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TMI Blog1945 (3) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... y of Rs. 1,600 plus a commission on the net profits. He was also to be provided with furnished residential. quarters free of rent and with a, motor car or at his option a monthly allowance of Rs. 500. A copy of the agreement is annexed and marked A. 3. On the 8th of September, 1939, the assessee submitted a return of income for the previous year ending on the 31st of December, 1938. In this return he included a sum of Rs. 12,302 under the head" business, profession or vocation." In the course of the assessment proceedings however he claimed that this sum was not in fact liable to taxation since he had ceased to do private professional work in view of the formation of the company and had not undertaken any such work during the relevant accounting period. The Income-tax Officer held that the income received from outstanding professional fees was liable to taxation and he completed the assessment on the following income: Rs. Salary 13,500 Profession 12,302 Dividends 378 Interest on loans 2,491 ¼ share of income from the estate of Mr. M. M. Kamdar 6,060 A copy of the assessment order is annexed and marked B. 4. On appeal the Appellate Assistant Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in fact discontinued his profession before the beginning of that year. 8. But even if the assessee did not undertake any new business in his personal capacity during the calendar year 1938 the department would still, in my opinion, be entitled to tax the professional fees which he received in that year. In claiming that these fees are not liable to taxation he relies mainly on the following observations made by Rowlatt, J., in the case of Bennett v. Ogston([1930] 15 Tax Cas 374): "When a trader or a follower of a profession or vocation dies or goes out of business... ....and there remain to be collected sums owing for goods supplied during the existence of the business or for services rendered by the professional man during the course of his life or his business, there is no question of assessing those receipts to income tax; they are the receipts of the business while it lasted, they are arrears of that business, they represent money which was earned during the life of the business and are taken to be covered by the assessment made during the life of the business, whether that assessment was made on the basis of bookings or on the basis of receipts." In my opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s income from a profession would escape assessment merely because he has chosen to maintain his accounts on the cash basis. I submit that an interpretation which produces this result cannot be correct. As Lord Trayner remarked in Californian Copper Syndicate v. Harris([1904] 5 Tax Cas. 159): "I cannot think that income tax is due or not according to the manner in which the person making the profit pleases to deal with it". 10. As regards the assessee's contention that the amount in question is not "income" but the realisation of a debt I venture to point out that every sum received by him for professional services rendered while he was carrying on his profession was the realisation of a debt, but nevertheless it was admittedly income. I further submit that the treatment of bad debts relating to a discontinued business is not relevant to the present question since the admissibility of a bad debt as a set-off against the other income of an assessee is governed by the specific provisions of the Act. Under the scheme of the Act all income, profits and gains are liable to taxation unless specifically exempted, and even if the income in question were held not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinuance is in some doubt, but in this Court it was agreed by counsel that February 16, 1938, should be taken as the date of discontinuance. The sum of Rs. 12,302 represents She assessee's outstanding professional fees earned from his practice as a consulting engineer previously to January 1, 1938, and paid to or re. ceived by the assessee during the calendar year 1938. It follows that, if a certain view of this matter was taken, the sum of Rs. 12,302 would have to be apportioned in order to discover how much of it was in fact received on or before February 15, 1938. The question referred to us is as follows: "Whether, in the circumstances of the case, the outstanding professional fees which were realised by the assessee during the year under assessment are taxable as part of his income for that year?" This question is misleading, as the expression "the year under assessment" is used not in the sense of the assessment year, which was 1939-40, long before which the business had been discontinued and in which no part of Rs. 12,302 was received, but the previous year, that is to say, the accounting year 1938. The industry of counsel, to whose clear and able ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s amended from time to time, but before the 1939 amendments came into operation. Section 3 provides that " where any Act of the Central Legislature enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or members of the association individually. " " Total income " is defined by sub-section 2(15) of the Act as follows : " ' Total income ' means total amount of income, profits and gains referred to in sub-section (1) of Section 4 computed in the manner laid down in this Act. " Turning to sub-section 4(1), it is in these terms : " Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which (a) are received or are deemed to be received in British India in such year by or on behalf of suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what may be done when a business or profession is discontinued. Section 10 is as follows : " (1) The tax shall be payable by an assessee under the head ' Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely : There follow, set out in numbered sub-paragraphs, a number of items of disbursement, such as rent, repairs, interest on capital borrowed for the purposes of business, premiums on insurance and depreciation, implemented by provisos and explanations. Section 12 is as follows : " (1) The tax shall be payable by an assessee under the head ' Income from other sources ' in respect of income, profits and gains of every kind which may be included in his total income (if not included under any of the preceding heads). (2) Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains provided that no allowance shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r vocation which was charged under the provisions of the Indian Income-tax Act, 1918, and it provides that, except in the case of a succession, 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 also provides that 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. No regard has been paid to this section in the assessment of the assessee to tax. No assessment has been made under it for the fraction of the year January 1 to February 15, 1938 (both inclusive). No reliance has been placed upon its operation by the Commissioner of Income-tax. Indeed there is nothing to show whether tax was charged on the profession under the provisions of the Indian Income-tax Act, 1918, or not. Looking at the scheme of the early sections, the salient features of the 1939 Act are, as it seems to me, that under Section 3 tax is to be charged for any particular assessment year in respect of the total income of the previous year, which, by the conjoint effect of sub-section 2(15) and S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessed by the machinery of computation laid down by the Act for inclusion in what the Act describes as the total amount of income, profits and gains. The fees outstanding from time to time of a professional man, who admittedly keeps his books on a cash basis, must, for the purpose of being processed to income, profits and gains, come either under head (iv) " Profits and gains of business, profession or vocation, " dealt with by Section 10, or under head (v) " Income from other sources, " dealt with by Section 12. Section 13 is mandatory : income, profits and gains shall be computed, for the purposes of Sections 10 and 12, in accordance with the method of accounting regularly employed by the assesseein this case the cash basis. The nexus between it and sub-section 2 (15) is not unimportant. Under Section 10 the profits and gains must be from a business, profession or vocation carried on by the assessee, and from these profits or gains certain stated allowances are to be deducted. Do the words " carried on by him " mean carried on by the assessee in the assessment year or the accounting year, or do they mean carried on by the assessee at any time ? If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which were receipts of the profession while the profession was still being carried on. Turning then to Section 12, are the outstanding fees when received " income from other sources ? " In order to be so, it would mean that some new source of income, profits or gains sprang up either on January 1 or on February 16, 1938, composed of the fees then outstanding. So far as the fees received on and between January 1 and February 15 are concerned, this clearly is not the case. The profession was then being carried on and these receipts, less the proper allowances, could, and, in my opinion, should have been assessed by the conjoint operation of Sections 10 and 25. On February 15 the profession ceased and according to the assessee's method of accounting there was left over a list of book-debts owed by debtors who were in arrear in the payment of their fees. In my opinion, having regard to the method of accounting employed by the assessee, these debts when collected are not income from other sources. There is nothing continuous about them and they are incapable of repetition, and the very fact that Section 25 is wholly silent with regard to them, though it deals with the si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing stated that the income of a zamindar would not be chargeable under the head " property, " and that if chargeable it would be under the head " other sources, " his Lordship continued : " Section 12 deals with that head, and requires close attention. Section 12, sub-section (1), provides that the tax shall be payable by an assessee under that head ' in respect of income, profits and gains of every kind and from every source to which this Act applies (if not included under any of the preceding heads). ' These words appear to their Lordships clear and emphatic, and expressly framed so as to make the sixth head mentioned in Section 6 describe a true residuary group embracing within it all sources of income, profits and gains provided the Act applies to them, i. e., provided that they accrue or arise or are received in British India or are deemed to accrue or arise or to be received in British India, as provided by Section 4, sub-section (1), and are not exempted by virtue of Section 4, sub-section (3). " Dealing with the incidence of taxation, his Lordship observed : " The tax is upon ' income, profits and gains. ' It is not a tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. ' But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production. " Having referred to and quoted Section 6 of the Act, his Lordship continued : " The claim of the taxing authorities is that the sum in question is chargeable under head (iv) business. By Section 2, sub-section (4), business ' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. ' The words used are no doubt wide, but underlying each of them is the fundamental idea of the continuous exercise of an activity. Under Section 10 the tax is to be payable by an assessee under the head business ' in respect of the profits or gains of any business carried on by him. ' Again, their Lordships think, the same central idea : the words italicised are an essential constituent of that which is to produce the taxable income : it is to be the profit earned by a process of production. And this is borne out by the provision for allowances which follows. They include rent paid for the premises where the business is carried on ; the cost of current r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a broker in Bombay, entered into certain future delivery contracts for the purchase and sale of commodities in various foreign markets from parties outside British India. No delivery was either given or taken, and the profits of such contracts were not received in British India. Sir George Rankin delivering the judgment of the Board said (pages 347-348) : " Their Lordships do not consider that the Indian Income-tax Act is patent of this construction. They will first deal with the argument based on Sections 4 and 6, that the respondent's business is the source of the profits, and that the sections require that the situation of the source should determine the place where the profits arise. This, in their Lordships' view, is a straining of the sections. The effect of Section 6 is to classify profits and gains under different heads for the purpose of providing for each appropriate rules for computing the amount ; its language is ' shall be chargeable . . . . in the manner hereinafter appearing. ' One of the heads is ' Business, ' which as a head of income stands alongside Salaries, Interest on securities, Professional earnings, and Other sources. True, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuate in British India ? ' is to divert attention from that to which the statute points and to devote attention to what it discards. " Though the last two cases to which I desire to refer are both reported in the 1943 volume of the Income Tax Reports, they both deal with the position before the 1939 Amending Act. The first of those cases is Indian Iron & Steel Co., Ltd. v. Commissioner of Income-tax, Bengal (1943) 11 I. T. R. 328). The assessee-company agreed to acquire and take over the whole of the property of another company as existing on the date of transfer, which was December 2, 1936, and the assessee-company continued the business which it purchased in conjunction with its own existing business. Both companies had to their respective credit large sums of unabsorbed depreciation allowance which, under the Act, they could set off against future profits. December 2, 1936, came within the accounting period, which was from April 1, 1936, to March 31 following, and it was held that the purchaser-company was not entitled to have the depreciation allowance of the vendor-company computed on the original cost of the assets of the vendor-company for the whole of the previou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me flows from some capital assets, of which the simplest illustration is the purchase of an annuity for a lump sum, does not prevent it from being income, though in some analogous cases the true view may be that the payments, though spread over a period, are not income, but instalments payable at specified future dates of a purchase price ". The arguments and submissions of counsel have in large measure ranged round these cases in endeavours to show that one or some of them are decisive of the case before us. But when all has been said, the basic question is, whether the receipt of these outstanding fees after the profession has been discontinued are taxable income. It seems to me that the view I take is consistent with these authorities. In the language used by Lord Russell of Killowen in delivering the Judgment in Probhat Chandra Barua v. The King-Emperor (1930) 57 I. A. 228), " it is not a tax on gross receipts, " and the sum of Rs. 12,302 in the case before us is unquestionably made up of gross receipts ; it is not a " taxable balance ". Even if the pictorial simile to be found in the judgment in the case of Commissioner of Income-tax v. Shaw Wallac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner of Income-tax, Punjab (1937) 5 I. T. R. 279), are in favour of the view which I take of this problem. On the other hand, a Full Bench decision in Calcutta, Behari Lal Mullick, In re (1927) 54 Cal. 630), is to the contrary. Having regard to the decisions in the Privy Council already referred to, I do not think it would be profitable to enter into any exhaustive discussion on the Indian decisions. In my judgment the answer to the question referred to us in this case is that that portion of these outstanding fees which was received from January 1 to February 15 (both inclusive) ought to have been assessed under Section 25 of the Act, and, had they been, they would have been liable to income-tax and that the balance being that portion received on and from February 16 till the end of the calendar year is not assessable to income-tax. In deference to the able arguments that have been addressed to us, there are two further aspects of the matter which I desire to mention. Although in my judgment, the primary answer to the question in this case is, that outstanding fees which come in after the determination of the profession which earned them are not receipts capable of computation as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of reading the judgment just delivered by the learned Chief Justice. After giving it anxious consideration I regret I am unable to agree with his view. This is a reference made under Section 66(2) of the Indian Income-tax Act, 1922, by the Commissioner. The relevant facts are that the assessee was the sole proprietor of a business run in the name of "Kamdar Karyalaya" and was also carrying on the profession of a consulting civil engineer in Bombay. The business of "Kamdar Karyalaya" was converted into a limited company, styled Kamdar Ltd., on February 16, 1938, and the assessee was appointed the "managing member" of the company. The business of "Kamdar Karyalaya" was transferred to the limited company. The question before us does not relate to that part of the transaction. After February 15, 1938, the assesses did not carry on the profession of a consulting civil engineer as before. The accounting year of the assessee was 1938. In respect of his professional earnings he kept accounts on the basis of receipts and his income of the previous years was computed on that footing, In respect of his income in 1938, the assessee contended that as h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies and had branch offices in different parts of India, For a number of years prior to 1928 they acted as distributing agents in India of the Burma Oil Co., Ltd., and the Angle-Persian Oil Co., Ltd., but had no formal agreements with either company. In or about 1927 the two companies joined and decided to make other arrangements for distribution of their products. The respondents' agency with the Burma Oil Co. was accordingly terminated on December 31, 1927, and that of the Anglo-Persian Co. on June 30, 1928. Sometime in the first half of 1928 the Burma Oil Co. paid to the respondents Rs. 12,00,000 ''as full compensation for cessation of the agency" and in August of the same year the Anglo-Persian Oil Co. paid to them a sum of Rs. 3,25,000 as "compensation for the loss of your office as agents of the company." These expressions were accepted as correctly describing the nature of the transactions. On behalf of the Commissioner it was sought to be argued that these payments were income in 1928 and liable to be taxed. The contention was negatived by the High Court at Calcutta and also by the Privy Council. Sir George Lowndes in his judgment observed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t; the sum must flow or grow out of a source in existence in the accounting year. In this connection the provisions of Section 24 of the Act were also relied upon. It was pointed out that unless the business was carried on in the accounting year, the loss of the previous year, which was carried over and permitted to be set off, could not be set off. Section 24 permitted such set-off only when the same business was continued. It was urged that while Sections 3 and 4 were charging sections, Chapter III commencing with Section 6 dealt with "taxable income." Under Section 6 it was provided that income shall be shown under five heads and the fourth head was "profits and gains of business, profession or vocation." Income under that head was dealt with in Section 10. That runs as follows: "The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him." It was urged that the very idea of income postulates the existence of source in the year in which it is taxed. Unless the source existed it could not be stated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived later. As regards the allowance and set-off permitted under Section 10 and 24 respectively it was argued that the same were permitted as provided in those sections, and Section 10(2) was wide enough to cover expenditure laid out for business or profession even though it had ceased to be carried on in the accounting year. Our attention has not been drawn to any decision on the construction of Section 4 after its amendment in 1939. Therefore it is desirable first to look at the provisions of the Income-tax Act in force in the assessment year. It is common ground that the Act as amended in 1939 is applicable to the case before us. In order to appreciate the rival contentions of the parties it is necessary to notice the relevant provisions of the Act of 1922 and consider the same with the amended provisions of the Act of 1939. This is material because several decisons of the Privy Council which have been relied on were pronounced on the wording of the sections of the Act of 1922. The Act of 1932 was an Act to consolidate and amend the law relating to income-tax and super-tax. In Section 2(16) the expression 'total income' was defined as follows: "'Total income& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following allowances, namely:-(i) any expenditure (not being in the nature of capital expenditure) incurred solely for the purposes of such profession or vocation, and not being personal expenses of the assessee...." Section 12, sub-section (1) provided as follows: "The tax shall be payable by an assessee under the bead 'Other sources' in respect of income, profits and gains of every kind and from every source to which this Act applies (if not included under any of the preceding heads)." Sub-section (2) provided: "Such income, profits and gains shall be computed after making allowances for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains, provided that no allowance shall be made on account of any personal expenses of the assessee." The relevant part of Section 13 was: Income, profits and gains shall be computed for the purpose of Sections 10, 11 and 12 in accordance with the method of accounting regularly employed by the assessee. Section 16 dealt with certain general exceptions which are not material. The rest of the sections are not material to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is based on the argument that as the source of income, viz., the practice of profession had ceased in the year 1938, the receipts after February 15 wore not income and not liable to tax. This argument cannot be accepted because it cannot be stated that throughout that year the source was not in existence. It is admitted that the assessee ceased to act as a consulting architect from February 15, 1938. Therefore, the utmost which could be urged is that the source ceased to exist on February 15, 1938. The question then arises if in respect of the fees earned for work done and completed in 1937 and up to February 16, 1938, there is a difference, if the receipt was on or before February 14 or after February 16. The argument urged by the assessed would make a difference in the amount liable to tax, according to the dates of receipt in the accounting year. The scheme of the amended Act of 1939 appears to be this: Chap ter I, in which Sections 3 and 4 are found, is headed, "Charge of Income-tax". As the words "total income" on which the charge has to be made occur in Section 3, it is necessary first to find out what that expression means under the Act. The second qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess is to ascertain if such income is excluded under Section 4(3) from tax. This is material because the heading of this section is "Applicability of the Act ". Section 4 itself excludes certain income, like agricultural income or income of charitable trusts from taxation. If it was so excluded, the same ceased to be income for the Act, and no computation is necessary to be made. If the amount passes these tests, it becomes income referred to in Section 4(1). According to Section 2(15), one has nest to compute the income in the manner laid down in other parts of the Act. Section 6 is in Chapter III which is headed "Taxable Income". That section enacts that the following heads of income, profits and gains shall he chargeable to tax in the manner thereafter appearing. It is clear, therefore, that Section 6 does not attempt to define income or prescribe limitations on income. It only sets out the heads under which income, which has been referred to in Section 4(1), is chargeable. The heads which are particularly dealt with in Sections 7, 8, 9, 10 and 12 do not also attempt to define the conditions under which the income is charged. They prescribe the manner in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipts. In Commissioner of Income-tax, Bombay Presidency and Aden v. Chunilal B. Mehta ([1938] 65 I.A. 332, at p. 347; 6 I.T.R. 531), Sri George Rankin stated that the effect of Section 6 was to classify the profits and gains under different heads for the purpose of providing appropriate rules for computing the amount of tax. He further stated (even when there was an express reference in Section 4(1) to Section 6 in the Act before its amendment in 1939) that Section 6 is intended as describing different kinds of profit and that if the condition "accruing, arising or received in British India, etc." is satisfied by the profits, they will not escape the tax by reason of any quality or circumstance of the source. Again Sections 7 to 12 divide themselves into two parts. Sections 7, 8 and 9 provide for charging tax. irrespective of the manner in which the assessee keeps his books. Salaries have to be charged as earned, whether the same are received or not by the assessee in the accounting year. Interest on securities under Section 8 is to he charged to tax if it is receivable by the assessee, i.e., irrespective of the question whether it is received or not. Under Section 9 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5)], the other sections of the Act have to be referred to. If the department seeks to bring a portion of income [as referred to in Section 4(1)] to charge under the head "Business, etc.," the same should be computed according to the rules found in Section 10 read along with Section 13. The amount of the total income referred to in Section 4(1) having been first ascertained, the department has to allocate it under the different heads mentioned in Section 6, and if it does not fall under any of the specific heads 1 to 4, it must go under the general head "Other sources," because the scheme clearly is that all income referred to in Section 4(1) must come for charge under one or the other of the heads mentioned in Section 6 and dealt with in Sections 7 to 12. The Judicial Committee of the Privy Council had occasion to examine the scheme of the Indian Income-tax Act of 1923, and consider the meaning of the word "income" before the Act was amended in 1939. I shall therefore next consider those decisions, only with a view to ascertain their Lordships' views about the scheme of the Act. As the word "income" is not defined in the amending Act als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uot;Other sources." The observation' that although Chapter I is intituled "Charge of Income-tax" the real charging section would appear to be Section 6 which occurred in Chapter III, in my opinion, was due to the express reference to Section 6 in Section 4(1) of the Act of 1922. The income, profits and gains, to which that Act applied, therefore, were as described or comprised in Section 6. Those words are now omitted from Section 4(1). In my opinion, therefore, those observations do not apply to Section 4(1.) under the present Act. Two vital changes are made in this connection by the Amending Act of 1939: (1) All reference to Section 6 is omitted in Section 4, and (2) in the definition of Section 2(15) there is an express reference to Section 4(1). It should also be noticed that the division of Section 4(1) into three clauses is new and makes a vital change in answering the first question "What income is to be included in the expression 'Total income' in Section 3?" This decision therefore supports the view that to ascertain the total income the first approach is to Section 4(1), nest to Section 4(3) and then to allocate it under one or other o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Every case is an authority only for the proposition it lays down. The Board was not concerned in that case with the question, "If the receipts were income of the agencies would it make any difference if they were received later on?" In my opinion that case while defining pictorially the word "income" does not lay down the proposition urged by the assessee. In Gopal Saran Narain Singh v. Commissioner of Income-tax Bihar and Orissa ([1935] 3 I.T.R. 237; 37 Bom. L.R. 817), the Board had to consider the meaning of the word "income" and the application of Sections 4 and 12 of the Act. The facts shortly put were these: The assessee who owned a nine annas share in an estate conveyed the greater portion of that estate to X who owned the remaining seven annas. The consideration of the transfer was (1) payment, of the assessee's debts amounting to Rs. 10,26,937, (2) a cash payment of Rs. 4,73,063, and (3) an annual payment of Rs. 2,40,000, to the assessee for life. The contention which was ultimately argued before the Privy Council was whether the annual payment of Rs. 2,40,000 was liable to tax as income. In delivering judgment Lord Russell at page 242 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the sense of attributing it to property as distinct from employment, or business as distinct from investment, Sections 4 and 6, taken together, say of business profits that they are taxable on certain conditions stated, in Section 4 and in a manner to be laid down in a later section.... What is to be learnt from an examination of the language of sub-section (1) of Section 4... is that Section 6 is intended as describing different kinds of profit and that, if the condition 'accruing, or arising or received in British India etc.,' is satisfied by the profits, they will not escape by reason of any quality or circumstance of the source... There is every presumption that in such a section in an Indian Act the legislature intends the exact language of the section to be the test of liability. To answer the question, 'Do these profits accrue or arise in British India?' by asking another, What in the sense of Section 6 is the source of these profits, and is it situate in British India?' is to divert attention from that to which the statute points and to devote attention to what it discards , However that may be, the profits of each particular business are to the compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered malarial for the construction of the avoids in the main part of Section 4(1). The opening words of Section 4(1) "Subject to the provisions of this Act .........." are inserted only to find out if any income, which is referred to in Section 4(1), is exempted under the same section or another section of the Act. As in my opinion Sections 6 to 12 are not sections defining or limiting the word "income," the above quoted words in Section 4 do not support the contention of the assessee. The absence of all reference to Section 6 in Section 4, and the words used in Section 6, make Sections 7 to 1'A as laying down now only the manner in which the income (which has been referred to in Section 4) has to be charged, according to the rules of computation relating to each individual head found in the said sections. Having regard to the scheme of the Act the questions to be considered are: (1) Whether it is income referred to in Section 4(1). (2) If so, whether it is exempted under Section 4 or any other section of the Act. The next step is to divide the income so arrived at under the heads mentioned in Section 6 and compute the same in the manner laid down in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... During the last year of business, when it was closed, all its profits and losses computed in the manner permitted by the Act were assessed and taxed. Thereafter, there can remain nothing to accrue or to be taxed in respect of that business. The contention is unsound when the computation is on the receipt basis, and, in my opinion, those observations are inapplicable when the mercantile basis was not the method of accounting. Counsel for the assessee strongly relied on the two English cases mentioned at the commencement of the judgment. In Bennett v. Ogstan ([1930] 15 Tax Cas. 374) the facts were these: A person doing money-lending business died. During his lifetime he had taken from his debtors bonds, which were payable at stated intervals, and which included certain portions of the loan and interest thereon. After the death of the money-lender certain bonds were discharged by the debtors by payment. It was argued on behalf of the estate of the deceased that this was not income as the trade had come to an end. The contention was rejected because it was pointed out that the repayment was of interest on capital which had remained advanced even after the death of the trader, and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the year of assessment, derived no income from that source. The Court held that the Indian Act of 1918 was framed on the model of the English Act. It was pointed out that under the English Act the assessment in any particular year was made on the income which the Legislature deemed the assessee to have received in the year of assessment. The Legislature imputed statutory income to the assessee for computation of income for the year of assessment. A reference to the previous year's income, under the English Act, was made only for the purpose of measurement and for computation of tax for the year of assessment. The observations of Rowlatt, J., in Browns case: "There is no doubt that the general scheme of the income tax is that it is payable in respect of a source of income existing in the year of assessment, though the amount is often measurd by the results of the previous years-" were, under the English Act, appropriate. The Court nest rejected the contention of the Crown that the Indian Income-tax Act, 1932 (which was applicable to the case), maintained the general scheme of the English Act of putting tax upon income derived during the year of assessment. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business is going on during that year, the income is taken to be covered by the assessment and there can arise no question of taxing it again at any later date. This emphasises the distinct principle of taxation under the English Act. The observations in Hillerns and Fowler v. Murray are also explicable on the same footing. On the other hand. Lord Wright in delivering the Judgment of the Privy Council in Kamakshya Nurain Singh's case ([1943] 11 I.T.R. 513) observed: "income, again, may consist of a series of separate receipts, as it generally does in the case of professional earnings". He did not draw a distinction between receipts during the time the assesses was carrying on a profession and after he had ceased to practise. In my opinion, the question whether a particular amount is income or not has nothing to do with the time of its receipt. The question of receipt is material only for the purpose of determining whether on that amount tax is to be levied under the Act in the year of assessment. The question of receipt may be material, not for the purpose of determining whether it is income or not, but for computing it in the assessment year. If the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kes the receipts of income, from whatever source derived, taxable if it is received in the "previous year". The words there used clearly mean the income received for the first time, if the method of accounting is not mercantile basis. On that amount the assessee wilt not be taxed on the accrual basis under Section 4(1)(b), but the taxation will be under Section 4(1)(a) only. As pointed out in Behari Lal Mullick, In re(1), the Income-tax Act of 1918 was framed to tax the income of the current year. To ascertain the amount the income of the previous year or the average of certain years was taken as a measure. The tax, however, was on the income of the current year. That scheme was changed by the Act of 1922 and thereafter in fact it was the income of the previous year which was taxed. On that ground alone the relief granted under Section 26 of the Act could be justified and reconciled. In 1939 the Act was again amended. One of the principal objects of the amendment of the various sections was to tax the foreign income of a resident or the foreign income of a nonresident brought into British India. We are not directly concerned with the motives of the Legislature but we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot liable to tax. In order to understand and appreciate this contention of the assessee, it is necessary to consider the scheme of the taxing statute, Section 3 of the Act provides that the tax shall be charged at the rate mentioned in the Finance Act. Section A, which defines the applicability of the Act, lays down the conditions of chargeability. It states what the total income of the assessee in any previous year is. That section deals in the first instance with any person whether he be a resident or non-resident in British India. Then it deals with a resident in British India and finally with a person not resident in British India, In the case of any person the conditions of ehargeability shall be that the income shall be received or deemed to be received in British India in the previous year. Having dealt with the receipt of income in British India and made it liable to tax in the case of every person, the section then proceeds to deal with accrual of income and in clause (b) it deals with accrual in the case of a resident in British India and in clause (e) in the case of a non-resident in British India. Then under sub-section (3) it provides various exceptions which need not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uot;income" if the assessee had been-carrying on his profession as a consulting civil engineer in the accounting year. It is also admitted that when these fees accrued to the assessee they were income, but he was not taxed with regard to these fees because he was maintaing his accounts on a cash basis and not a mercantile basis, which right is given to him under Section 13 of the Act. It is difficult to see how or why these receipts which would be "income" if the business was going on should cease to be "income" merely because that business had ceased at the time these receipts were collected. Section 4 refers to all income, profits and gains from whatever source derived. This particular income was derived from the profession of the assessee. Section 4 does not lay down as a condition of chargeability that the source should be in existence at the time the income is received. The only two conditions which are imposed by that section are that the receipt must be income and it must be received in British India during the previous year. In this case it is not disputed that the assessee received the amount in question in British India during the previous year an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 provide a machinery for computation for every species of income which is made chargeable under Section 4. In the first instance, there are four specific heads under Section 6; and even if a particular kind of income does not fall under any of these four specific heads, it Would fall under the wide residual head provided under Section 12. As pointed out by Lord Russell of Killowen delivering the judgment of the Privy Council in Probhat Chandra Barua v. The King-Emperor ([1930] 57 I.A. 228 at p. 239), Section 12 describes "a true residuary group embracing within it all sources of income, profits and gains provided the Act applies to them, i.e., provided that they accrue or arise or are received in British India or are deemed to accrue or to be received in British India, as provided by Section 4, sub-section (1), and are not exempted by virtue of Section 4, sub-section (3)." It would not he true to say that Sections 6 to 13 in any way control or limit the conditions of chargeability laid down in Section 4 of the Act. In the first place, as I have already pointed out, these sections merely provide various heads under which different income is to be classified for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome, profits and gains of every hind and from every source to which the Act applied. Under the amended Act income, profits and gains of every kind which may be included in the total income and are not included under any of the specific beads mentioned in Section 6 may be included under this head. While it is true that the amendments I have just referred to do not in any way extend the definition or the import of income under the Act, whatever the position might have been under the old Act, it is perfectly clear that under the Act with which we are concerned Section 6 is not a charging section and it does not in any way affect or control the conditions of chargeability. The next question is: do these receipts fall under the head "Profits and gains of business, profession or vocation?" This head only applies to a business, profession or vocation carried on by the assessee la the case before us the profession was undoubtedly carried on by the assessee. The material question is whether the section requires that it should be carried on at or up to a particular point of time. Three possible constructions have been suggested at the bar: first, that the expression "carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such discontinued business or profession should not fall under the residuary head under Section 12, if in fact they were received during the year under assessment. It has been contended that what the assessee received was gross receipts and these do not constitute profits and gains of a business or profession. It has got to be remembered that as this assessee had adopted the cash basis as his method of accounting, he would be taxed on the actual receipts and not on any accrual basis. It is true that he would not be liable to pay the tax on gross receipts, but he would be permitted to deduct therefrom all permissible allowances under Section 10 of the Act. In the case before us the assessee received the sum of Rs. 12,302 from his profession. There is no reason why he should not deduct from this sum any permissible expenditure incurred by him for the purpose of his profession. If in fact he incurred no expenditure for the purpose of his profession in the year under assessment, then the receipts constitute the profits and gains of his profession. The contentions of the assessee have received considerable support from the observations of Mr. Justice Rowlatt reported in two Englis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derived no income from a source which in the previous years had yielded income the statutory rules as to computation of the present and future by reference to the past did not apply so as to impute to the year of assessment an income which did not exist at all. The basis and subject-matter of the tax was the income in the year of assessment. As a matter of law this in true because it is the true construction of the English statutes and for no other reason." It has been strenuously urged by Sir Jamshedji Kanga that the Privy Council in Commissioner of Income-tax v. Shaw Wallace & Co., has decided that when a business comes to an end any income derived from such a business is not liable to tax. The facts of that case clearly show that the two sums received by the assessee company were received not out of any business carried on by them but as a solatium, for the compulsory cessation of its business. As they did not arise from any Business or from any continuous exercise of an activity, the Privy Council came to the conclusion that the sums did not represent income, profits or gains within the meaning of the Act and liable to tax. It is not permissible in my opinion to extend t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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