(1) This is a reference under section 66(1) of the Indian Income-tax Act, 1922. The following two questions of law, which arise out of I. T. A. No. 9815/1959 -60 9815/1959 -60 have been referred to this court by the income Tax appellate Tribunal, Hyderabad Bench for decision.
1. Whether on the facts and in the circumstances of the case, the income of the period of 18 months from 1-10-53 to 31-3-1955 being the total income determined for the assessment year 1955-56 was chargeable to tax at the rate applicable to such total income or at the rate applicable to the proportionate income of the period of 12 months?
2. Whether, on the facts and in the circumstances of the case, the income from property fell to be assessed for the period of 18 months from 1-10-1953 to 31-3-1955 or for the proportionate period of 12 months only?
(2) The assessee in each of the cases is an individual. He derives income from property and from dividends and bank interest. He is a partner in a firm besides. The previous year of his choice for purposes of assessment of income-tax hither to, upto the assessment year 1954-55, was the fasli year ending with September. He desired to switch on to the financial year on grounds of convenience. He could do so in law only with the permission of the income-tax Officer and subject to the condition imposed by him. He submitted for the relevant year two returns of income: one as usual for the period 1-10-1953 to 31-3-1955 to catch up with the financial year. At the same time, he requested the income-tax officer for a change in the financial year accordingly. The income tax officer acceded to his request on the condition that the entire period of 18 months income will be taxed in one assessment. The assessee made no grievance. In fact, he agreed to the principle that 18 months income could be taken in one assessment. His contention however was that even so the chargeable income of property in view of clear provisions of S. 9 would be only of 12 months and not 18 months, His further contention was that though 18 months income might be included in the assessment, the tax could be charged only on the basis of the proportionate income of 12 months. Both these contentions did not find favour with either the Income-Tax Officer or with the appellate Assistant Commissioner or even with the Appellate Tribunal. The result is that the questions involved are now on reference before us for decision.
(3) For a correct appreciation of the position relevant statutory provisions must be noticed. The liability to tax arises by reason of S. 3 which is a charging section. Section 3 of the Income-tax Act enjoins that the tax should be charged on the total income of the assessee for the previous year at the rates fixed by the Finance Act for that year and in accordance with and subject to the provisions of the Income-tax Act. The total income of any previous year of a person, according to s. 4 of the Income tax Act, includes all income, profits and gains of that person from what ever source derived . . . . If the source be income from property, s. 9 enjoins that the tax shall be payable by the assessee under that head in respect of the 'bona fide annual value' of the property consisting of buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property, as he may occupy for the purposes of any business, profession or
vocation carried on by him the profits of which are assessable to tax, subject of course to certain allowances provided in that section. Sub-s. (2) of S. 9 says:
'(i) * * * (ii) to (vii) * * * for the purpose of this section, the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year. '
The previous year referred to in S. 3 is defined in S. 2 (11) which reads thus:
'S.2 (11) 'previous year' means in respect of any separate source of income, profits and gains . . . .
(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 :
Provided that where an assessee has once been assessed in respect of a particular source of income, profits and gains , he shall not in respect of that source exercise this option so as to vary the meaning of the expression 'previous year' as then applicable to him except with the consent of the Income tax Officer and upon such conditions as the Income-tax Officer may think fit; or (b) * * * * (c) * * * *
It is manifest from the above provisions that according to the scheme of the Indian Income Tax Act the tax is charged for a financial year at the rate prescribed by the annual finance act on the total income of the previous year. Each previous year is the subject of a separate assessment in the relevant assessment year. Though the year of assessment is the financial year, the previous year of the assessee need not necessarily be the previous year of the assessee need not necessarily be the previous financial year for this expression has to be understood as defined in S. 2 (11) (a). It substantially means the accounting year previous to the assessment year comprised of 12 months. There can be only one previous year to a given year of assessment having regard to the drift of Ss. 2 (11) and 4. Though ordinarily it is of full 12 months, it may sometimes be of a longer or shorter period. If the taxable source of income is property consisting of buildings or lands appurtenant thereto, the tax has to be paid in respect of its annual value, which expression has to be understood as explained in sub-clause (2) of that section. The annual value shall be the sum which is reasonably expected from letting the property from year to year.
The expressions 'annual value' and ' year to year' used in the provision as under stood in the common parlance as well, postulate, a period of twelve months. It is the inherent capacity of that property to yield profits for one year of 12 months that is brought to tax for any accounting year normally of twelve months. It cannot on that account be said that even though the length of the previous year at the request of the assessee has been extended to 18 months the tax leviable would be only on the expected income of 12 months. It is no doubt true that having regard to the language of the provisions, some discrepancy between the actual income and statutory income for the year of 12 months for tax purposes is bound to arise. In fact that appears to be a normal and familiar feature of income tax low. But it does not follow that reasonably expected income of 12 months shall remain the total taxable income even for a period of eighteen months. It cannot be said that even though a period of eighteen months. It cannot be said that even though a period of 18 months has been included in the accounting year on grounds of convenience of the assessee and subject to the condition against any portion of the income of the period escaping from tax normally due, the taxable income would yet be of a period of twelve months only.
It is obvious but for the change in the previous year the additional six months income would have undoubtedly been brought to tax. It is also clear that the change permitted was not intended to allow any portion of the income otherwise taxable to escape taxation. As we have already noticed the previous year hither to adopted by the assessee, was ending with the fasli year (i.e., ending with September), and the assessee
ow chose to adopt the financial year. As this could be done with the permission of the Income Tax Officer, subject to the conditions imposed by him, the assessee asked for the permission of the Income Tax Officer who readily granted it with the condition that the entire 18 months income will be taxed in one assessment for the assessment year 1955-1956. The assessee cannot possibly act upon the consent of the Income tax Officer without being bound building the condition imposed by him for the same. It was open to the assessee in view of the condition imposed to stick on to the previous year of his past choice. But he actually agreed that eighteen months income may be brought to tax in due accordance with law.
His contention seems to be that even so under the statue the total tax leviable on the income of eighteen months in relation to property was that sum as is due on the reasonably expected letting value of the property for a period of 12 months. For this he relied on S. 9 of the act if his contention is to prevail the remaining six months' income which could otherwise have been brought to tax, must, now on account of the change, notwithstanding the condition attached there to escape taxation. That certainly cannot be the meaning of S.9 Section 4 clearly shows that the tax has to be charged on the total income of the year. The previous year being of a period of 18 months, the entire income of the period must necessarily be subject taxation. Normally the previous year is only of 12 months duration. But when in the particular circumstances, it has been extended to 18 months because the previous year cannot be split up and there can be only one previous year to a given year of assessment, the full period from the end of the previous year for the preceding year's assessment to the end of the new accounting date has to be taken into consideration.
What all S. 9 enjoins is that the bona fide annual value of the property shall be the measure of assessment. The bona fide annual value or in other words reasonably expected letting value for an year of 12 months being the standard for the accounting year of 12 months, total income in this case has to be worked out having regard to the whole period of eighteen months included in the in the accounting or previous year in this case. when the change of the year was allowed subject to certain condition which the law permits the condition must necessarily be complied with. While levying the tax, the Income tax Officer has not departed from this principle. He has taken the bona fide annual value into account and has determined the total income having regard to the length of that year which is of 18 months. the method adopted be said to be inconsistent with the provisions S. 9.
Thus, on the question referred to we are of the view that when the Income Tax Officer had allowed the change in the previous year as requested on condition that the income of whole period shall be brought to tax in one year and the previous year, as a result, for the accounting year in question, covered a period of more than 12 months, the total income for that period was chargeable to tax at the rates applicable to such total income. Even in relation to tax at the rates applicable to such total income. Even in relation to tax on property the year in this case being of 18 months be expected letting value of the property for such year would be measure of assessment of income for that year. We are also of opinion that s. 9 which provides for levy of tax not on actual but on the notional income of the property and fixes the measure as annual value cannot be constructed to mean that even though the previous year may be of a longer period, only 12 months notional income shall be taken into account for taxation. We, therefore, answer question Nos. 1 and 2 in the following manner :
(1) That the income of the period of 18 months from 1-10-1953 to 31-3-1955 being the total income determined for the assessment year was chargeable to tax at the rate applicable to such total income and not at the rate applicable to such total income and not at the rate applicable to the proportionate income of the period of 12 months.
(20 That on the facts and in the circumstances of the case, the income from property was liable to be assessed for 18 months from 1-10-1953 to 31-3-1955 that being the size of the previous year and not on the reasonably expected income of 12 months only.
(4) The reference is answered accordingly. The costs of the reference will be paid by the petitioner. Advocate's fee is fixed at Rs. 150/-
(5) Answered accordingly.