1. This is a reference under section 66 (1) of the Indian Income-tax Act, 1922. The question that is referred for determination is :
'Whether, on the facts and in the circumstances of the case, the amount of Rs. 7,318 could be included in the income of the assessee-company for the assessment year 1961-62, under the provisions of section 10 (2A) or section 12 (5) ?'
2. The assessee is a limited company, which has gone into voluntary liquidation on December 31, 1959. The assessee-company was the selling agent of the National Rayon Corporation Ltd. before the voluntary liquidation proceedings were commenced. The agency of the company came to an end some time in March, 1958. The assessment year is the year 1961-62, and the corresponding previous year is the calendar year 1960. During the year the assessee-company had an income of Rs. 7,318 in the outstanding creditors' account and this amount was on account of expenses claimed in earlier years. The assessee-company had maintained its accounts on mercantile basis, and even though the amount in fact was not paid, yet as the liability was incurred, it was allowed as expenses incurred in the earlier years. In the year of account relevant to the assessment year 1961-62, the amount was outstanding in the outstanding creditors' account. The Income-tax Officer added the amount of Rs. 7,318 to the total income of the assessee having regard to the provisions of section 10 (2A) of the Act or in the alternative section 12 (5) of the Act. He took the view that in the earlier years, in view of the claim made by the assessee-company, the aggregate sum of Rs. 7,318 was allowed as expenses, but as nobody came forward to claim these expenses, the same were shown under the heading 'Outstanding creditors'. It was contended on behalf of the assessee before the Income-tax Officer that the expenses wre originally allowed under the head 'Business income' under section 10 (2A) but the assessee-company ceased to carry on business as from March 30, 1958, that the liquidators did not have any business income and as such, the unclaimed liability which was a business expenditure allowed under section 10 could not then be taxed under section 10 as there was no business income during the year. However, the assessee-company wanted to claim that, as there was no business in the previous year, the virtual remission or unclaimed liability should not be assessed as income under section 12 (5). The Income-tax Officer rejected the contention of the assessee-company and took the view that section 10 (2A) contained a deeming provision and the stipulation laid down therein ought to be carried out to its logical conclusion. Accordingly, the amount was liable to be assessed under section 10 (2A). In the alternative, he took the view that the provisions of section 12 (5) were also attracted. The order passed by the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner. On an appeal by the assessee-company before the Tribunal, it was contended on his behalf that neither the provisions of section 10 (2A) nor those of section 12 (5) were attracted, that the company had ceased to carry on the business as from March 30, 1958, that the liquidator has not carried on any business after the date of the winding-up and since the business in respect of which the expenditure was allowed came to a stop in 1958, and was not carried on during the year of account, neither section 10 nor section 10 (2A) would apply. It was also urged that the provisions of section 12 (5) would not apply because the deductions allowed during the preceding years were under section 10. The Tribunal took the view that the provisions of section 12 (5) were not attracted because the deductions in the first place were given in the preceding years under section 10. It, however, rejected the contention of the assessee-company that the provisions of section 10 (2A) were not attracted. The Tribunal took the view that section 10 (2A) creates business profits by a fiction and that fiction pre-supposes that the business is carried on. Since the section deems certain amounts to be profits of business, profession or vocation, it must be presumed that business, profession or vocation was carried on during the year of account, or else, the fiction created by that section would be a superstructure without foundation. The Tribunal pointed out that in the latter part of the section itself it is provided that not only the amounts in question would be deemed to be profits and gains of business but they would be deemed to have accrued or arisen during the previous year. There could be no profit from business accruing during the previous year unless the business was carried on during that period. The deeming of accrual, therefore, necessarily pre-supposes deeming of business accruing during the year. The Tribunal was of the view that the amount was subject to tax in view of the provisions of section 10 (2A). Upon application by the assessee-company, the question has been referred to this court for its determination.
3. Having regard to the question referred to this court, two questions arise for consideration, viz., whether the sum of Rs. 7,318 could be included in the income of the assessee-company for the assessment year 1961-62, either under the provisions of section 10 (2A) or section 12 (5). Section 12 (5) will not apply because the deductions in the first place in the earlier years were given under section 10. Section 12 (1) provides that 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 its total income if not included under any of the proceeding heads. Sub-section (5) thereof provides that the provisions of sub-sections (2A) and (4A) of section 10 shall apply, so far as may be, in computing income, profits and gains of an assessee under this section as they apply in computing profits or gains of an assessee under that section. As in none of the earlier years, the sum aggregating to Rs. 7,318 was taxed under the head 'other sources', the provisions of section 12 (5) will not be attracted.
4. Question then arises whether the amount can be subjected to tax in view of the provisions of section 10 (2A). The argument on behalf of the assessee-company is that admittedly no business was carried on at any time in the previous year by the assessee-company. The amount of Rs. 7,318, even if remitted, cannot be treated as income or profit under section 10 (2A). It was urged that the question is directly covered by the decision of the Gujarat High Court and it is well-settled law that the High Court has consistently followed such a decision as far as possible in construing a statute which is an all India statute to have uniformity amongst the different High Courts. See Ambika Silk Mills Ltd. v. Commissioner of Income-tax : 22ITR58(Bom) .
5. The question whether the amount of Rs. 7,318 could be assessed in view of the provisions of section 10 (2A) is concluded by the decision of the Gujarat High court in Baroda Traders Ltd. v. Commissioner of Income-tax : 57ITR490(Guj) . The Division Bench has taken the view in this case that sub-section (2A) of section 10 of the Indian Income-tax Act, 1922, must be read along with sub-section (I) and an essential requirement for the application of sub-section (2A) is the existent of the business in the 'previous year'. Upon construction of sub-section (2A) it took the view that it creates two fictions : (i) that though the amount received or the benefit derived in respect of a trading liability which has been allowed would not be income, it is to be deemed to be profits or gains; and (2) that such profits or gains have to be deemed as having accrued during that previous year, i.e., the year of remission or cessation. The sub-section does not go further and provide that in a case where the business is discontinued before the commencement of that previous year, i.e., the year of remission or cessation, it shall be deemed to have continued during that year notwithstanding its discontinuance. At page 503 it is pointed out that section 10 provides for computation of tax under the head 'profits or gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by an assessee. It is clear from this language that in order that the section may apply, the requirement is that the business, profession or vocation should have been carried on during the accounting year. The words 'carried on' occurring in sub-section (1) must mean that if the business had been discontinued before the commencement of the accounting year, the profits of the business, though received in the accounting year, cannot be taxed because the source of the income does not exist in the accounting year. The allowances provided for in sub-section (2) also are to be made in respect of 'such profits or gains', i.e., profits or gains in respect of the business, profession or vocation carried on during the accounting year. Sub-section (2A) being part of the main section, would, prima facie, seem to be governed by the requirement laid down in sub-section (1) unless there is something in the language of sub-section (2A) to read it as an independent provision. The object of enacting the sub-section clearly is to bring to tax as income that which has been earlier allowed as a deduction or an allowance. The opening words of the su-section, namely, 'where for the purpose of computing profits or gains under this section' would themselves indicate that the sub-section is not an independent provision but a part of the scheme of section 10, a scheme for computing profits or gains. As part of the scheme for such computation, the sub-section provides that where an allowance or deduction has been made in the assessment of any year in respect of any loss, expenditure or trading liability, and subsequently during any previous year the assessee has received any amount of such loss or expenditure or has obtained some benefit in respect of such trading liability by remission or cessation thereof, the amount received by him or the value of the benefit shall be deemed to be profits or gains and such profits and gains shall also be deemed to have accrued during that previous year. The deeming provision thus creates two fictions : (1) that though the amount so received or the benefit in respect of trading liability would not be income, it is to be deemed to be profits or gains; and (2) that such profits or gains have to be deemed as having accrued during that previous year, i.e., the year of remission or cessation. The first fiction was necessary, for, otherwise, the amount would not be profits or gains, and the second was necessary because, unless it was deemed that it accrued during the year of remission or cessation, it cannot be taxed for that particular year. But, it would seem that beyond these two fictions, the sub-section does not go further and provide that in a case where the business is discontinued before the commencement of that previous year, i.e., the year of remission of cessation, it shall be deemed to have continued during that year notwithstanding the discontinuance.
6. In the present case, the Tribunal in its order in paragraph 5 has made it clear that the department did not challenge the position that the company was not carrying on the business after 31st March, 1958, and the assessee has not challenged the position that it obtained some benefit in respect of the liability by way of remission or cessation thereof.
7. It is our duty to preserve uniformity in law in respect of an all-India statute to follow the decision of the Gujarat High Court, even though we may be persuaded upon reconsideration to take a different view. Mr. Joshi on behalf of the revenue has reserved his right to contend that the question involved in this reference raises an important question as to the construction of the provisions of section 10 (2A) and section 12 (5) of the Act and also to contend that the view taken by the Gujarat High court is erroneous. It will be open to the revenue to take such a contention in case the matter has to be considered by any higher court. Following the decision of the Gujarat High Court, our answer to the question referred is in the negative. The revenue shall pay the costs of the assessee-company.