was grossed up and assessed to income tax and supertax at the rates prescribed by the Finance Act, 1950. The balance of Rs. 2,28,392 was not subjected to income tax but was assessed to super tax at the concessional rates under the Part B States (Taxation Concessions) Order, 1950 :

Held, that under the Part B States (Taxation Concessions) Order, 1950, tax was payable on the entire dividend income, excluding the non taxable portion under paragraph 12 of the Order, only at the concessional rates under the Order.

Anup Prabha Bai Sethi v. Commissioner of Income tax (1962) 44 I T R 237 (M P) fol.

V. M. Chitaley and V. S. Dabir for the Assessee.

M. Adhikari (Advocate-General) for the Commissioner.

DIXIT, C. J.--

This is a reference under section 66 (1) of the Income tax Act at the instance of the assessee and the questions referred to us by the Appellate Tribunal for decision are :

"(i) What is the previous year' in respect of the source of income, viz., managing agency and selling agency and financing of the Binod Mills Ltd., Ujjain, for the purpose of assessment for the assessment year 1950 51 whether the year ended March 31, 1950, or the year ended Diwali, 1949

(ii) Whether the selling agency commission attributable to sales made to parties in Part A States accrued in Part A States

(iii) Whether for the purpose of bringing to tax the dividend income of the assessee for the assessment year 1950 51, and having regard to paragraph 12 of the Part B States (Taxation Concessions) Order, 1950

(a) the net dividend income, say of Rs. 34,468 (gross Rs. 50,137) has been rightly brought to tax, both income tax and super tax, without any concession in regard to the tax payable thereon ;

(b) the net dividend income, say of Rs. 2,28,392 has been rightly subjected to super tax at Part B States rates to super tax only "

The facts briefly stated are that the assessee is a Hindu undivided family with its head office at Indore and branches at several other places in former Part B States, such as Madhya Bharat which included Indore and Gwalior States, Hyderabad (Dn.) State, Rajasthan, etc. It derives its income from several sources such as property, dividends, business, managing agency commission, shares in partnership firms, etc. The assessee family was at one time carrying on business in Bombay and was assessed in the status of a non resident Hindu undivided family. Its business was, however, closed down for some time in 1945, and no assessment was made for the years 1948 49 and 1949 50. In the course of the assessments before the assessment year 1948 49, in the status of the assessee as a nonresident Hindu undivided family the previous year adopted by the assessee was the appropriate Diwali year. In the first assessment year 1950 51, after the amendment of the definition of "taxable territories" in 1950, the assessee claimed that in respect of its income by way of commission from the managing and selling agency of the Binod Mills Ltd., Ujjain, its previous year was one ending on March 31, 1950 ; and that on this basis the managing and selling agency commission which accrued to the assessee for the calendar year 1949, on December 31, 1949, or January 1, 1950, was taxable 'and not .the managing and selling agency commission for the calendar year 1948. This contention of the assessee was overruled by the Appellate Tribunal and the taxing authorities, who took the view that the case of the assessee did not fall under the substantive provision contained in section 2 (11) of the Act, and that as the assessee family had "once been assessed" in the previous assessment years in respect of this source, therefore, it was not open to it to vary the previous year. Accordingly, the family was assessed by the Income tax Officer on the basis of the Diwali year beginning from November 2, 1948, and ending on October 21, 1949, as the account year, which included managing and selling agency commission for the calendar year 1948, which accrued to the assessee on December 31, 1948, or January 1, 1949.

In the account year in question the assessee derived not dividend income of Rs. 2,62,860 from the Binod Mills Ltd., Ujjain, a company registered in a Part B State, viz., the former Madhya Bharat. Out of this income Rs. 34,468 were without any dispute taken as attributable to profits that accrued or that could be deemed to have accrued to the Binod Mills Ltd., Ujjain, in Part A States and the remaining amount of Rs. 2,28,392 was regarded as attributable to profits which accrued to the dividend paying company in Part B States. As the dividend income attributable to profits accruing in Part A States was subjected to tax, the Income tax Officer grossed up the net dividend of Rs. 34,468 to Rs. 50,137. This income was subjected to income tax as well as super tax at the rates prescribed by the Finance Act, 1950, rejecting the claim of the assessee for concession in regard to this income under the Part B States (Taxation Concessions) Order, 1950. The balance of Rs. 2,28,392 was, however, not subjected to any income tax in view of the provisions contained in paragraph 12 of the Taxation Concessions Order, 1950. It was, however, subjected to super tax at the concessional rates mentioned in the said Order. The Tribunal rejected the contentions of the assessee that the dividend income of Rs. 2,28,392 was not subject to supertax under paragraph 12 of the Taxation Concessions Order, 1950; that the amount of Rs. 2,62,860 should not have been apportioned as the Income tax Officer had done and on this amount income tax as well as super tax could be levied only at the Part B States concessional rates ; and that in any case supertax was payable on the entire dividend income of Rs. 2,6.,860 only at the concessional rates.

The Appellate Tribunal's conclusion about the assessee's previous year being the Diwali year ending on October 21, 1949, in respect of the managing and selling agency commission and the assessee not being allowed to vary it so as to adopt for this source the financial year ending on March 31, 1950, was based on the reasoning that in the assessment years before 1948, that is to say, even before April 1, 1950, the assessee was assessed in respect of the managing and selling agency commission on the footing of the Diwali year inasmuch as, though the commission income from non taxable territories was not included in its total income or total taxable income, it was included in the total world income for determining the rate of tax applicable to it ; that the assessee had thus already exercised its option in the matter of selection of the previous year ; and that, therefore, the assessee could not be allowed either under the proviso to clause (a) of section 2 (11) (i) or the substantive clause (a) to vary the previous year. A similar question came up for our decision in Commissioner of Income tax v. Lady Kanchanbai ((1962) 44 I T R 242 (M P)). In that case the Appellate Tribunal, Delhi, rejected the construction of the expression "an assessee has once been assessed" occurring in the proviso to clause '(a) of section 2 (11) (i) which the Appellate Tribunal, Bombay, has adopted in the present case. In Commissioner of Income tax v. Lady Kanchanbai, we have expressed the opinion that the expression "where an assessee has once been assessed in respect of a particular source of income, profits and gains" means where the income, profits and gains of a particular source has been computed in the manner laid down in the Act and included in the total income, and that an assessee could not be said to have been assessed for the purposes of the proviso if his income from a source of income in non taxable territory was included in the earlier account years for the purpose of determining his total world income and the average rate of tax applicable to the total world income. It must, therefore, be similarly held in the present case that the assessee could not be said to have been previously assessed within the meaning of the expression "has once been assessed" as used in the proviso to section 2 (11) (i)(a) merely because its managing and selling agency commission income was included in. its total world income for determining the rate of tax applicable to it in the assessment years before 1948.

The additional reason given by the Tribunal here for rejecting the assessee's claim with regard to the selection of the financial year ending on March 31, 1950, as the previous year in respect of the managing and selling agency commission was that the assessee had already exercised its option and chosen the Diwali year. The orders of the Tribunal and of the taxing authorities do not, however, give any indication as to the acts of the assessee on the basis of which it can be concluded that there has been an exercise of option. It is plain from the language of section 2(11)(i)(a) that the exercise of option in the matter of selection of the previous year must be in respect of a particular source of income, profits and gains for the purpose of assessment as understood in the sense indicated earlier. The requisities essential to option or election are well settled. For the validity of an option, it is essential that the party opting should be cognizant of his rights. The party must have the knowledge of his or her right to opt and of those circumstances which would influence the exercise of an option. In Bisheshwar Singh v. Commissioner of Income tax ((1955) 27 I T R 376 (Pat.)) the Patna High Court has gone to the extent of saying that for the exercise of an option under section 2 (11) (c) the assessee is bound to make some statement before the income-tax authorities to show that he had applied his mind and that he had exercised the option given to him. Even if it is held that such an express statement is not essential, there can be no doubt that the exercise of option must be demonstrably plain either by express or implied act involving the utter improbability of the party adopting the other choice open .to it. Here, the assessee did not make any statement before the income tax authorities about the exercise of option. , Its accounts were no doubt made on the footing of the Diwali year ending on October 21, 1949. But that by itself is not a circumstance conclusive of the exercise of option under section 2 (11)(i)(a). The account year is normally one ending on .March 31, of the year in which the income is earned. The option is with the assessee to adopt any other period of account not terminating with March 31. The fact that under clause (a) the assessee cannot adopt any other period unless his accounts have been made up to that date on which, under his system of account, the year ends does not mean that if the assessee has made up his accounts on a date not terminating with March 31, he has exercised the option given to him under clause (a). The option can be exercised in any case until the filing of the return and under section 22(3) the assessee has the liberty to furnish a revised return, at any time before the assessment is made if he discovers any omission or wrong statement therein.: The fact that the assessments before 1948, were made on the basis of the Diwali year as the previous year and in those years of account the managing and selling agency :commission was included in the total world income for purposes of rate cannot in any sense be regarded as . an indication of the fact that the assessee has exercised his option and adopted the Diwali year as the year of account in respect of the managing and selling agency source of income for the purpose of its assessment to tax. In the assessment years before 1948, when the managing and selling agency commission accruing in nontaxable territories was not taxable, the assessee could not have contemplated the necessity for exercising the option in the matter of the .previous .year with reference to the assessability to tax of income from this, source. The circumstances which came into being after the amendment of the definition of "taxable territories" in 1950, did not exist in 1948, or in the earlier years and it is impossible to hold that the assessee was cognizant of its rights and, of those circumstances influencing the exercise of the option when the income from the managing and selling agency source became taxable after April 1, 1950. Our answer to the first question is, therefore, that in respect of the managing and selling agency source of income the previous year chosen by the assessee is the year ending on March 3, 1950.

The second question was not pressed by Shri Chitale, learned counsel appearing for the assessee. It is, therefore, unnecessary to express any opinion thereon.

The third question is answered fully by the opinion expressed by us in Smt. Anup Prabha Bai Sethi v. Commissioner of Income-tax ((1962) 44 I T R 237 (M P)) where a similar question arose for consideration. In that case, after analysing the material provisions of the Income-tax Act and paragraph 12 of the Taxation Concessions Order, 1950, we expressed the following. view (1962) 44 I T R 237, 240 (M P) :

"So that if a part of the profits of a company registered in a State in which there was no State law are liable to be taxed in the taxable territories other than a Part B State, the concession would nonetheless apply if in that Part B State the profits were not liable to be taxed. The amount of net dividend paid out of the profits which have been taxed in the taxable territories other than a Part B State may be grossed up under section 16 (2) of the Act before its inclusion in the assessee s total income But if the shareholder is an assessee falling under paragraph 4 the tax payable on the entire dividend income included in the total income, after excluding the proportion of non taxable dividend under paragraph 12, would be at the concessional rates under the Taxation Concessions Order, 1950. This position, obvious' from the provisions of paragraphs 4, 5 and 6 of the Order, is not disputed by the learned counsel for the assessee and the learned Advocate-General appearing for the department."

We also pointed out in the case of Anup Prabha Bai Sethi that the concession given by paragraph 12 of the Taxation Concessions Order, 1950, was confined to income tax and did not apply to super tax and that the assessee in that case (who was similarly placed as the assessee here in so far as the income from dividends was concerned) was liable to pay super tax at the concessional rates mentioned in the Taxation Concessions Order, 1950.

For these reasons, our answer to the first question is that the previous year in respect of the managing and selling agency source of income is the financial year ending on March 31, 1950, as chosen by the assessee. With regard to the third question, the answer is that the tax payable on the entire dividend income included in the total income after excluding the proportion of non taxable dividend under paragraph 12 of the Taxation Concessions Order, 1950, would be at the concessional rates under the said Order and the assessee is liable to pay super tax at the concessional rates mentioned in the Taxation Concessions Order, 1950, on the entire dividend income. The assessee shall have costs of this reference. Counsel's fee is fixed at Rs. 250.

Reference answered accordingly.

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