Case: Commissioner Of Income-Tax, Madras Vs. Express Newspapers Ltd., Madras

item of income falls specifically under one head it is to be charged under that head and no other. The expression "income, profits and gains" in S. 6 is a composite concept which takes in all the six heads of income mentioned therein. The 4th head is "profits and gains of business, profession or vocation" and the 6th head is "capital gains". Section 10 taxes the profits and gains of a business, profession or vocation carried on by an assessee; it also enumerates the different kinds of allowances that can be made in computing the profits. Under S.10(1), as we have already pointed out, the necessary condition for the application of the section is that the assessee should have carried on the business for some part of the accounting year. Section 26(2) indicates the manner of assessment of the income, profits and gains of any business, profession or vocation. This section does not provide for the assessment of income under any other head. It only says that if there is a succession to a person carrying on business during in accounting year, the person succeeded and the person succeeding can each of them be assessed in respect of his actual share. The proviso deals with a case where the person succeeded cannot be found; in that event, the assessment of the profits of the year in which the succession took place up to the date of the succession and for the year preceding that year shall be made on the person succeeding him. If an assessment has already been made in respect of the said years on the person succeeded, it can be recovered from the person succeeding. But both sub-s. (2) and the proviso deal only with income, profits and gains of the business, that is to say, for the assessment made in respect of profit and gains under the 4th head of S. 6. Now turning to S.12B, it provides for capital gains. 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 the previous year in which the sale etc. took place. This deeming clause does not lift the capital gains from the 6th head in S. 6 and place it under the 4th head. It only introduces 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 profit 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 S. 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 they are not treated as the profits from the business. The profits and gains of business, and capital gains are two distinct concepts in the Income-tax Act : the former arises from the activity which is called business and the latter accrues because capital assets are disposed of at a value higher than what they cost the assessee. They are placed under different heads; they are derived from different sources; and the income is computed under different methods. The fact that the capital gains are connected with the capital assets of the business cannot make them the profit of the business. They are only deemed to be income of the previous year and not the profit or gains arising from the business during that year.8. If that be the scheme of the Act, the contention of the learned counsel for the Revenue can easily be answered. He asks that if S. 26(2) deals with only profits and gains of the business, why should the Legislature use the word "income" therein? As we have indicated, the expression "income, profits and gains" is a compendious term to connote the income from the various sources mentioned in S. 6; therefore, the use of such an expression does not efface the distinction between the different heads, but only describes the income from the business. The expression "profits" in the proviso makes it clear that the income, profits and gains in sub-s. (2) of S. 26 only refer to the profits under the 4th head in S. 6. On the other hand, if the interpretation sought to be put upon the expression "income" in sub-s. (2) of S. 26 by the Revenue is accepted, then the absence of that word in the proviso destroys the argument. But the more reasonable view is that both the sub-section and the proviso deal only with the profits under the 4th head mentioned in S. 6 and, so construed, excludes capital gains. The argument that sub-s. (2) of S. 26 read with the proviso thereto indicates that the total income of the person succeeded is the criterion for separate assessment under subs. (2) and for assessment and realisation under the proviso is on the assumption that sub-s. (2) and the proviso deals with all the heads mentioned in S. 6 of the Act. But if, as we have held, the scope of sub-s- (2) of S.26 is only limited to the income from the business, the share under sub-s. (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. In the result we agree with the High Court in regard to the answer it has given in respect of the second question.9

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]A conspectus of the said sections discloses a clearcut scheme. Though income-tax is only one tax levided on the total income, S. 6 enumerates six heads whereunder the income of an assessee falls to be charged. This Court in United Commercial Bank Ltd. v. Commr. of Income-tax, West Bengal, (1957) 32 ITR 688 : ((S) AIR 1957 SC 918  ) laid down that Ss.7 to 12 are mutually exclusive and where an item of income falls specifically under one head it is to be charged under that head and no other. The expression "income, profits and gains" in S. 6 is a composite concept which takes in all the six heads of income mentioned therein. The 4th head is "profits and gains of business, profession or vocation" and the 6th head is "capital gains". Section 10 taxes the profits and gains of a business, profession or vocation carried on by an assessee; it also enumerates the different kinds of allowances that can be made in computing the profits. Under S.10(1), as we have already pointed out, the necessary condition for the application of the section is that the assessee should have carried on the business for some part of the accounting year. Section 26(2) indicates the manner of assessment of the income, profits and gains of any business, profession or vocation. This section does not provide for the assessment of income under any other head. It only says that if there is a succession to a person carrying on business during in accounting year, the person succeeded and the person succeeding can each of them be assessed in respect of his actual share. The proviso deals with a case where the person succeeded cannot be found; in that event, the assessment of the profits of the year in which the succession took place up to the date of the succession and for the year preceding that year shall be made on the person succeeding him. If an assessment has already been made in respect of the said years on the person succeeded, it can be recovered from the person succeeding. But both sub-s. (2) and the proviso deal only with income, profits and gains of the business, that is to say, for the assessment made in respect of profit and gains under the 4th head of S. 6. Now turning to S.12B, it provides for capital gains. 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 the previous year in which the sale etc. took place. This deeming clause does not lift the capital gains from the 6th head in S. 6 and place it under the 4th head. It only introduces 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 profit 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 S. 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 they are not treated as the profits from the business. The profits and gains of business, and capital gains are two distinct concepts in the Income-tax Act : the former arises from the activity which is called business and the latter accrues because capital assets are disposed of at a value higher than what they cost the assessee. They are placed under different heads; they are derived from different sources; and the income is computed under different methods. The fact that the capital gains are connected with the capital assets of the business cannot make them the profit of the business. They are only deemed to be income of the previous year and not the profit or gains arising from the business during that year.8. If that be the scheme of the Act, the contention of the learned counsel for the Revenue can easily be answered. He asks that if S. 26(2) deals with only profits and gains of the business, why should the Legislature use the word "income" therein? As we have indicated, the expression "income, profits and gains" is a compendious term to connote the income from the various sources mentioned in S. 6; therefore, the use of such an expression does not efface the distinction between the different heads, but only describes the income from the business. The expression "profits" in the proviso makes it clear that the income, profits and gains in sub-s. (2) of S. 26 only refer to the profits under the 4th head in S. 6. On the other hand, if the interpretation sought to be put upon the expression "income" in sub-s. (2) of S. 26 by the Revenue is accepted, then the absence of that word in the proviso destroys the argument. But the more reasonable view is that both the sub-section and the proviso deal only with the profits under the 4th head mentioned in S. 6 and, so construed, excludes capital gains. The argument that sub-s. (2) of S. 26 read with the proviso thereto indicates that the total income of the person succeeded is the criterion for separate assessment under subs. (2) and for assessment and realisation under the proviso is on the assumption that sub-s. (2) and the proviso deals with all the heads mentioned in S. 6 of the Act. But if, as we have held, the scope of sub-s- (2) of S.26 is only limited to the income from the business, the share under sub-s. (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. In the result we agree with the High Court in regard to the answer it has given in respect of the second question.