Case: Commissioner Of Income-Tax Bombay Vs. Chugandas And Co., Bombay

1. M/s. Chugandas and Co. - a firm dealing in securities - received in the year 1946 Rs. 4,13,992/- as interest on securities held by it. In 1947, it received Rs. 1,01,229/ - as interest from the same source. On June 30, 1947 the firm discontinued its business. In proceedings for assessment for 1947-48 and 1948-49 the firm, relying upon S. 25(3) of the Indian Income-tax Act 1922, claimed exemption from payment of tax on income earned in the relevant previous year, on the plea that the firm was carrying on business before the Indian Income-tax Act, 1922, was enacted, and on that business, tax had been charged under the provisions of the Indian Income-tax Act 7 of 1918 in respect of the business done immediately before that Act was repealed. The firm also applied to substitute the income earned in the year 1947 for to 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 S. 8 and not under S. 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.2. 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 asthe assessee is entitled to the benefit of S. 25 (3) in respect of the interest onis 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 interest had for computing the taxable income to be taken into account under Section 8 of the Indian Income-tax Act, 1922.3. Section 25(3), on the true interpretation of which the respective contentions of the assesee and the Commissioner have to be adjusted,is in the followingany 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 discontinued, then, unless there has been a succession by virtue of which the provisions of sub-section (4) have been rendered applicable, no tax shall be payable in respect of the income, profits and gains of the period between the end of the previous year and the date of such discontinuance, and the assessee may 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 said period. Where any such claim is made, an assessment 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.from liability to pay tax in respect of the income, profits and gains under S. 25(3) may be claimed by an asscssee if the business is one in respect of which tax was charged at any time under the Indian Income-tax Act, 1918 and the business is discontinued - there being no succession by virtue of which the provisions of sub-sec. (4) of S. 25 have been rendered applicable. Section 25(3) however applies even if the person assessed under the Income-tax Act, 1918, was different from the person who claims relief under that section provided the former was the predecessor-in-interest of such person qua the business. The reason for enacting S. 25 (3) was that under the Indian Income-tax Act 7 of 1918, income-tax was levied by virtue of S. 14 (2) of Act 7 of 1918 on the income of the year of assessment. Tax was therefore levied in the financial year 1921-22 on the income of that year. By the Indian Income-tax Act 11 of 1922 the basis of taxation was altered and by S. 3 of that Act, charge for tax was imposed upon the income of the previous year. When Act 11 of 1922 was brought into force, on 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 S. 3 of Act 11 of 1922 read with the appropriate Finance Act, resulting in double taxation in respect of the income for that year.4. But with a view to make the number of assessment equal to the number of years during which the business was carried on, the Legislature enacted the exemption prescribed by S.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 S. 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 meaning of S. 25(3)for which exemption may be obtained on discontinuance raises a problem on which there was a difference of opinion in the High Court in the judgment under appeal, Tendolkar, J., was of the view that by this expression only profits and gains of business, chargeable to tax under the head "profits and gains of business, profession or vocation" under S, 10 read with S.6(iv) stood exempt from liability under S.25(3). S. T. Desai J., held that S. 25(3) exempted from liability to tax all income, profits and gains earned by conducting a business, profession or vocation irrespective of whether they were chargeable to tax under the head "profits and gains of business, profession or vocation", and with this view K. T. Desai, J., to whom the case was referred for opinion, agreed.

Court's reasoning:
6. 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 S. 10 read with S. 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 S. 8 read with S.6 (ii) of the Act. Similarly dividends from shares will be shown under S. 12(1A) and not under S. 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 S. 10, but income received from the buildings so long as they are owned by the assessee will be shown under S. 9 read with S. 6(iii). Income earned by an assessee carrying on business will in each case be broken up, and taxable income under the head profits and gains of business will be that amount alone which is earned in the business, and does not fall under any other specific head.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 S. 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 Sch. 1, S. 5 of that Act classified the income chargeable to Income-tax, and "Interest on securities" was charged under S. 7 read with S. 5(ii). In respect of interest on securities by S. 14(1) the aggregate amount of the assessees income chargeable under each of the heads mentioned in Ss. 6 to 11 became taxable in the year in which it was received. Act 7 of 1918 undoubtedly made a provision in S. 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 1918 which excluded from liability to tax, interest on securities for the year in which that income had accrued. By S. 3 of Act 11 of 1922 interest on securities earned in the year 1921-22 became chargeable and under S. 68 of that Act which was a provision transitory as well as repealing, machinery provided by the Income-tax Act of 1918 was expressly kept alive for the purpose of assessment and making adjustments under S. 19 of the Income-tax Act, 1918. Interest on securities earned in 1921-22 was therefore chargeable to tax under Act 11 of 1922. We are therefore unable to agree with counsel for the Commissioner that interest on securities not been exposed to double taxation for the year 1921-22, benefit of S. 25(3) was not admissible to that class ofexpression "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 up on 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 subsection and the proviso deal only with the profits under the 4th head mentioned in S. 6 and, so construed, it 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 sub-s. (2) and for assessment and realisation under the proviso is on the assumption that sub-s. (2) and the proviso deal with all the head 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 income from the business. The argument is really begging the question itself. " It is obious that the Court in that case held having regard to the special nature of "capital gains" which are not in truth income, but are deemed income for the purpose of taxation and the phraseology used, that the liability of the successor under the proviso to S. 26(2) is only in respect of tax on income, profits and gains of the business strictly so-called, to be computed under S. 10 read with S. 6(iv) and not in respect of all receipts which may be regarded as income of the business. The schemes of S. 25(3). and S. 26(2) proviso are different. The first grants an exemption because there has been a double levy of tax, and an intention to exempt all income, profits and gains of business from taxation may be attributed to the Legislature. Section 26(2) fastens liability of the predessor, if he cannot be found, upon the successor and must be strictly construed. The legislature has imposed by S. 26(2) liability upon the successor to be assessed for profits earned in a business carried on by his predecessor, and unless there is a clear intention expressed in the statute to include in that expression what in reality is not income, but is deemed income, the liability to assessment would justifiably be limited to profits of the business which is computable under S.where a doubt arises on the facts placed before the taxing authority whether theis entitled to exemption from taxation under a certain statutory, provision, the burden lies upon him to establish that exemption. But, here we are concerned not with any question of burden of proof but with a question of interpretationwhether the exemption which is admittedly given by S. 25(3) operates in respect of the entirety of the business income for the year in question in the course of which the business is discontinued or whether it applies only to that class of income which is taxable under the head "profits and gains of business" carried on by the assessee in thatfact that underof S. 26 liability is imposed upon the successor to pay tax on behalf of his predessor or to be assessed in respect of the income of the person succeeded for the previous year, will not in our judgment, be sufficient to hold that the exemption which has been granted in consequence of double taxation under the Acts of 1918 and 1922 also must be restricted to income which is taxable under S. 10.