1. M/s. Chugandas and Co. - a firm dealing in securities - received in theyear 1946 Rs. 4,13,992/- as interest on securities held by it. In 1947 itreceived Rs. 1,01,229/- as interest from the same source. On June 30, 1947 thefirm discontinued its business. In proceedings for assessment for 1947-48 and1948-49 the firm, relying upon s. 25(3) of the Indian Income-tax Act, 1922,claimed exemption from payment of tax on income earned in the relevant previousyear, on the plea that the firm was carrying on business before the IndianIncome-tax Act, 1922, was enacted, and on that business, tax had been chargedunder the provisions of the Indian Income-tax Act 7 of 1918 in respect of thebusiness done immediately before that Act was repealed. The firm also appliedto substitute the income earned in the year 1947 for the income of the previousyear. The Income-tax Officer held that the interest earned by the firm onsecurities being 'liable to be assessed to tax' under s. 8 and notunder s. 10 of the Income-tax Act, firm was not entitled to the benefit of theexemption claimed. The order of the Income-tax Officer was confirmed in appealby the Appellate Assistant Commissioner. The Income-tax Appellate Tribunal,however, reversed the order and held that the firm was entitled to the benefitof the exemption in respect of the entire income of the business includingincome from securities in the year in which the business was discontinued.
2. At the instance of the Commissioner, the Tribunal referred under s. 66(1)of the Act a question, which when reframed by the High Court of Bombay read asfollows :-
'Whether the assessee is entitled to the benefit ofs. 25(3) in respect of the interest on securities ?'
3. It is common ground that the principal business of the assessee was as adealer in securities. Securities held by the assessee were its stock-in-tradeand interest on those securities was received from time to time, and thisinterest had for computing the taxable income to be taken into account under s.8 of the Indian Income-tax Act, 1922.
4. Section 25(3), on the true interpretation of which the respectivecontentions of the assessee and the Commissioner have to be adjusted, is in thefollowing terms :
'Where any business, profession or vocation onwhich tax was at any time charged under the provisions of the Indian Income-taxAct, 1918 (VII of 1918), is discontinued, then, unless there has been asuccession by virtue of which the provisions of sub-section (4) have beenrendered applicable, no tax shall be payable in respect of the income, profitsand gains of the period between the end of the previous year and the date ofsuch 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, anassessment shall be made on the basis of the income, profits and gains of thesaid period, and if an amount of tax has already been paid in respect of theincome, profits and gains of the previous year exceeding the amount payable onthe basis of such assessment, a refund shall be given of the difference.'
5. Exemption from liability to pay tax in respect of the income, profits andgains under s. 25(3) may be claimed by an assessee if the business is one inrespect of which tax was charged at any time under the Indian Income-tax Act,1918 and the business is discontinued - there being no succession by virtue ofwhich the provisions of sub-s. (4) of s. 25 have been rendered applicable.Section 25(3) however applies even if the person assessed under the Income-taxAct, 1918, was different from the person who claims relief under that sectionprovided the former was the predecessor-in-interest of such person qua thebusiness. The reason for enacting s. 25(3) was that under the Indian Income-taxAct 7 of 1918, income-tax was levied by virtue of s. 14(2) of Act 7 of 1918 onthe income of the year of assessment. Tax was therefore levied in the financialyear 1921-22 on the income of that year. By the Indian Income-tax Act 11 of1922 the basis of taxation was altered and by s. 3 of that Act, charge for taxwas imposed upon the income of the previous year. When Act 11 of 1922 wasbrought into force on April 1, 1922, two assessments in respect of the sameincome for the year 1921-22 had to be made. The income for 1921-22 wasaccordingly charged to tax twice; it was charged under Act 7 of 1918 and it wasalso charged to tax under s. 3 of Act 11 of 1922 read with the appropriateFinance Act, resulting in double taxation in respect of the income for thatyear.
6. But with a view to make the number of assessments equal to the number ofyears during which the business was carried on the Legislature enacted theexemption prescribed by s. 25(3). This benefit was however restricted only tothe income, profits and gains of business, profession or vocation on which taxhad been charged under the provisions of the Indian Income-tax Act, 1918. Byenacting s. 25(3) the legislature intended to exempt the income, profits andgains resulting from the activity styled business, profession or vocation fromtax when the business, profession or vocation is discontinued if tax wascharged in respect thereof under the Act of 1918. That much is clear. But thatis not the whole problem. What is to be regarded as income, profits and gains ofbusiness, profession or vocation within the meaning of s. 25(3) for whichexemption may be obtained on discontinuance raises a problem on which there wasa difference of opinion in the High Court. In the judgment under appeal,Tendolkar J. was of the view that by this expression only income, profits andgains of business chargeable to tax under the head 'profits and gains ofbusiness, profession or vocation' under s. 10 read with s. 6(iv) stoodexempt from liability under s. 25(3). S. T. Desai J., held that s. 25(3)exempted from liability to tax all income, profits and gains earned byconducting a business, profession or vocation irrespective of whether they werechargeable to tax under the head 'profits and gains of business,profession or vocation', and with this view K. T. Desai, J., to whom thecase was referred for opinion, agreed.
7. To appreciate the point in dispute, it is necessary to bear in mind thescheme of the Act for computing the taxable income. Under the Act, income-taxis a single tax on the aggregate of income received from diverse headsmentioned in s. 6 : s. 6 is not a charging section, and income computed undereach distinct head is not separately chargeable to tax. But income which ischargeable under a specific head, cannot be brought to tax under another headeither in lieu of or in addition to that head. As observed by this Court in TheUnited Commercial Bank Ltd., Calcutta v. The Commissioner of Income-tax, WestBengal : 1SCR79 'the scheme of the Indian Income-tax Act, 1922,is that the various heads of income, profits and gains enumerated in s. 6 aremutually exclusive, each head being specific to cover the item arising from aparticular source and, consequently, 'interest on securities' whichis specifically made chargeable to tax under s. 8 as a distinct head, fallsunder that section and cannot be brought under s. 10 Whether the securities areheld as trading assets or capital assets.' In The United Commercial Bank'case : 1SCR79 the Income Tax Officer split up the income of a BankingCompany was in the course of assessment, into two heads - 'interest onsecurities' and 'business income', and set off the business lossagainst the income from securities in the year of assessment, but did not allowthe business loss of a previous year to be set off under s. 24(2) against thatincome. This view was approved by the High Court of Calcutta. The High Courtheld that the several heads under s. 6 of the Income-tax Act are mutuallyexclusive, and an item falling under an exclusive head cannot be charged underanother head. This view was affirmed by this Court, and it was held that'interest on securities' being specifically charged under s. 8, whichis a distinct head, it could not be brought under s. 10, whether the securitieswere trading assets or capital assets.
8. It must therefore be held that even if an item of income is earned in thecourse of carrying on a business, it will not necessarily fall within the head'profits and gains of business' within the meaning of s. 10 read withs. 6(iv). If securities constitute stock-in-trade of the business of anassessee, interest received from those securities will for the purpose ofdetermining the taxable income be shown under the head 'interest onsecurities' under s. 8 read with s. 6(ii) of the Act. Similarly dividendsfrom shares will be shown under s. 12(1A) and not under s. 10. If an assesseecarries on business of purchasing and selling buildings, the profits and gainsearned by transactions in buildings will be shown under s. 10, but incomereceived from the buildings so long as they are owned by the assessee will beshown under s. 9 read with s. 6(iii). Income earned by an assessee carrying onbusiness will in each case be broken up, and taxable income under the head profitsand gains of business will be that amount alone which is earned in thebusiness, and does not all under any other specific head.
9. Tendolkar J., in the judgment under appeal was of the opinion that incomeof the business to be computed under s. 10 alone could be admitted to theexemption : the majority of the Court held that all income earned by carryingon business qualified for the exemption. Now clause (3) of s. 25 expresslyprovides that income of a business, profession or vocation which was charged atany 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 forthe period between the end of the previous year and the date of suchdiscontinuance. Tax is charged under the Income-tax Acts on specific units,such as, individuals, Hindu Undivided Families, Companies Local Authorities,Firms and Association of persons or partners of firms and members ofassociations individually, and business, profession or vocation is not a unitof assessment. When, therefore, s. 25(3) enacts that tax was charged at anytime on any business, it is intended that the tax was at any time charged onthe owner of any business. If that condition be fulfilled in respect of theincome of the business under the Act of 1918, the owner or hissuccessor-in-interest qua the business, will be entitled to get the benefit ofthe exemption under it if the business, is discontinued. The section in termsrefers to tax charged on any business, i.e., tax charged on any person inrespect of income earned by carrying on the business. Undoubtedly it is not allincome earned by a person who conducted any business, which is exempt undersub-s. (3) of s. 25 : non-business income will certainly not qualify for theprivilege. But there is no reason to restrict the condition of theapplicability of the exemption only to income on which the tax was payableunder the head 'profits and gains of business, profession orvocation'. The Legislature has made no such express reservation, and thereis no warrant for reading into sub-s. (3) such a restricted meaning.Sub-section (3) it may be noticed does not refer to chargeability of income totax under a particular head as a condition of obtaining the benefit of the exemption.
10. 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, theLegislature has in terms referred to such a head. For instance, by s. 18(2)liability is imposed upon any person responsible for paying any incomechargeable under the head 'salaries' to deduct income-tax andsuper-tax on the amount payable. Similarly under s. 18(3) persons responsiblefor paying income-tax under the head 'interest on securities' areliable to deduct income-tax and super-tax at the prescribed rates on the amountof interest payable. Section 24 enables set-off in respect of loss sustainedunder any of the heads mentioned in s. 6 against income, profits and gains fromany other head in that year. These are some of the provisions in whichreference is made to specific heads of taxation. But the exemption under s.25(3) is general : it is not restricted to income chargeable under s. 10 of theAct. Some indication is also furnished by the scheme of sub-ss. (1) and (2) ofs. 25. Under sub-s. (1) the Income-tax Officer is given power to make what iscalled an 'accelerated assessment' when a business, profession orvocation 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 incomeor disappearing from the scene of his activity. But such an assessment would inthe normal course have to be in respect of the entire income that business,profession or vocation. If the contention of the Department that income of thebusiness, profession or vocation for the purpose of an accelerated assessmentis to be limited only to income on which tax is payable under s. 10 be correct,the assessment under s. 25(1) would serve little useful purpose, because incomereceived from securities, from dividends, from house-property, etc. wouldremain still to be determined and brought to tax after the end of the year andin the relevant year of assessment. Again an assessee discontinuing hisbusiness, profession or vocation is entitled by s. 24 to set off losses in onebusiness against profits in another, and this right may turn out to be illusoryif in the assessment of the income of a business which is discontinued, profitsand gains which fall within s. 10 only are taken into account. The Revenueauthorities, it is true, may get a complete picture of the liability of theassessee to taxation only on final assessment. This is not to say that a merepossibility of two assessments is decisive of the intention of the Legislature,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 besubject, after an accelerated assessment under s. 25(1), to final assessment inrespect of the non-business income to determine his overall liability. But thepossibility of two assessments in respect of the same business for the sameyear, one of which serves no useful purpose, must be taken into account inascertaining the meaning to be attributed to the expression 'income,profits and gains of business, profession or vocation' which isdiscontinued. The phraseology of s. 25(2) also supports the view that theincome, profits and gains of business are not restricted to profits and gainschargeable under s. 10. For failure to give notice of discontinuance of business,penalty for an amount not exceeding the tax assessed in respect of any income,profits or gains of the business may be imposed. There is no logical reason forrestricting the penalty to the amount of tax assessed on profits and gainsdetermined for the purpose of s. 10.
11. It has also to be noticed that prior to the insertion of sub-s. (1A) ofs. 12 by s. 9 of the Finance Act, 1955, with effect from April 1, 1955, incomefrom dividends was chargeable under s. 12 but under s. 10, if the shares fromwhich such income was received were the stock-in-trade of the assessee. Theresult of the insertion of s. 12(1A) is that in respect of a business in sharesdividends received from the shares were till March 31, 1955, regarded asprofits and gains of business assessable to tax under s. 10. After theenactment of the Finance Act of 1955, dividends became chargeable under s.12(1A) under the head 'income derived from other sources'. Could ithave been the intention of the Legislature that dividend income of a businessin respect of which tax was charged under the head 'Income fromshares' under Act 7 of 1918 would not, after March 31, 1955, be entitledto the benefit of the exemption under s. 25(3) merely because the head underwhich it was charged prior to the Finance Act of 1955 is now the head'other sources'
12. Section 2(4) of the Indian Income-tax Act, 1922 defines'business' as including any trade, commerce, or manufacture or anyadventure or concern in the nature of trade, commerce or manufacture. Businessis therefore an activity of a commercial nature. By s. 25(3) indisputablyexemption from payment of tax was intended to be given where there had been inrespect of the same activity double taxation when Act 11 of 1922 was enacted.If the right arises on discontinuance of the activity styled business, as s.25(3) expressly provides, tax in connection with that activity would primafacie be tax payable on the income, profits and gains derived from thatbusiness activity. The heads described in s. 6 and further elaborated for thepurpose of computation of income in Sections 7 to 10, and 12, 12A, 12AA and 12B areintended merely to indicate the classes of income : the heads do notexhaustively delimit sources from which income arises. This is made clear in thejudgment of this Court in the United Commercial Bank Ltd.'s case : 1SCR79 that business income is broken up under different heads only for thepurpose of computation of the total income : by that break-up the income doesnot cease to be the income of the business, the different heads of income beingonly the classification prescribed by the Indian Income-tax Act for computationof income. It cannot be gainsaid that there was on the part of the Legislaturea desire by enacting s. 25(3) to give relief to two classes of income subjectedto double taxation for the income of the year 1921-22. That this benefit wasrestricted to income paid by assessees who paid tax on income derived frombusiness and professional earnings under the earlier Act and was not availablein respect of other income, will not, in our judgment, be a ground for giving arestricted meaning to the expression 'income, profits and gains ofbusiness, profession or vocation' occurring in sub-s. (3) of s. 25. Anintention to grant a partial exemption to income, profits and gains of abusiness, profession or vocation may not be lightly attributed to theLegislature.
13. There is no force in the contention raised by counsel for theCommissioner that for the year 1921-22 interest on securities could not becharged to tax twice over. Under the Income-tax Act, 7 of 1918, by s. 14(2) taxwas levied in respect of the year beginning from April 1, 1918 in respect ofeach subsequent year, upon every assessee on his taxable income in that year atthe rate specified in Sch. I. Section 5 of that Act classified the incomechargeable to income tax, and 'Interest on securities' was chargedunder s. 7 read with s. 5(ii). In respect of interest on securities by s. 14(1)the aggregate amount of the assessee's income chargeable under each of theheads mentioned in Sections 6 to 11 became taxable in the year in which it wasreceived. Act 7 of 1918 undoubtedly made a provision in s. 19 for adjustment ofliability to tax when the actual income was ascertained. Our attention has notbeen invited to any provision in the Income-tax Act 7 of 1918 which excludedfrom liability to tax, interest on securities for the year in which that incomehad accrued. By s. 3 of Act 11 of 1922 interest on securities earned in theyear 1921-22 became chargeable and under s. 68 of that Act which was aprovision transitory as well as repealing, machinery provided by the Income-taxAct of 1918 was expressly kept alive for the purpose of assessment and makingadjustments under s. 19 of the Income-tax Act, 1918. Interest on securitiesearned in 1921-22 was therefore chargeable to tax under Act 7 of 1918, and itwas also chargeable to tax under Act 11 of 1922. We are therefore unable toagree with counsel for the Commissioner that interest on securities not beingexposed to double taxation for the year 1921-22, benefit of s. 25(3) was notadmissible to that class of income.
14. Counsel also contended, relying upon the judgment of this Court inCommissioner of Income-tax, Bihar and Orissa v. Ramkrishna Deo  Supp. 1S.C.R. 176, that it is for the respondent to prove that the income sought tobe taxed is exempt from taxation, and unless he discharges that burden, theclaim of the respondent must fail. Undoubtedly where a doubt arises on thefacts placed before the taxing authority, whether the tax-payer is entitled toexemption from taxation under a certain statutory provision, the burden liesupon him to establish that exemption. But, here we are concerned not with anyquestion of burden of proof, but with a question of interpretation whether theexemption which is admittedly given by s. 25(3) operates in respect of theentirety of the business income for the year in question in the course of whichthe business is discontinued or whether it applies only to that class of incomewhich is taxable under the head 'profits and gains of business'carried on by the assessee in that year.
15. Section 26 on which reliance was placed by counsel for the Commissioneralso may be noticed in this connection. That section provides for a scheme ofassessment when there is change in the constitution of a firm or succession toa business. The section applies not to discontinuance of business, but tochanges in the constitution of the assessee firm and to succession to business.Under sub-s. (1) if at the time of making an assessment it be found by theIncome-tax Officer that a change has occurred in the constitution of a firm orthat a firm has been newly constituted, the firm as constituted at the time ofmaking the assessment has to be assessed. But the income, profits and gains forthe previous year for the purpose of inclusion in the total income of thepartners must be apportioned between the partners who in such previous yearwere entitled to receive the same. If the tax assessed upon a partner cannot berecovered from him it may be recovered from the firm as constituted at the timeof making the assessment. This provision deals with the machinery of assessmentand not with computation of income, nor with exemption from liability to tax.Sub-section (2) of s. 26 deals with deals with cases of succession to anyperson carrying on any business, profession or vocation by another personcarrying on business, profession or vocation in such capacity, and providesthat the person succeeding is, subject to the provisions of sub-s. (4) of s.25, liable to be assessed in respect of his actual share of the income, profitsand gains of the previous year. But the proviso enacts that if the personsucceeded in the business, profession or vocation cannot be found, theassessment of the profits of the year in which succession took place up to thedate of succession, and for the previous year, shall be made on the personsucceeding in like manner and in the same amount as it would have been made onthe person succeeded or when the tax in respect of the assessment made foreither of such years assessed on the person succeeded cannot be recovered fromhim, it shall be payable by and recoverable from the person succeeding. Thisclause also deals with liability to assessment and payment of tax and not withthe computation of income and whatever interpretation may be placed on s. 26 asto the extent of liability incurred by a successor to a business, profession orvocation, it is not indicative of the extent or of the field of the right toclaim exemption under s. 25(3). Section 26 provides for apportionment ofliability to tax in case of change in the constitution of firms and successionto persons carrying on business : it directs apportionment of tax liability inrespect of the actual share of the successor and the person succeeded. The factthat under sub-s. (2) of s. 26 liability is imposed upon the successor to paytax on behalf of his predecessor or to be assessed in respect of the income ofthe person succeeded for the previous year, will not, in out judgment, besufficient to hold that the exemption which has been granted in consequence ofdouble taxation under the Acts of 1918 and 1922 also must be restricted toincome which is taxable under s. 10.
16. We may briefly refer to the decision of this Court in The Commissionerof Income-tax, Madras v. The Express Newspapers Limited, Madras : 53ITR250(SC) . In that case Free Press Limited - a Private Company - transferredits business on August 31, 1946 to the assessee 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 profitof 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 taxablebecause it accrued in a winding up sale and not in a trading venture. Liabilityof the second amount to tax as capital gains was not canvassed, but it wascontended by the Express Newspapers Ltd. that as successor to the Free PressLtd., it was not liable to be assessed under s. 26(2). In examining the schemeof section 12B it was observed :-
'Under that section the tax shall be payable by theassessee under the head capital gains in respect of any profits or gainsarising 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 theprevious year in which the sale, etc. took place. This deeming clause does notlift the capital gains from the 6th head in s. 6 and place it under the 4thhead. It only introduces a limited fiction, namely, that capital gains accruedwill be deemed to be income of the previous year in which the sale waseffected. The fiction does not make them the profit or gains of the business.It is well settled that a legal fiction is limited to the purpose for which itis created and should not be extended beyond its legitimate field. Sub-sections(2A) and (2B) of s. 24 provide for the setting off of the loss falling underthe head 'capital gains' against any capital gains falling under thesame head. Such loss cannot be set off against an income falling under anydifferent head. These three sections indicate beyond any doubt that the capitalgains are separately computed in accordance with the said provisions and theyare not treated as the profits from the business. The profits and gains ofbusiness and capital gains are two distinct concepts in the Income-tax Act :the former arises from the activity which is called business and the latteraccrues because capital assets are disposed of at a value higher than what theycost to the assessee. They are placed under 'different heads; they arederived from different sources; and the income is computed under differentmethods. The facts that the capital gains are connected with the capital assetsof the business cannot make them the profit of the business. They are onlydeemed to be income of the previous year and not the profit or gains arisingfrom the business during the year.'
17. Dealing with s. 26(2) it was observed :-
'The expression 'profits' in the provisomakes it clear that the income, profits and gains in sub-s. (2) of s. 26 onlyrefer to the profits under the 4th head in s. 6. On the other hand, if theinterpretation sought to be put upon the expression 'income' insub-s. (2) of s. 26 by the Revenue is accepted, then the absence of that wordin the proviso destroys the argument. But the more reasonable view is that boththe sub-section and the proviso deal only with the profits under the 4th headmentioned in s. 6 and, so construed, it excludes capital gains. The argumentthat sub-s. (2) of s. 26 read with the proviso thereto indicates that the totalincome of the person succeeded is the criterion for separate assessment undersub-s. (2) and for assessment and realisation under the proviso is on theassumption that sub-s. (2) and the proviso deal with all the heads mentioned ins. 6 of the Act. But if, as we have held, the scope of sub-s. (2) of s. 26 isonly limited to the income from the business, the share under sub-s. (2) andthe assessment and realisation under the proviso can only relate to the incomefrom the business. The argument is really begging the question itself.'
18. It is obvious that the Court in that case held having regard to thespecial nature of 'capital gains' which are not in truth income, butare deemed income for the purpose of taxation and the phraseology used, thatthe liability of the successor under the proviso to s. 26(2) is only in respectof tax on income, profits and gains of the business strictly so-called, to becomputed under s. 10 read with s. 6(iv) and not in respect of all receiptswhich 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 beena double levy of tax, and an intention to exempt all income, profits and gainsof business from taxation may be attributed to the Legislature. Section 26(2)fastens liability of the predecessor, if he cannot be found, upon the successorand must be strictly construed. The Legislature has imposed by s. 26(2)liability upon the successor to be assessed for profits earned in a businesscarried on by his predecessor, and unless there is a clear intention expressedin the statute to include in that expression what in reality is not income, butis deemed income, the liability to assessment would justifiably be limited toprofits of the business which is computable under s. 10.
19. The appeals therefore fail and are dismissed with costs. One hearingfee.
20. Appeals dismissed.