PETITIONER:
COMMISSIONER OF INCOME-TAX, MADRAS
Vs.
RESPONDENT:
K. SRINIVASAN AND K. GOPALAN.
DATE OF JUDGMENT:
22/12/1952
BENCH:
DAS, SUDHI RANJAN
BENCH:
DAS, SUDHI RANJAN
MAHAJAN, MEHR CHAND
BHAGWATI, NATWARLAL H.
CITATION:
1953 AIR 118 1953 SCR 463
CITATOR INFO :
F 1956 SC 367 (12)
RF 1961 SC1633 (10,25)
F 1969 SC1068 (6)
ACT:
Indian Income-tax Act (XI of 1922), ss. 2 (1), 25 (3) & (4),
26 (2) -Firm charged under Act of 1918-Accounting year
ending on 30th June each year- Transfer of business on 1st
March, 1940 -Exemption from tax under s. 25 (4)-Period for
which exemption can be granted-”End of Previous year”,
meaning of-Interpretation -Directions in Income -tax Manual,
value of.
HEADNOTE:
Two brothers who had been carrying on in partnership a
business, which had been assessed to income-tax under the
Indian Income-tax Act of 1918 and the accounting year of
which was a period of 12 months ending on the 30th June each
year, transferred the business to a limited company on the
1st March, 1940, and claimed in the assessment for the year
1940-41 that under s. 25 (4) of the Income-tax Act, 1922,
they were not liable to pay income-tax on the income of
their business from 1st July, 1938, up to 29th February,
1940, a period of 20 months. The Income-tax authorities
were of the view that exemption could be claimed only
487
for the period from 1st July, 1939, to 29th February, 1940,
a period of 8 months:
Held, that the expression “end of the previous year” in sub-
ss. (3) and (4) of s. 25 in the context of those sub-
sections means the end of the accounting year (a period of
full 12 months) expiring immediately preceding the date of
discontinuance or succession and the assessee firm was
entitled to claim exemption from tax only in respect of the
period from the 1st July, 1939, to the 29th ‘February,1940,
On a true construction of ss. 25 and 26, the Income-tax
Officer is not empowered to make an accelerated assessment
in the year in which succession occurs on the profits of
that year and prematurely assess the successor so that he ,
may be able to give relief to the person succeeded. The
exemption provided for in s. 25 (4) and the apportionment
mentioned in s. 26 (2) have to be made in the assessment
year in which the profits of the year of succession fall to
be assessed under s. 3 of the Act.
For the purposes of the charging sections of the Act the ex-
pression “previous year” is co-related to a year of
assessment immediately following it, but it is not
necessarily wedded to an assessment year in all cases and it
cannot be said that the expression “previous year” has no
meaning unless it is used in relation to a financial year.
In a certain context it may well mean a completed accounting
year immediately preceding the happening of a contingency.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 9 of 1952.
Appeal from the Judgment and Order dated 2nd January, 1950,
of the High Court of Judicature at Madras (Satyanarayana Rao
and Viswanatha Sastri JJ.) in Case Referred No. 68 of 1946.
M. C. Setalvad, Attorney-General for India, (P. A. Mehta,
with him) for the appellant.
K. S. Krishnaswami Aiyangar (M. Subbaraya Aiyar, with
him) for the respondents.
1952. December 22. The Judgment of the Court was delivered
by
MAHAJAN J.-This is an appeal from,the judgment of the High
Court of Judicature at ‘Madras in a reference made by the
Income-tax Appellate Tribunal under section 66 (1) of the
Indian Income-tax Act, XI of 1922.
488
For several years prior to 1939-40 the respondents, .who
are. brothers, had been carrying on in partnership the
business of ” The Hindu,” a daily newspaper of Madras. The
profits of this business had been charged to income-tax in
the hands of the respondents under the Indian Income-tax Act
of 1918. The firm’s year of account was a period of twelve
months ending with 30th June each year. In respect of the
profits of the year of account ending 30th June, 1938,
assessment was made in the year 1939 40 and the firm was
charged to income-tax for that assessment year. On 1st
March, 1940, the respondents transferred their business as a
going concern to a private limited company called “ Kasturi
and Co. Ltd.” -
For the assessment year 1940-41 the respondents claimed that
the firm was not liable to pay any income-tax on the income
of its business from the end of the accounting year ending
30th June, 1938, to 29th February, 1940, the date on which
the limited company succeeded to the business of the firm
(i.e., for a period of 20 months) under section 25 (4) of
the Act, as it had been assessed under the Indian Incometax
Act, 1918. The Income-tax Officer disallowed the claim and
held that since the assessment pertained to the year 1940-41
the previous year with reference to that assessment would be
the year ending 30th June, 1939, and the period for which
exemption could be claimed under section 25(4) of the Act
was the interval from the end of that previous year, i.e.,
1st July, 1939, upto to the date of succession, i.e., 29th
February, 1940, i.e, a period of eight months. This order
was confirmed on appeal by the Appellate Assistant
Commissioner. On further appeal the Tribunal held that on a
proper construction of section 25(4) of the Act, tax was not
payable by the firm in respect of the profits and accounts
of the business for the whole of the period from 1st July,
1938, to 29th February, 1940, (a period of 20 months). At
the instance of the Commissioner of Income-tax (the
appellant) the Tribunal stated a case to the High Court and
referred to it the following question for its opinion:-
489
” Whether on the facts of this case, the Appellate Tribunal
was right in holding that the period the profits of which
were entitled to exemption from the payment of tax under
section 25(4). of the Indian .Income-tax Act, 1939, was the
period commencing from 1st July, 1938, and ending.With 29th
February, 1940.”
The reference was heard by Satyanarayana Rao and Viswanatha
Sastri JJ. and they delivered divergent opinions on the
question referred. Satyanarayana Rao J. agreed with the
conclusion of the Tribunal and answered the question in the
affirmative, while Viswanatha Sastri J. answered the
question in the negative, with the result that under the
provisions of the law the Tribunal’s order was confirmed, it
being in accordance with the opinion delivered by the senior
Judge. Leave to appeal to this Court was granted and this
appeal is before us on a certificate given by the High
Court.
The principal question to decide in this appeal is whether
on a true construction of section 25(4) of the Act, and on
the facts stated the period the profits of which were
entitled to exemption from the payment of tax is the period
between 1st July, 1939, to 29th February, 1940, (a period of
eight months) or the period commencing from 1st July, 1938,
and ending with 29th February, 1940 (a period of 20 months).
To decide this question it is necessary to set out the
relevant provisions of the Act. Section 2(11), which
defines ” previous year ” in so far as it is relevant for
purposes of this appeal is :-
” (11) (a) the twelve months ending on the 31st day of March
next preceding-the year for which the assessment is to be
made, or, if the accounts of the assessee have been made up
to a date within the said twelve months in respect of a year
ending on any date other than the said 31st day of March,
then at the option of the assessee the year ending on the
day, to which his accounts have so been made up.”
490
Section 3 of the Act provides:-
Where any Central Act 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 the members of the
association individually.”
This is the charging section. Section 25 of the Act makes
different provisions to cover some special cases. The parts
of the section relevant to this appeal pro-
vide as follows:-
(1)Where any business, profession or vocation to which- sub-
section (3) is not applicable, is discontinued in any year,
an assessment may be made in that year on the basis of the
income, profits or gains of the period between the end of
the previous year and the date of such discontinuance in
addition to the assessment, if any, made on the basis of the
income, profits or gains of the previous year.
(3) Where any 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
491
the basis of such assessment, a refund shall be given of the
difference.
(4) Where the person who was at the commencement of the
Indian Income-tax (Amendment) Act, 1939 (VII of 1939),
carrying on any business, profession or vocation on which
tax was at any times charged under the provisions of the
Indian Incometax Act, 1918, is succeeded in such capacity by
another person, the change not being merely a change in the
constitution of a partnership, no tax shall be payable by
the first mentioned person in respect of the income, profits
and gains of the period between the end of the previous year
and the date of such succession, and such person 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.
(6) Where an assessment is to be made under subsection (1),
sub-section (3), or sub-section (4) the Income-tax Officer
may serve on the person whose income, profits and gains are
to be assessed, or, in the case of a firm, on any person who
was a member of such firm at the time of its discontinuance,
or, in the case of a company, on the principal officer
thereof, a notice containing all or any of the requirements
which may be included in a notice under sub-section (2) of
section 22, and the provisions of this Act shall, so far as
may be, apply accordingly as if the notice were a notice
issued under that sub-section.”
For a proper construction of section 25 it is also necessary
to set out the history and object of this enactment.
Under the Act of 1918 income-tax was levied on the income of
the current year, i.e., the year of
492
assessment but as the income of that year could not be
known till after the expiry of the year, the assessment was
made on the basis of the income of the ” previous year” but
after the close of the assessment year an ,adjustment used
to be made on the basis of the income of the assessment
year. The Act of 1922 introduced a change in this respect.
Under section 3 of the Act, ‘the income of the previous year
is made the subject of the charge and tax is levied on the
income of the previous year though it is a tax for the
assessment year. On the passing of the Act of 1922, the
previous system of assessment was kept alive for one year.
The result was that for the year 1922-23, there were two
assessments, one under the Act of 1922 on the income of
1921-22 and another under the old system byway of assessment
on the income of the same year 1921-22. In other words, the
income of the year 1921-22 was assessed twice, once under
the Act of 1918, and again under the Act of 1922. To remove
this anomaly and in order to make the number of assessments
tally with the number of years during which the business
existed, section 25(3) of the Act of 1922 was enacted
exempting from tax the profits for the period between the
end of the previous year and the date of discontinuance in
the case of a business whose profits had been assessed to
tax under the Act of 1918. There was no provision in
section 25 as enacted in 1922 for giving any relief in cases
of succession to a business which was taxed under the Act of
1918. In 1939 a provision was made to extend similar relief
to cases of succession and with this object section 26(2) of
the Act was amended and section 25(4) was added by the
amending Act of 1939. The result of the amendment of
section 26(2) and the insertion of section 25(4) is that
upon a transfer of business the transferor, i.e., the person
who was succeeded in the business, would get the same relief
as if the business had been discontinued by him.
The scheme of the Act is that by the charging section, i.e.,
section 3, income-tax is levied for a financial year at the
rate prescribed by the annual Finance Act
493
on the total income of the previous year of every in-
dividual, etc. Each previous year’s income is the, subject
of separate assessment in the relative assessment year.
Though the year of assessment is the financial year, the
previous year of an assessee need not necessarily be the
previous financial year, for this expression is to be
understood as defined by section# 2(11) (a) of the Act.
The respondents were duly assessed to tax for the year of
assessment, i.e. the financial year 1939-40, on the income
of the previous year ending on 30th June, 1938. Their
income of the accounting year ending 30th June, 1939, would
in the ordinary course be liable to assessment in the
financial year 1940-41, and the profits of the year ending
30th June, 1940, would be assessable in the financial year
1941-42. Succession took place in the accounting year 1939-
40. Under sub-section (2) of section 26, as it stood before
its amendment in 1939, the person succeeding to a business
was liable to tax for the year of succession, as if he had
been carrying on business throughout that year and had
received the profits of the whole of that year. Thus
Kasturi and Company Limited would have been liable to be
assessed on the profits earned during the year ending 30th
June, 1940, irrespective of the fact that actually they
would have only received profits in that year for a period
of four months. After the amendment in 1939 sub-section (2)
of section 26 provides that the person succeeded and the
person succeeding “ each be assessed in respect of his
actual share, if any, of the income, profits and gains of
that year.” Thus the profits of the year in which the
succession occurs are to be apportioned between the
predecessor and the successor according to the actual share
of each in the year’s profits, the predecessor and the
successor are each liable to tax at the rate applicable to
each and the profits of each have to be computed separately
in accordance with the provisions of section 10 and other
sections and each has to be granted the deductions and
allowances appropriate to his case, and
494
assessment on each has to be separate and distinct. If the
business was charged under the Indian Incometax Act, 1918,
and the person succeeded is exempt from tax under section 25
(4) he would not charged in respect of the profits of the
period from the end of the previous year up to the date of
succession, while the person succeeding would be liable
under sub-section (2) of section 26 in respect of the
profits earned by him after the date of succession. The
proviso to sub-section (2) lays down two exceptions to the
general rule that the successor is not liable to tax in
respect of the profits of the period prior to the date of
succession. In two cages, namely, (1) when the predecessor
cannot be found, or (2) when the tax assessed on the
predecessor cannot be recovered from him, the successor is
liable to pay the tax in respect of the profits of the year
in which the succession took place up to the date of
succession as well and further for the profits earned during
the year preceding that year. In this case if either of
those contingencies arose, Kasturi and Company Limited would
have been liable to pay tax on profits of the whole
accounting year ending 30th June, 1939, as well as of the
whole of the accounting year ending 30th June, 1940, and end
of the preceding year in this context would be 30th June,
1939. It is a question whether in this situation they would
be entitled to the relief provided in section 25(4).
On behalf of the Commissioner of Income-tax, Madras, the
learned Attorney- General contended that Satyanarayana Rao
J. was in error in granting exemption to the firm from tax
in respect of the profits earned during a period of 20
months and that under section 25, sub-section (4), the only
relief permissible was in respect of profits earned during
the period of 8 months from 1st July, 1939, to 1st March,
1940. It was said that the profits of the year of
succession were liable to assessment in the usual course in
the financial year 1941-42 and the Income-tax Officer had no
power to make an accelerated assessment in order to give
relief to the persons succeeded in the business
495
and that being so, it was not right to hold that the
expression ” previous year” in section 25, sub-section (4),
was co-related to the assessment year 1939-40, i.e the year
in which,the succession took place or to the assessment year
1941-42 in which in the ordinary course assessment for those
profits would have been made but that on a true construction
of this sub- section and having regard to the history of its
enactment and the object for which it was inserted in
section 25, the assessee firm was entitled to exemption from
the payment of tax, only for the period between 1st July,
1939, and 29th February, 1940, and to no more. It seems to
us that there is force in this contention, Section 25 (4)
was inserted in the Act of 1922 in the year 1939 at the same
time as section 26(2) was amended. On a plain reading of
these two sections together, it is quite clear that the
Income-tax Officer is not empowered to make an accelerated
assessment in the year in which succession occurs on the’
profits of that year, and prematurely assess the person
succeeding to a business so that he may able to give’ relief
to the person succeeded. The exemption provided for its
section 25 (4) and the apportionment mentioned in section 26
(2) have to be made in the assessment year in which the
profits of the year of succession fall to be assessed under
sections of the Act, and in this situation the end of the
‘previous year in this case can, in no circumstance, be the
end of the accounting year beginning 1st of July, 1937, and
ending 30th of June, 1938, because the income, profits and
gains of the accounting year of succession (i.e., year
beginning 1st July, 1939, and ending 30th June, 1940) which
have to be apportioned between the predecessor and successor
of the business under section 26(2) and for which the
successor becomes liable in case the predecessor commits a
default, could only be assessed in the assessment year 1941-
42. The income,’ profits and gains of the accounting year
beginning 1st July, 1938, and ending 30th June, 1939, for
which the predecessor alone is liable in the first instance
to
496
tax fall for assessment in the assessment year 1940-41. The
successor in business, in case of default by the
predecessor, is also liable to pay the tax on the profits of
that year as well. What subjection (4) of section 25
provides is that when the profits of the year of succession
fall to be assessed, the predecessor of a business can claim
exemption from liability to pay tax on the profit earned
from the end of the previous year to the date of succession,
the “Previous year” here meaning the completed accounting
year immediately preceding the date of succession (in this
case year ending 30th June, 1939). He can further claim
that the profits earned between 1st July, 1939, to 29th
February, 1940, be deemed the profits of the accounting year
1st July, 1938, to 30th June, 1939, and if on those profits
in assessment year 1940-41 tax in excess of what is
chargeable on the profits of this broken period has been
paid, be given refund for the excess. Truly speaking, the
firm was entitled to the relief provided for in- section
25(4) in the assessment year 1941-42 but the Income-tax
Officer was prepared to give him that in the assessment year
1940-41,and on that score the assessee can have no
grievance.
Satyanarayana Rao J. held that the words ” previous year ”
in sub . section (1) of section 25 refer to the year of
account relevant to the year of assessment in which the
discontinuance occurs, that the section authorises the
Income-tax Officer to make a cumulative assessment in
respect of the profits of the period between the end of the
last accounting year of which the profits have been assessed
before the date of discontinuance and that date, that ” sub-
section (3) of section 25 is an exception to the general
rule contained in sub-section (1) of that section, and that,
though the language employed in sub-section (3) does not
correspond to the language employed in sub-section (1)
indicating that in this Sub-section also the assessment year
should be taken to be the year in which the discontinuance
occurs, all the same there is no reason
497
to depart and to place a different interpretation on the
expression ‘previous year’ in this sub-section$ from the one
placed on sub-section (1).” On the same line of reasoning
the learned Judge gave the same meaning to the expression ”
previous year ” in subsection (4) of section 25 and as a
result held that the firm was ‘entitled to exemption from
tax for profits earned between the 1st July, 1938, and 29th
February, 1940, a period of 20 months.
Mr. Krishnaswami Aiyangar appearing for the respondents, was
not prepared to support the whole of the reasoning of
Satyanarayana Rao J. but he contended strenuously that the
conclusion reached by the learned Judge was the only one
that could be reached on a true construction of the
phraseology employed in the various sub-sections of section
25. In short, his argument was that sub-section (1) of
section 25 confers an option on the Income-tax Officer, in
case of discontinuance of a business which was not assessed
under the Act of 1918, to make an accelerated assessment in
the year of discontinuance itself on the income, profits and
gains earned up to the period of discontinuance and not
assessed before in any preceding assessment year; that the
expression ” previous year” in the context of this sub-sec-
tion means the end of the accounting year the profits of
which have been last assessed to tax, which in this case
means the year ending 30 th June, 1938. It was further
contended that any other meaning given to these words would
create a hiatus and would lead to the result that on the
date of discontinuance the Income-tax Officer would be
entitled to assess the profits of the broken period without
being entitled to assess the profits of a whole previous
year that had expired, the profits of which in the usual
course could not be assessed in the year of discontinuance
-and that such a construction would defeat the very purpose
of the power given by the sub-section. On a parity of
reasoning it was suggested that the words “between the end
of the previous year and the date of such discontinuance” in
subsections (3) and (4)
498
should be given -the same meaning as in sub-section (1), and
that the assessee should be given exemption in respect of
profits earned between the 1st July, 1938, and 29th
February, 1940. It was said that the two terminals fixed
for the purposes of assessment under section 25(1) were the
terminals fixed for exemption from tax in section 25(3) and
(4) and it would be wrong to hold that the assessment under
section 25(1) could be made for a period different from that
for which relief could be given under section 25 (3) and
(4). It was urged that the scope of the charge authorised
by section 25 (1) was co-extensive with the extent of the
relief provided for in subsections (3) and (4).
Before proceeding further it is convenient to make a few
observations regarding the proposition stated by
Satyanarayaua Rao J. that section 25 (1) provides for
cumulative assessment in cases of discontinuance of
business. The words of the section do not justify this
conclusion. They do not empower the Incometax Officer to
make a cumulative assessment in respect of profits earned in
two different accounting periods or entitle him to merge the
profits of two years into one total sum and apply to them
the rate of one of the financial years. All that the
section authorises the Income-tax Officer to do is that it
gives him an option to make a premature assessment on the
profits earned up to the date of discontinuance in the year
of discontinuance itself instead of in the usual financial
year. This assessment he is entitled to make in addition to
the normal assessment for the financial year of
discontinuance. Mr. Aiyangar very rightly conceded that the
construction placed on subsection(1) of section 25 by the
learned Judge in this respect was not right.
As regards the main contention of Mr. Aiyangar based on the
analogy of the language employed in sub-section (1) of
section 25, we are of the opinion that this contention is
based on a fallacy and cannot be sustained. As above
pointed out, sub-section (1) of section 25 merely empowers
the Income-tax Officer,
499
if he so chooses to do, to make an accelerated assessment in
case of discontinuance of business at the time of
discontinuance to save loss of revenue by the disappearance
of an assessee. In other words, the subsection imposes a
liability of premature assessment on the assessee. It
confers no benefit on him. Sub-sections (3) and (4) of
section 25 have a different end in’ view and are not in pari
materia with sub-section (1). They are in the nature of
substantive provisions intended to give relief from tax
charged in certain cases. The mere circumstance of their
being grouped together with sub-section (1) in section 25
cannot lead to the conclusion that the provisions therein
contained are of the same nature and character as the provi-
sions contained in sub-section (1). Satyanarayana Rao J.
was clearly in error when he held these two subsections were
in the nature of exceptions to the rule laid down in sub-
section(1). The truth of the matter is that it is sub-
section(1) itself which is an exception to the general rule
laid down in the charging section of the Act, namely,
section 3. The object of sub-sections (3) and (4) is to
provide relief to a business for the double assessment
suffered by it in the financial year 1922-23 and it is
entitled to this relief in the year of assessment in which
the income and profits of the accounting period in which
discontinuance or succession takes place fall to be
assessed. The Income-tax Officer is not authorised to
accelerate the relief by making a premature assessment on
these profits. Not only is the language of these two sub-
sections different from the language of sub-section (1), but
they deal with two different categories of assessees. Sub-
‘section (1) deals with a category of assessees who were
never subjected to double tax, while sub-sections (3) and
(4) deal with that class who suffered assessment under the
Act of 191.8 and paid double tax. The liability for
premature assessment imposed under section 25 (1) on the
former class of assessees has feed imposed on considerations
entirely different from those on which provision has been
made for exemption to tax in sub-sections
65
500
(3) and (4) for the other class. In, these
circumstances, such relief cannot be said to be co-extensive
with the liability imposed. Moreover, the provisions of the
Income-tax Act in respect to exemptions and deductions
cannot be construed on the ‘analogy of the provisions
contained in the charging sections of the Act even if the
language of these provisions is similar. Mr. Aiyangar’s
contention that sub-section (1) crystallizes the rights of
the assessee on the date of discontinuance and that not only
does it relieve him from being taxed after the date of
discontinuance, but that it entitles him to further relief
provided for in sub-section (3) does not seem to be well-
founded. Sub-section (1) of section 25 confers no right of
any kind on an assessee which can crystallize on the date of
discontinuance and which cannot be varied subsequently to
his disadvantage. On the other hand, as already said it
imposes a premature burden on the assessee which but for
this sub-section he could not be called upon to bear till
the appropriate year of assessment was reached.
The learned Attorney-General was not prepared to accept the
construction placed on Sub-section (1) of section 25 by Mr.
Aiyangar and contended that sub-section did not authorise
the Income-tax Officer to make an assessment in the year of
discontinuance on the profits of an accounting year which
had come to a close before the date of discontinuance, and
that those profits had to be assessed in the usual way in
the appropriate financial year, and that authority given to
make an accelerated assessment only related to the broken
period beginning with the end of the completed accounting
year immediately preceding the date of discontinuance and
ending with the date of discontinuance. In our opinion, it
is not necessary for the purposes of deciding this case to
finally express an opinion as to the true meaning of the
words ” between the end of the previous year to the date of
discontinuance ” used in section 25 (1) of the Act.
After a careful consideration of the different provisions of
the Act relevant to this enquiry, we have
501
reached the conclusion that the expression “end of the
previous year ” in sub-sections (3) and (4) of section 25 in
the context of those sub-sections means the end of an
accounting year (a period of full 12 months) expiring
immediately preceding the date of discontinuance or
succession, (in this case 30th. June, 1939). We are
satisfied that Viswanatha Sastri J.”. was right when he held
that having regard to the object of the legislature in
enacting sub-sections (3) and (4) of section 25 and having
regard to the plain language of these sub-sections, the
assessee’s contentions could not be upheld. We are,
however, unable to subscribe to the conclusion reached by
the learned Judge that the expression ” previous year “ in
subsections (3) and (4) of section 25 was co-related to the
year of assessment 1940-41. The profits of the year of
discontinuance could not, according to the scheme of the
Act, be taxed till the financial year 1941-42 and the
previous year co-related to that assessment year would be
the accounting year ending 30th June, 1940. It is obvious
that the ‘end of the accounting year falling after the date
of discontinuance could not appositely be said to be the end
of the previous year preceding that date. The expression
((previous year” substantially means an accounting year
comprised of a full period of twelve months and usually
corresponding to a financial year preceding the financial
year of assessment. It also means an accounting year
comprised of a full period of twelve months adopted by the
assessee for maintaining his accounts but different from the
financial year and preceding a financial year. For purposes
of the charging sections of the Act unless otherwise
provided for it is co-related to a year of assessment
immediately following it, but it is not necessarily wedded
to an assessment year in all cases and it cannot be said
that the expression “previous year” has no meaning unless it
is used in relation to a financial year. In a certain
context it may well mean a completed accounting year
immediately preceding the happening of a contingency. The
construction we have placed on
502
this expression in sub-sections (3) and (4) of section 25 is
in accord with the substance of the definition given in
section 2 (1 1) of the Act. Any other construction of the
section is bound to lead to a number of anomalies, the most
glaring being that in case of persons whose year of account
is the financial year, exemption from tax under section 25
(3) or (4) could never be given for a period of more than
twelve months, while in case of persons who adopt different
accounting year, exemption would become available for a
period extending up to 24 months. Such could never have
been the intention of the framers of the Act.
That the “previous year” in the context of section 25(3) and
(4) means a completed accounting year immediately preceding
the discontinuance or succession is borne out by the
provisions as regards nonliability for tax for the broken
period and the ‘claim to be made by the assessee that the
income, profits and gains of the previous year shall be
deemed to have been the income, profits or gains of the
broken period. The intention of the legislature being to
give relief against double assessment for the year 1922-23,
the assessee in the case of discontinuance or succession
would be entitled to claim exemption from payment of tax for
the broken period and also claim that the income, profits or
gains of the previous year, i.e.) the year preceding the
broken period, should be treated as the income, profits or
gains of the broken period.
Reference was made in the judgment of the Appellate Tribunal
to the views of the Select Committee when clause (1) of
section 25 was considered at the time of the draft Bill No.
XXVI of 1921 in support of its conclusion, but it was
rightly held by the High Court that it was not a permissible
consideration in interpreting a statute and Mr. Aiyangar did
not seriously press this matter before us. He, however,
drew our attention to the directions contained in the
Income-tax Manual in force for a number of years and
contended that the department itself placed on sub-sections
(3) and (4) of section 25 the same construction as was
503
placed on them by the senior Judge in the High Court and
that was the true construction of these two sub-sections.
This argument, in our opinion, has no’ validity. The
department changed its view subsequently and amended the
manual. The interpretation placed by the department on
these sub-sections cannot be considered to be a proper guide
in a matter like this when the construction of a statute is
involved.
The result is that we allow the appeal and hold that the
answer given by the senior Judge to the question referred
was wrong and that the answer given by Viswanatha Sastri J.
was the correct one. In the circumstances of this case we
would make no order as to costs throughout.
Appeal allowed.
Agent for the appellant: G. H. Rajadhyaksha.
Agent for the respondent : M. S. K. Aiyangar.