1966 (1) TMI 25 - SC - Income Tax

Whether the Income-tax Officer is entitled to have the length of the previous year as 21 months though the assessee itself applies for such a change? Held that - If the previous year at any given time applicable to the assessee ends on June 30 and he wants to vary it so as to make it end on March 31 next the Income-tax Officer has power to accord sanction to the change on the condition that the previous year would consist of the entire period of 21 months commencing on June 30 of the year up to which his accounts were last made up to March 31 of the year up to which his accounts are newly made up. The condition properly safeguards the interest of the revenue. Had he sanctioned the change on the footing that the previous year of the assessee in relation to the current assessment year would be the period of 12 months from April 1 to March 31 the income of the preceding 9 months from July 1 to March 31 would have escaped taxation altogether. Once the length of the previous year is fixed and the income of the previous year is determined that income must be charged at the rate specified in the Finance Act and at no other rate. The order of the Income-tax Officer in substance permitted the change of the previous year on condition that the previous year in relation to the assessment year 1952-53 would consist of the period of 21 months commencing from July 1 1950 and ending on March 31 1952. The Income-tax Officer had power to impose this condition. The further condition that the income of the previous year of 21 months would be assessed at the rate applicable to the income for 21 months is redundant. Once the length of the previous year is found to be a period of 21 months the income of the entire period of 21 months must be considered to be the income of the previous year relevant for the assessment year 1952-53 and the entire income must be assessed at the rate specified in the relevant Finance Act. Appeal dismissed.

Issues: Interpretation of proviso to section 2(11)(i)(a) of the Indian Income-tax Act, 1922 regarding the length of the "previous year" and the power of the Income-tax Officer to sanction changes.

The judgment by the Supreme Court delves into the interpretation of the proviso to clause (i)(a) of section 2(11) of the Indian Income-tax Act, 1922. The appellant initially adopted the year ending on June 30 as the "previous year" but sought to change it to a 21-month period ending on March 31. The Income-tax Officer sanctioned this change with a condition that the total income for the 21 months would be taxed at the applicable rate for the entire period. The appellant contested this in appeals, arguing that the income should be assessed at the rate applicable to a proportionate 12-month period. The High Court ruled in favor of the revenue, prompting the appeal to the Supreme Court.

The main contention revolved around the length of the previous year and the power of the Income-tax Officer to allow a 21-month period. The Supreme Court analyzed the relevant sections of the Income-tax Act, emphasizing that the length of the previous year need not be restricted to 12 calendar months. It highlighted that the assessee has the option to choose an accounting year ending on any date within the preceding financial year as the previous year. The court elucidated that the Income-tax Officer can sanction changes to the previous year upon proper terms, safeguarding the revenue's interests.

The court rejected the appellant's argument that there could be two previous years for the same assessment year, emphasizing that the concept is contradictory and not supported by the Act. It clarified that the Income-tax Officer cannot vary the rate at which income is assessed, as the rate is fixed by the Finance Act for the assessment year. Therefore, once the length of the previous year is determined, the income must be charged at the specified rate. The court upheld the Income-tax Officer's power to impose conditions on changing the previous year and dismissed the appeal with costs, affirming the assessment of the income for the 21-month period at the rate applicable to the entire duration.

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