# COMMISSIONER OF INCOME-TAX BOMBAY v. CHUGANDAS AND CO., BOMBAY

- **Citation:** [1964] 8 S.C.R. 332
- **Court:** Supreme Court of India
- **Decided:** 1964-07-29
- **Bench:** K. SUBBA RAo, J.C. Shah Ands. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-bombay-v-chugandas-and-co-bombay-3270
- **Pages:** 16

## Headnote

Indian Income·tax Act (XI of 1922), 1. 25(3)-Ex•mption applicable to
wllot incom1.
The respondent was a firm dealing in oecuritiea and was charaed to
lncome·tax under the Income-tax Act (VII of 1918). It rea:ived certain
IUDla of money as interest on securitiea in the accounting years 19-46
and 1947 (assessment years 1947-48 and 1948-49) respectively
It cl;..
continued its business on 30th June 1947, and, for the assessment )'l&r
1948-49. claimed exemption from taxation under s. 25(3) of the Inoometax Act (XI of 1922).
The income-tax officer and the Appel:ate
Assistant Commissioner, held that, the income fell under the hel4
.. interest on securities'' under s. 8 and not under the bead "profits and
1ains of business, profession or vocation'' under s. 10 and that therefore,
!be respondent was not entitled to the exemption. The Appellate
Tn1>Unal reversed that order and the High Court (by a majority)
coofirme4 the order of the Tnl>unal. The Commissioner of Income-tu
appealed to the Supreme Court.
Hild: The appeal should be dismissed.
When s. 25(3) of the Indian Income·tax Act (XI of 1922) enacll
that "'where any business, profession or vocation on which tax was at
any time charged", it is intended that the tax was at any time charged
on the owner of the business. If that condition be fulfilled in respect
of the income of the bu(tnoa,, under the Indian Income-tax Act (VII of
1918), the owner will be entitled to get the benefit of the exemption
under the section if the business is discontinued.
The section in tenm
men to tax charged on any business, that is, tax charged on any person
hi respect of all income earned by carrying on the business. There k
ao reason to restrict the condition of th1> applicability of the exemption
only to income on which tax was payable under s. I 0 of the Act under
the bead "profita and gains of business, profession or vocotion".
The United Commercial Bank Ltd., Calcutta Y. Th• Comml1,1on11
of Income-tax, Weit Bengal, [1958] S.C.R. 19 and Th• Commi1sioner
of lncome-tax, Madra1 v. The Expre" New1paper1 Limited, MadrOI,
[1964] 8 S.C.R. 189, reierred to.
CIVIL APPELLATE
JURISDICTION : Civil Appeals Nos.
685 & 686 of 1963.
8 S.C.R .. '
SUPREME COURT REPORTS_ 333 _
1964 -
C.LT.
"·
Appeal from the judgment and order dated December
17, 18, 1958, of the Bombay High Court·· in Income-tax
Reference No. 27/X of 1954.
Chugandai
KJ N. Raiagopala Sastri and R. N. Sachthey, for tho
!!:::..
appellant.
N. A. Palkhivala, J. B. Dadachanil, 0. C. Mathur and
Ravinder Narain, for the respondent.
July 29, 1964. The Judgment of the Court was delivered
by:
SHAH, J.-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, 194 7 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 tho
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
191& in respect of the business done immediately before
that Act was repealed. The firm also applied to substitute·
the income earned in the year 194 7 for the income of tho
previous year. The Income-tax Officer held that the inter- .
est 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 lncome-ta:r
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 cntitc
income of the business including

## Text

-
"""· 29
332
SUPREME COURT REPORTS
COMMISSIONER OF INCOME-TAX BOMBAY
v.
CHUGANDAS AND CO., BOMBAY
(K. SUBBA RAo, J.C. SHAH ANDS. M. SIKRI, JJ.)
Indian Income·tax Act (XI of 1922), 1. 25(3)-Ex•mption applicable to
wllot incom1.
The respondent was a firm dealing in oecuritiea and was charaed to
lncome·tax under the Income-tax Act (VII of 1918). It rea:ived certain
IUDla of money as interest on securitiea in the accounting years 19-46
and 1947 (assessment years 1947-48 and 1948-49) respectively
It cl;..
continued its business on 30th June 1947, and, for the assessment )'l&r
1948-49. claimed exemption from taxation under s. 25(3) of the Inoometax Act (XI of 1922).
The income-tax officer and the Appel:ate
Assistant Commissioner, held that, the income fell under the hel4
.. interest on securities'' under s. 8 and not under the bead "profits and
1ains of business, profession or vocation'' under s. 10 and that therefore,
!be respondent was not entitled to the exemption. The Appellate
Tn1>Unal reversed that order and the High Court (by a majority)
coofirme4 the order of the Tnl>unal. The Commissioner of Income-tu
appealed to the Supreme Court.
Hild: The appeal should be dismissed.
When s. 25(3) of the Indian Income·tax Act (XI of 1922) enacll
that "'where any business, profession or vocation on which tax was at
any time charged", it is intended that the tax was at any time charged
on the owner of the business. If that condition be fulfilled in respect
of the income of the bu(tnoa,, under the Indian Income-tax Act (VII of
1918), the owner will be entitled to get the benefit of the exemption
under the section if the business is discontinued.
The section in tenm
men to tax charged on any business, that is, tax charged on any person
hi respect of all income earned by carrying on the business. There k
ao reason to restrict the condition of th1> applicability of the exemption
only to income on which tax was payable under s. I 0 of the Act under
the bead "profita and gains of business, profession or vocotion".
The United Commercial Bank Ltd., Calcutta Y. Th• Comml1,1on11
of Income-tax, Weit Bengal, [1958] S.C.R. 19 and Th• Commi1sioner
of lncome-tax, Madra1 v. The Expre" New1paper1 Limited, MadrOI,
[1964] 8 S.C.R. 189, reierred to.
CIVIL APPELLATE
JURISDICTION : Civil Appeals Nos.
685 & 686 of 1963.
8 S.C.R .. '
SUPREME COURT REPORTS_ 333 _
1964 -
C.LT.
"·
Appeal from the judgment and order dated December
17, 18, 1958, of the Bombay High Court·· in Income-tax
Reference No. 27/X of 1954.
Chugandai
KJ N. Raiagopala Sastri and R. N. Sachthey, for tho
!!:::..
appellant.
N. A. Palkhivala, J. B. Dadachanil, 0. C. Mathur and
Ravinder Narain, for the respondent.
July 29, 1964. The Judgment of the Court was delivered
by:
SHAH, J.-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, 194 7 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 tho
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
191& in respect of the business done immediately before
that Act was repealed. The firm also applied to substitute·
the income earned in the year 194 7 for the income of tho
previous year. The Income-tax Officer held that the inter- .
est 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 lncome-ta:r
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 cntitc
income of the business including income from securities in
the year in which the business was discontinued.
At the· instance of the Commissioner, tho Tribunal
referred under s. 66( 1) ·of the
Act a question, whiclr
S/UJIJ 1·
1964 -
CJ.T.
v.
:hugmultU
and
Co. -
Shah· 1.
334
SUPREME COURT REPORTS
[rg64]
when reframed by the High Court of Bombay read as
follows:~
"Whether the assessee is entitled to the benefit of
s.
25 (3) in respect of the interest on
securities?"
It is 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 s. 8 of the Indian Income-tax Act, 1922.
Section 25 ( 3), on the true interpretation of which the
respective contentions of the assessee and the Commissioner have to be adjudged, is in the following terms:
"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 di<continuance, 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."
Exemption from liability to pay tax in respect of the income,
profits and gains under s. 25 ( 3) may be claimed by an
I •
g S.C.R.
SUPREME COURT REPORTS
335
assessee if the business is one in respect of which tax was
1964
charged at any time under the Indian Income-tax Act, 1918
CJi.
and the business is discontinued-there being no succession
•· .
by virtue of which the provisions of sub-s. ( 4) of s. 25 Chugan~a;_
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 predecessorin-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 charge/
to tax under s. 3 of Act 11 of 1922 read with ·the approprfate Finance Act, resulting in double taxation in respect
of the income for that year.
But with a view to make the number of assessments
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
Shah/.
1964
_C.l.T.
"·
ChugandtU
Co.
Shah /. ·
336
SUPREME COURT REPORTS
there was a difference of opinion in the High Court. In
the judgment under appeal, Tendolkar, J., was of the viev·
nd that by this expression only income, profits and gains of
•
business chargeable to tax under the head "profits and gains
of business, profession or vocation" under s. 10 read wit~
s. 6(iv) stood exempt from liability under s. 25l3),_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.
·
To appreciate the point in dispute, it is necessary. to
bear in mind the scheme of the Act for computing the
taxable income. - Under the Act, income-tax is a single tax
on the aggregate of income received from diverse
heads
mentioned in s. 6: s. 6 is not a charging section, and income
computed under each distinct head is not separately chargeable to tax. But income which is chargeable under a
specific head, cannot be brought to tax under another head
either in lieu of or in addition to that head. As observed
by this Court in The United Commercial Bank Ltd .•
Calcutta v.
The Commissioner of Income-tax, West
·Bengal(') "the scheme of the Indian Income-tax Act, 1922,
is that the various heads of income,
profits and gains
enwji.erated in s. 6 are mutually exclusive, each head being
specific to cover the item arising from a particubr source
and, consequently, "interest on securities" which is specifically made chargeable to tax under s. 8 as a distinct head,
falls under that section and cannot be brought under s. 10,
whether the securities are held as trading assets or capital
asset." In The United Commercial Bank's case(')
th~
Income Tax Officer split up the income of a Banking Company was in the course of assessment, into two heads--
"interest on securities" and "business income", and set off
the business loss against the income from securities in the
year of assessment, but did not allow th(: business loss of a
previous year to be set off under s. 24(2) against that
(I) [1958] S.C.R. 19·
,
d S.C.R. ·.·. . SUPREME COURT REPORTS
337
incom~. This view was approved by the High Court of
1964.
Calcutta.
Th_e High Court held that the. several heads
c.1.r.
under s. 6 of the Income-tax Act are mutually exclusive,
v.
d
·
"all· ·
d
I · ·
Chugandfl3
an
an lt~m 1
mz un er an exc us1ve head cannot be
co. ·
charged u•:.J;• ic<Jther head. This view was· affirmed by
this Court, and it was held that "interest on securities"
being specifically charged . under s. 8, which is a distinct
head, it coulu not be brought under s. 10, whether the
securities were trading assets or. capital assets. ·
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 faJJ within the head "profits and gains of busi·
ness" within the meaning of s. 10 read with s. 6(iv). If
securities constitute stock-in-trade of the business of an
11Ssessee, 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( IA) and not under s. 10. If an
11Ssessee 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 incoine under the head profits and
gains of business will be that amount alone which is earned
in the business, and does not aJJ under any other specific
head.·
·
Tendo!kar J., in the judgment under appeal was of the
· opinion that income of the business to be computed under
'· 10 alone could be admitted to the exemption:
the
majority of the Court held that all income earned by carr)r-
. ing on business qualified for the exemption. · Now cl. ( 3)
of s. 25 expressly provides that income of a business, profession or vocation which was charged at any time under
Act 7 ·of 1918 to tax is, on discontinuance of that business,
· profession or vocation, exempt from liability· to tax under
Act 11 of 1922 for the period between the end of the
previous year and the c!ate of such discontinuance. Tax is
charged und~r the Income-tax Acts on specific units, such
>l S.C.-22
1964 -
CJ.T.
...
~Ill
Co. .... ,.
SUPREME COURT REPORTS
[rg64J
as, individuals, Hindu Undivided
Families,
Companie!
Local Authorities, Firms and Associations of persons or
partners of firms and members of associations individually,
and and business, profession or vocation is not a unit of assessment.
When, therefore, s. 25 ( 3)
enacts that tax was
charged at any time on any business, it is intended that the
tax was at any time charged on the owner of any business.
If that condition be fulfilled in respect of the income of th11
business under the Act of 1918, the owner or his successorin-interest qua the business, will be entitled to get the benefit of the exemption under it if the business, is discontinued.
The section in terms refers to tax charged on any bminess,
i.e., tax charged on any person· in respect of income earned
by carrying on the business. Undoubtedly it is not all
income earned by a person who conducted any business,
which is exempt under sub-s. (3) of s. 25: non-business
income will certainly not
qualify for the privilege.
But
there is no reason to restrict the condition of the applicability of the exemption only to income on which the tali
was payable under the head "profits and gains of business,
profession or vocation".
The Legislature has made no
such express reservation,
and
there is
no warrant for
reading into sub-s. (3) such a restricted meaning.
Subsection (3) it may be nQticed does not refer to chargeability
of income to tax under a particular head as a condition of
obtaining the benefit c• the exemption.
Diverse other provisions of the Act lend strong support
to that view. Where the Legislature intended to refer to a
specific head of taxation under s. 6 of the Act as a condition for imposing an obligation or claiming a right, the
Legislature has in terms referred to such a head.
For
instance, by s. 18 (2) liability is imposed upon any person
responsible for paying any income chargeable under
the
head "salaries" to deduct income-tax and super-tax on the
amount payable.
Similarly
under
s. 18 ( 3) · persolll
responsible for paying income-tax under the head "interest
on securities" are liable to deduct income-tax and supel'-
tax at the prescribed rates on the amount of interest payable.
Section 24 enables set-off in respect of loss sustained under
any of the heads mentioned in s. 6 against income, profiill
•
"'->-
•
': -
8 S.CR. ·
SUPREME COURT REPORTS
339
and gains from any other head in that - year. These are
DU -
some of the p:ovi<:ions in which reference is made to specific
ci:r.
heads cf ta,•,alion.
But the exemption under s. 25 (3)
is Ch • ,.1,
gener~!: 'ti~ ;:o~ ~~stricted to income chargeable under s. 10
u.• ea.
of the Act. Some indication is also furnished by the scheme
of sub-ss. (1) and (2) of s. 25. Under sub-s. (1) the
Income-tax -Officer is given power to make what is called
an "accelerated assessment" when a business, profession or
l'Ocation is discontinued in any year. The reason of the
rule contained in s. 25 (1) is to prevent loss of revenue by
the assessee discontinuing the business, profession or vocation and frittering away or secreting the assets and income
or disappearing from the scene of his activity. But such an
asses-sment would in the normal course have to be in respect
of the entire income of that business, profession or 0vocation.
If the contention - of the Department that income of th•
business, profession or vocation for the purpose ·of an
accelerated assessment is to be limited only to income on
which ta~ is payable under s. 10 be correct, the assessment
under s. 25 ( 1) would serve little useful purpose, because
income received from securities, from dividends, - from
house-property etc. would remain still to be determined and
brought to tax after the end of the year and in the relevant
year_ of a~sessment. Again an assessee discontinuing
his
business, profession or vocation is entitled by s. 24 to set
off losses in one business against profits in another, and
this right may tum out to be illusory if in the assessment
of the income of a bnsiness which is discontinued, profit and -
gains which fall within s. 10 only are taken into account.' -
The Revenue authorities, it is true, may get · a complete
picture of the liability of the assessee to taxation only on
tlnal assessment. This is not to say that a mere possibility
of two assessments is decisive of the intention of the Legi!-
lature, for if that be the test, every person who has income
received from business, profession or vocation and income
_from other source would still have to be subject, after an
accelerated assessment under s. 25 (1), to a final
asses:;-
ment in respect of the non-business income to determine his
overall liability.
But the possibility of two assessments in
respect of _the same bqsiness for the same year,
one of ·
which acrvcs no useful purpose, must be taken into account
S"'1h J.
1161 -
c.1:r.
T.
ChutndtM
Co. -
Arlt J.
340
SUPREME COURT REPORTS
[rg64j
in ascertaining the meaning to be attributed to the expr!li·
sion "income, profits and gains of business, profession or
•nd vocation" which
is discontinued. The phraseology of
s. 25 (2) also supports the view that the income, profits and
gains of business are not restricted to profits and gains chargeable under s. 10. For failure to give notice of discontinu·
ance of business, penalty for an amount not exceeding the
tax assessed in respect of any income, profits or gain~ of
the business may be imposed. There is no logical reason
for restricting the penalty to the amount of tax asses~d on
profits and gains determined for the purpose of s. 10.
It has also to be noticed that prior to the insertion of
sub-s. (IA) of s. 12 bys. 9 of the Finance Act, 1955, with
effect from April 1, 1955, income from dividends was
chargeable not under s. 12 but under s. 10, if the shares
from which such income was received were the stock-in·
trade of the assessee.
The result of the insertion of
'· 12(1A) is that in respect of a business in shares dividends
.CCeived from the shares were till March 31, 1955, regarded
as profits and gains of business assessable to tax under s. 10.
After the enactment of the Finance Act of 1955, dividends
became chargeable
under
s. 12(1A) under the head
"income derived from other sources". Could it have been
the intention of the Legislature that dividend income of a
business in respect of which tax was charged under the head
"Income from shares" under Act 7 of 1918 would not,
after March 31, 1955, be entitled to the benefit of the
exemption under s. 25 ( 3) merely because the head under
which it was charged prior to the Finance Act of 1955 ii
now the head "other sources" ?
Section 2(4) of the Indian Income-tax Act,
1922
defines "business" as including any trade, commerce,
oc
manufacture or any adventure or concern in the nature of
trade, commerce or manufacture. Business is therefore an
activity of a commercial nature. By s. 25 (3) indisput·
ably exemption from payment of tax was intended to be
given where there had been in respect of the same activity
double taxation when Act 11 of 1922 was enacted. If the
right arises on discontinuance of the activity styled businelli,
'·
.,
· 8 S.C.R.
SUPRE.ME COURT REPORTS
_34L ·
as S.' 25 (3) exprrssly provides, tax in connection. with that
1964
acti~ity ·11ff·l •J in·ir za facie be tax payable on the income>,
CJ.T.
profit> an·~ rein> ,\erived from that business adivity; The
"·
heads described in s. 6 and further elaborated for the pur- Chug""::":.
pose of computation of income in ss. 7 to 10, and 12, 12A
12AA and 12B are intended merely to indicate the classes
of income: · the heads do not exhaustively delimit sources
from which income arises. ':rhis is made clear in the judg111ent of this Court in the United Commercial Bank Ltd.'s
case(') that business income is broken up under different .
heads only for the purpose of computation of the total
income: by that break-up the income does not cease to be
the income of the business, the different heads of income
being only the classification prescribed by the Indian
Income-tax Act for computation of income. It· c'annot be
gainsaid that there was on the part of the Legislature a
desire by enacting s. 25 (3) to give relief to two classes of ·
income subjected to double taxation for the income. of the
year 1921-22. That this benefit was restricted to income
paid by assessees who paid tax. on income derived from
business and professional earnings under the earlier Act and
Nas not 'available in respect of other income, will not, in
our judgment, be a ground for giving a restricted meaning
to the expression "income, profits and gains of business,
profession or vocation" occurring in sub-s. (3) of s. 25.
An intention to grant a partial exemption to income, profits
and gains of a business, profession or vocation may not be
lightly attributed to the Legislature.
There is no force in the contention raised by counsel for
the Commissioner that for the year 1921-22 interest on
'ecurities could not be charged to tax twice. over. Under
the Income-tax Act, 7 of 1918, bys. 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.
I. Section 5 of that Act classified the income chargeable to
income-tax, and "Interest on securities" was charged under
s. 7 read with s. S(ii). In respect of interest on securities
by s. 14(1) the aggregate amount of the assessee's income
chargeable under each lif the heads mentioned in ss. 6 to 11
(r) [1958]S.C.R. 79
Shah J.
•.,
'
SUPREME COURT REPORTS
[1g64]
1904
became taxable in the year in which it was received. Act 7 of
c.J.T. · ·
1918 undoubtedly made a provision ins. 19 for adjustment of
Chugurl;;
•nd liability to tax when the actual income was ascertained.
Co.
Our attention has not been invited to any provision in the
Shch /.
. . ,/
Income-tax Act 7 of 1918 which excluded from liability t(}
tax, interest on securities 1or 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 Inomc-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 T of
1918, and it was also chargeable to tax under Act 11 of
1922. We are therefore unable to agree with· counsel· for
the Commissioner that interest on securities not being exposed to double taxation for the year 1921-22, benefit of
s. 25 (3) was not admissible to that class of income.
Counsel also contended, relying upon the judgment of
this Court in Commissioner of Income-tax, Bihar and Orissa ·
T. Ramakrishna Deo( 1) that it is for the respondent to prove
that the income sought to be taxed is exempt from taxation,
and unless he discharges that burden, the claim · of the
respondent must fail.
Undoubtedly where a doubt arises
on the facts placed before the taxing authority, whether the
tax-payer is entitled to exemption from taxation under a
certain statutory provision, tho 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 interpretation whether the exemption which is admittedly
ttven by s. 25 (3) operates in respect of the entirety of the
business income for the year in question in the course of
which th~ business is discontinued or whether it applies only
to tnat class of iricome which is taxable under tho head
"profits and gains of business" carried on by the asses~ee in
that year.
Section 26 on which reliance was placed by counsel foe
the Commissioner also may be noticed in this connection.
(I) (1959] Sapp. I s.C.R. 176
. '
'
8 S.Clt
SUPREME CQURT REPORTS
343
That. section provides for a scheme of assessment when
there· is change in the constitution of a firm or succession
to a business. The section applies not to discontinuance of
business, but to changes _in the constitution of the assessee
firm and to swces"ion- to business. Under sub-s. (1) if at
the time cf mr. ""fog l1ll assessment it be -found by the
Income-tu Officer that a change has o_ccurred in the
constitution of a firm or that a firm has been newly constituted, the firm as constituted at the time of -inaking the ·
1t>sessment has to be assessed. But the income, profits and .
gains for the previous year for the ptirpose of inclusion in
the total income of the partners must be apportioned
between the partners who in such previous year were
entitled to receive the same. If the ta-.; assessed upon a
partner cannot be recovered from him it may be recovere'I
from the firm as constituted at the time of making the
l!SSessment.
This provision deals
with the machinery of
· assessment and not with computation of income, nor with .
exemption from liability to tax. Sub-section (2) of s. 26
deals with cases of succession to any person carrying on any
business, profession or vocation by another person carrying
on business, profession or vocation in such capacity, and
provides that the person succeeding is, subject to the provi-
'ions of sub-s. ( 4) of s. 25, liable to be assessed in respect
of his actual share of the income, profits and gains of the
previous year.
But the proviso enacts that if the person
'ucceeded in the business, profession or vocation cannot be
found, the assessment of the profits of the year in which
'uccession took place upto the date of succession, and for·.
the previous year, shall be made on the person succeeding
in like nianner and in the same amount as it would have
been made on the person succeeded or when the tax in
respect of the assessment made for either of such years
assessed on the person succeeded cannot be recovered from
him, it shall be payable by and recoverable from the person
rucceeding.
This clause also deals with liability to assessment and payment of tax and not with the computation of
income and whatever interpretation may be. placed on s. 26
It> to the extent of liability incurred by a successor to a
business, profession or ".OCation, it ·is not indicative of the
ment or of the field of the right to claini exemption under
19M
C.I.T.
: "'·
Chuganda.r
Co. ·
Shah/.
344
SUPREME COURT REPORTS
1964
s. 25(3): Section 26 provides for apporticmment of liability
Cii. ''
to tax in case of change in the constitution of firms and
"· ..
succession to persons carrying on business: it directs apporClw,ga'1;a;_ : .. and tionment of tax liability in respect of the actual share of
Shah J,
the Sl!Ccessor and the person · succeeded. The fact that
under sub-s. (2) of s. 26 liability is imposed upon the
successor to pay tax on behalf of his predecessor 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.
We may briefly refer to the decision of this Coun in
The Commissioner' of Income-tax,· Madras v • . The Express
Newspapers Limited, Madras('). In that case Free Press
Limited-a Private Company-transferred its . business on
August 31, 1946 to the asscssee the Express Newspapers
Ltd. and thereafter resolved to wind up its business voluntarily. An amount of Rs. 2,14,000/- was assessed in the
relevant year of assessment as business profit of the transferor
company
taxable under s.
10(2) (vii)
and
Rs. 3,94,576/-
taxable as capital gains. The business
profit was held to be not taxable because it accrued in a
winding up sale and not in a trading venture. Liability of
the second amount to tax as capital gains was not canvassed,
but it was contended by the Express Newspapers Ltd. that
as successor to the Free Press Ltd., it was not liable to be
assessed under s: 26(2). In examining the scheme of
s. 128 it was observed:-
"Under that section the tax shall be payable by the
assessee under the head capital gains in respect
of any profits or gains arising from the sale of
a capital asset effected during the prescribed
period. It says further that such profits or
gains shall be deemed to be income of the
previous year in which the sale etc. took place.
This deeming clause does not lift the capital .
gains from the (\th head in s. 6 and place it
(1) [1964] 8 S.C.R. 189
8 S.C.R
SUPREME COURT REPORTS
under the 4th head. It only introduces a
1954
limited fiction, namely,
that· capital
gains
CJ.T.
ac::rued wm ·be deemed to be income of the Chndv.
·
•
h" h th
I
ff
d
uga
as
- and,
pr~'<v'1S )t:ar m w IC
e sa e was a ecte .
co. -
The ii:';QP does not make thein·the' profit or
gains of the business. It is well settled that a
legal fiction is limited to the purpose for which
- it is created and should not be extended beyond
its legitimate field. Sub-section (2A) and (2B)
of s. 24 provide for the setting off of the loss
falling under the head "capital gains" against
any capital gains falling under the same head.
Such loss cannot be set off against an income
falling under any different -head. These three
sections ·indicate beyond any doubt_ that the
capital
gains are
separately computed -- in
accordance with the said provisions and they
are not treated as the profits from the business.
The profits and gains of business and capital
gains are two distinct concepts in the Incometax Act: the former
arises ·from the -activity
which is called business and the latter accrues
because capital assets are disposed of at a
value higher than what they cost to the
assessee.
They are
placed under "different·
heads; they are derived from different sources;
and the income
is computed under different
methods. The fact that the capital gains are
connected with the capital assets of the business cannot make them the profit of the business. They are only deemed to be income or·
the previous year and not the profit or gains
arising from the business during that year."
Dealing with s. 26(2) it was observed:-
" The expression "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 th'e other- -
hand, if the. interpretation sought to be put
upon the expression "income" in sub-s. (2) of'
Shah /.
HU
CJ.T.
...
..Chugandtis _ anti
Co.
Shah J.
-- SUPREME COURT- REPORTS --l1g64!
s. 26 by tho Revenue is accepted, then the
-absence of that word in the proviso destroys
_the argument. But the more reasonable view
is that both the sub-section 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
heads mentioned in s. 6 of the Act. But if, iu
we have held, the scope of sub-s. (2) of s. 26
is only limited to the iricome from
the busi-
- ness, the share under sub-s. (2)
and the
assessment and realisation
under the proviso
can only relate to the income from the business.
The argument is really begging the
question itself."
It is obvious 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, profit$ 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 predecessor, if he cannot be found, upon the successor
and must be strictly construed.
The Legislature has imposed bys. 26(2) liability upon the successor to be assessed for profits earned in a business carried on by hi>
_predecessor, and· unless there is a _ c1ear intention expressed
8 S.C.R.
SUPREME COURT REPORTS
347
in the ·statute to include in that expression what in reality
1964.
is not 'income, but is deemed income, the liability to
CJ.'l.
assessment would justifiably
be limited to· profits of. tlie Chu:•,J;,,
a1Ul
business which is computable under s. 10.
·
\
Co.
The appeals therefore fail and are dismissed with costs.
One hearing fee.
Appeals di.rmissd.
C. PERIASWAMI GOUNDAN AND ORS.
. --v.
SUNDARESA IYER AND ORS.
(K. SUBBA RAO AND S. M. Sllll, JJ.)
/Mm rrant--Suit for_ ejectment-Defendant raised plea of LoJt GrantWhen presumption of Lo1t Grant arise.1-Whether trant i.r melvaram.
or both ,,_ .. urm.J--Right of Archaka.t-Whether ArchaktJ.f can cl&im
remuneration. in a 1uit for ejectment.
The :appellants filed suits for the recovery of certain properties from
tl!.e pos!e!sion of the respondents. The plaintiffs were the trwtees of
the temples and the defendants were the archak!s and the alienees of
tho suit properties. The!e suits were based on title and the relief a,,ked
fee was the eviction of the arcbakas from the suit property z.s they. · ·
accordi.n: to the plaintiff:!!, (appellants) bad no title to rerriain in
pcssession. Tho plaintiffs claimed that the suit properties ·were the
iJLOperties of the deity !.nd that the defendants bad no, right therein.
The archal!.S raised the plea that the title of the deity was confined
enly to rr.elvaram in the plaint-!chedule landa and that they had title
to the Kudivaram. Both the Trial Court and the High Court confirmed
the title of the deity to both the intere!ts (VaramJ) and negatived the
title of the defendant-Archakas.
The High Court also held. that the
art:h.akas were entitled to have a portion of the said properties allotted
to lliem toward.J their remuneration for the services to the temples and.
&a.Te a decree directing the division of the said properties into two halYes
and puttin.; the archakas in possession of one half. Against this decree
of the High Court both the arch al: as and the trustees (appellants)
preferred cross appeals to this Court.
Sluzh /.
1964
July, :n .