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Issues Involved:
1. Construction and applicability of sub-section (2A) of section 10 of the Income-tax Act, 1922. 2. Determination of the appropriate assessment year for the income in question. Issue 1: Construction and Applicability of Sub-section (2A) of Section 10 of the Income-tax Act, 1922 The primary issue in this case revolves around the interpretation of sub-section (2A) of section 10 of the Income-tax Act, 1922, particularly whether the deemed profits under this sub-section can be taxed if the business has ceased operations during the relevant accounting year. The assessee-company had ceased its business operations before the relevant accounting year. The Income-tax Officer brought to tax a sum of Rs. 18,401 as deemed profits under sub-section (2A), arguing that there was no requirement for the business to be carried on during the previous year for the sub-section to apply. However, the Appellate Assistant Commissioner set aside this order, holding that the primary requirement for the applicability of sub-section (2A) was that the business must have been carried on during the relevant year as required by section 10(1). The Tribunal, on appeal, disagreed with the Appellate Assistant Commissioner, stating that section 10(2A) creates business profit by a fiction and presupposes that there is business carried on. The Tribunal emphasized that the fiction created by the section would be a superstructure without foundation if the business was not carried on during the year of account. The High Court analyzed the language of section 10, which taxes the profits and gains of business carried on by the assessee. The Court noted that the words "carried on by him" in sub-section (1) imply that the business must be carried on during the relevant accounting year. The Court further explained that sub-section (2A) enacts a fiction where the amount received by an assessee or the value of the benefit from remission or cessation is to be regarded as profits or gains of business, which otherwise would not be income, and they are to be regarded as profits or gains as having accrued or arisen during such previous year. The Court concluded that the fiction in sub-section (2A) does not extend to deeming the business to be in existence during the relevant year if it had ceased operations. The Court supported this conclusion by referring to the decision in Commissioner of Income-tax v. Express Newspapers Ltd., which held that the requirement of carrying on business during the previous year is essential for the application of section 10. Issue 2: Determination of the Appropriate Assessment Year The second issue pertains to the determination of the appropriate assessment year for the income in question. The assessee-company argued that the proper accounting year would be the financial year 1957-58, and therefore, the assessment year would be 1958-59, as the remission was given in February 1958. The Court examined the returns filed by the assessee-company, which had exercised its option under section 2(11) to fix the previous year ending on December 31, 1958. The Court found that the assessee-company had shown the amount of Rs. 54,172 in its original returns filed on October 5, 1959, and had specifically stated that the calendar year 1958 was its accounting year. The Court concluded that the proper assessment year would be 1959-60, as the assessee-company had exercised its option for the calendar year 1958 as its previous year. Conclusion: The High Court held that the amount of Rs. 18,401 could not be brought to tax under sub-section (2A) of section 10, as the business had ceased operations during the relevant accounting year. The Court answered the first question in the negative, indicating that the deemed profits under sub-section (2A) could not be taxed if the business was not carried on during the relevant year. The second question, regarding the appropriate assessment year, was answered in the affirmative, confirming that the proper assessment year was 1959-60, based on the assessee-company's choice of the calendar year 1958 as its previous year. The Commissioner was directed to pay the costs of the reference to the applicant.
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