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Commissioner of Income-tax Vs. V.V.S. Sarma and anr. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 270 of 271 of 1970 (Reference Nos. 58 of 59 of 1970)
Judge
Reported in[1977]110ITR778(Mad)
ActsIncome Tax Act, 1961 - Sections 3; Pondicherry (Taxation Concessions) Order, 1964; Taxation Laws (Extension to Union Territories) Regulation, 1963; Finance Act
AppellantCommissioner of Income-tax
RespondentV.V.S. Sarma and anr.
Appellant AdvocateA.N. Rangaswami and ;Nalini Chidambaram, Advs.
Respondent AdvocateM. Uttama Reddy and ;T.R. Raghavan, Advs.
Excerpt:
.....on residual income before deducting compulsory deposit paid under scheme - under para 8 income of previous year relevant to assessment year charged to tax at indian rate of tax allowing deduction at 60% thereof - tax to be determined first and then deduction to be made - deduction of compulsory deposit comes under separate enactment and not part of income tax act - question answered in affirmative against revenue. - - the tribunal held that the application of the concessions order must be interpreted in such a manner, not affecting the substance of the scheme of the income-tax act and that so far as the income from salary was concerned, when an assessee had not kept any books of account, the previous year was clearly the financial year ending with 31st march, and that, therefore,..........subject to certain modifications made by the same regulation. prior to such extension, there was a french income-tax law in force in the now union territory of pondicherry, and that law was also repealed by the regulation with effect from the first day of april, 1963. 2. under the scheme of the french taxation laws, the ' previous year ' was the calendar year and the assessment year, the subsequent calendar year. thus, for the year ending december 31, 1962, the assessees were taxed under the then existing law in the assessment year 1963. since the income-tax act, 1961, was extended by the regulation to the union territory of pondicherry and that came into force with effect from the first day of april, 1963, the income accruing or arising in the previous! year ending march 31, 1963, in.....
Judgment:

V. Ramaswami, J.

1. The Income-tax Act, 1961, was extended to the Union Territory of Pondicherry by the Taxation Laws (Extension to Union Territories) Regulation III of 1963 (hereinafter called 'the Regulation') with effect from the first day of April, 1963. The extension was subject to certain modifications made by the same Regulation. Prior to such extension, there was a French income-tax law in force in the now Union Territory of Pondicherry, and that law was also repealed by the Regulation with effect from the first day of April, 1963.

2. Under the scheme of the French taxation laws, the ' previous year ' was the calendar year and the assessment year, the subsequent calendar year. Thus, for the year ending December 31, 1962, the assessees were taxed under the then existing law in the assessment year 1963. Since the Income-tax Act, 1961, was extended by the Regulation to the Union Territory of Pondicherry and that came into force with effect from the first day of April, 1963, the income accruing or arising in the previous! year ending March 31, 1963, in the Union Territory of Pondicherry became liable for assessment under the Income-tax Act, 1961. Thus, some of the income, which could be assessed under the French law, also became assessable under the Income-tax Act; by reason of the coincidence of the whole or a part of the calendar year 1962 with the previous year for the assessment year 1963-64. In some cases, the income of the calendar year 1962 had beenassessed under the French law and some had not suffered the tax. The Regulation inserted Section 294A conferring power on the Central Government, if it considered it necessary or expedient to do so, for avoiding any hardship or anomaly or removing any difficulty that may arise as a result of the application of the Income-tax Act to the Union Territory of Pondicherry, to make by general or special order, an exemption reduction in rate or other modification in respect of the income-tax or super-tax in favour of any assessee or class of assessees or in regard to the whole or any part of the income of any assessee or class of assessees. In exercise of this power, the Central Government issued the Pondicherry (Taxation Concessions) Order, 1964 (hereinafter referred to as the 'Concessions Order'). The concessions in respect of the income assessable in the assessment year 1963-64 are embodied in paragraphs 4 and 5 of this Concessions Order, which read as follows:

'4. Tax on income for the previous year ending on 31st December, 1962.--(1) The income of the previous year ending on the 31st December, 1965, which is the previous year for the French assessment year, 1963, shall be assessed under the Income-tax Act, 1961, if and only if such income has not already been assessed under the French law.

(2) Where the income referred to in sub-paragraph (1) has not been assessed under the French law, it shall be assessed under the Income-tax Act, 1961, for the assessment year commencing on the 1st day of April, 1963, and the tax payable thereon shall be determined as hereunder;--

(a) the tax on the amount of such income included in the total income shall be computed at the Indian rate of tax ;

(b) the amount of such income shall be computed under the French law and the tax thereon computed at the French rate of tax ;

(c) where the amount of tax computed under Clause (a) is less than or is equal to the amount of tax computed under Clause (b) the amount of the first-mentioned tax shall be the tax payable ; and

(d) where the amount of tax computed under Clause (a) exceeds the amount of tax computed under Clause (b), the excess shall be deducted from the first-mentioned tax and the balance shall be the tax payable.

5. Tax on income assessable in 1963-64 which does not fall under paragraph 4.--The income of any previous year relevant to the assessment year commencing on the 1st day of April, 1963, which does not fall within paragraph 4 of this order shall be assessed under the Income-tax Act, 1961, for the aforesaid assessment year and the tax payable thereon shall be determined as hereunder :--

(a) the tax on the amount of such income included in the totalincome shall be computed--

(i) at the Indian rate of tax, and

(ii) at the French rate of tax;

(b) where the amount of tax computed at the Indian rate of tax is less than or is equal to the amount of tax computed at the French rate of tax, the amount of the first-mentioned tax shall be the tax payable; and

(c) where the amount of tax computed at the Indian rate of tax exceeds the amount of tax computed at the French rate of tax, the excess shall be deducted from the first-mentioned tax and the balance shall be the tax payable.'

3. It may be seen that so far as the income of the year ending 31st December, 1962, which was the previous year for the French assessment year 1963 is concerned, it shall be assessed under the Income-tax Act, 1961, as provided under Clause (2) of paragraph 4 if and only if such income had not already been assessed under the French law. If such income of the previous year ending 31st December, 1962, had already been assessed under the French law, such income would not be covered by the provisions of paragraph 4(2). Similarly, the income for the period from January I, 1963, to March 31, 1963, was also outside the provisions of paragraph 4. Paragraph'5 deals with the assessment of income of any previous year relevant to the assessment year 1963-64 which does not fall within paragraph 4. Clause (2) of paragraph 2 states that all words and expressions used in the Concessions Order, which had not been defined therein but defined in the Income-tax Act, 1961, shall, in relation to the provisions relating to income-tax, have the meaning assigned to them in the Income-tax Act, 1961. Therefore, the words 'previous year ' in paragraph 5 is the previous year as denned in Section 3 of the Income-tax Act, 1961. The important things to note in this provision of the Act is that where an assessee does not maintain any accounts, the financial year immediately preceding the assessment year is the previous year and if the assessee maintains an account and such accounts of the assessee have been made up to a date within the said financial year, then at the option of the assessee, the 12 months ending on such date. Thus, under paragraph 5, if the assessee was not maintaining any accounts, the income assessable in the assessment year 1963-64 is the income of the financial year, namely, the year ending 31st March, 1963. , Paragraph 5 provided for the determination of the tax payable on such income of the previous year. But in the proviso to Clause (2) of paragraph 2 it was provided as follows :

' Provided that where an assessee has once been assessed for any year under the French law in respect of income from any particular source, the expression ' previous year ' in relation to that source of his income shall, for the purposes of making an assessment for any assessment year underthe Income-tax Act, 1961, mean the year ended on the 31st day of December, immediately preceding that assessment year, unless the assessee is permitted by the Income-tax Officer (the permission being subject to such conditions as the Income-tax Officer may think fit to impose) to have a different previous year in respect of that source of income.'

4. These two tax cases relate to the assessments of two different assessees for the assessment year 1964-65. Their income for the year ending December 31, 1962, had already been assessed in the French assessment year 1963. They were not maintaining any accounts. Before any assessment for the assessment year 1963-64 under the Income-tax Act, 1961, was taken up, the assessment for the assessment year 1964-65 was started by the Income-tax Officer in July, 1965. He held out to the assessee an option in relation to the previous year which was, (1) of the calendar year 1963, or (2) the period of 15 months from January 1, 1963, to March 31, 1964, purporting to act under the proviso to paragraph 2(2). The assessees agreed for the assessment of the income concerned during the period of 15 months from January 1, 1963, to March 31, 1964, in the assessment year 1964-65. Accordingly, the Income-tax Officer completed the assessment for the assessment year 1964-65 taking the income earned during the period of 15 months from January 1, 1963, to March 31, 1964. While computing the tax payable, the Income-tax Officer gave a deduction of 60 per cent. of the tax as concession under paragraph 8 of the Concessions Order. But the concession from the additional surcharge on residual income was computed on the amount of additional surcharge after deducting the amount of compulsory deposit paid under the Compulsory Deposit (Income-tax Payers) Scheme, 1963. Both the assessees preferred appeals before the Appellate Assistant Commissioner and advanced the following three contentions :

1. The assessee's earlier consent to the assessment of 15 months' income would not disentile him to go on appeal, if the agreement should have been made contrary to the provisions of law.

2. In the case of salaried employees, who did not maintain any books of accounts, there cannot be a previous year other than the financial year under Section 3 of the Income-tax Act, 1961. Hence, the income for the period from April 1, 1963, to March 31, 1964, should alone be assessed for the assessment year 1964-65.

3. While calculating the concession under para. 8 of the Concessions Order, it should be calculated at 60% of the additional surcharge without deducting from it the compulsory deposit paid.

5. The Appellate Assistant Commissioner held that in respect of a salaried employee, who had not maintained any accounts, the previous year was the financial year under Section 3 and that, therefore, only the income of the previous year ending March 31, 1964, could have been assessed in theassessment year 1964-65, and the proviso to paragraph 2(2) was not applicable. He further held that the concession of 60 per cent. of the tax shouldbe calculated from the gross additional surcharge before deducting thecompulsory deposit on the ground that there was no reference at all to thecompulsory deposit in the Income-tax Act or in the Finance Act for thepurpose of calculation of tax and the deduction of compulsory deposit wasonly allowable under a separate enactment different from the Income-taxAct, 1961.

6. The department filed an appeal in respect of both these cases before the Appellate Tribunal. The Tribunal held that the application of the Concessions Order must be interpreted in such a manner, not affecting the substance of the scheme of the Income-tax Act and that so far as the income from salary was concerned, when an assessee had not kept any books of account, the previous year was clearly the financial year ending with 31st March, and that, therefore, the assessee was within his rights in claiming the financial year as the previous year for the assessment of the income from salary. The Tribunal further held, agreeing with the Appellate Assistant Commissioner, that the deduction of 60 per cent. of the tax including additional surcharge on residual income should be calculated before deduction of compulsory deposit and not after deducting the compulsory deposit.

7. At the instance of the revenue, the following two identical questions are referred in each of these references;

' 1. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee was within his rights in claiming the period of twelve months ended March 31, 1964, as the previous year for the assessment of his income from salary for the assessment year 1964-65

2. Whether the Tribunal was right in law in holding that the deduction of 60% of the tax to which an assessee is entitled under para. 8 of the Pondicherry (Taxation Concessions) Order, 1964, should be calculated from the gross additional surcharge on residual income before deducting the compulsory deposit paid under the Compulsory Deposit (Income-tax Payers) Scheme, 1963?'

8. It was argued by the learned counsel for the revenue that the assessee had been assessed under the French law on the income from salary for the previous year 1962, and that, therefore, the assessee's previous year for any assessment under the Income-tax Act for income from that source cannot be any year other than the appropriate calendar year in relation to the concerned assessment year. It was further argued that, if any charge is to be made in this previous year, it could only be subject to such conditions as may be imposed by the Income-tax Officer as provided in the proviso toparagraph 2(2) of the Concessions Order. The condition imposed by the Income-tax Officer, in the instant case, was that the previous year for the assessment year 1964-65 may be adopted with March 31, 1964, as the last date, but covering a period of 15 months.

9. On the other hand, it was contended by the learned counsel for the assessee that the previous year in respect of a salaried person who has not maintained any accounts is the financial year and this is unalterable on any ground. The power given under the proviso to paragraph 2(2) of the Concessions Order could not, in any way, override the substantive provisions in the Act itself.

10. We think the learned counsel for the assessee is well-founded in his contention. The Concessions Order itself was issued on February 20, 1964, before the assessment year 1964-65 commenced. The assessee had been assessed under the French law on the income from salary for the year ended December 31, 1962. If he was willing to be assessed for the assessment year 1963-64, with the financial year as the previous year, for the same source of income, it would not have been possible for the Income-tax Officer to have refused to assess him and suggest that the income of the three months from January 1, 1963, to March 31, 1963, should be added to the income of the assessment year 1964-65 at that stage. It might have been possible for him to have imposed some other conditions while making the assessment for 1963-64 with the financial year as the previous year. But it would not justify his action in suggesting the same in the course of the next assessment year. Sections 6(2) and 7 of the Regulation also show that we must interpret the Concessions Order in a manner not affecting the substance of the scheme of the Income-tax Act. The substance of the Income-tax Act is that in respect of income from salary for which no books of account have been kept by the assessee, the previous year is the financial year and the rates applicable are according to the Finance Act of that year. That could not have been altered under the Concessions Order. If the statutory provision does not enable the Income-tax Officer to change the previous year, we do not think that the consent of the assessee could have, in any way, clothed the Income-tax Officer with such authority. Further, in order to pin down the assessee to his option, one must also have regard to the fact whether the assessee had knowledge of his right to opt and all those circumstances which would influence the exercise of such an option. We are not persuaded to hold that the assessee was made fully aware of the implications when the Income-tax Officer held out the option. In fact, the assessees immediately filed appeals against the order of assessment. We, therefore, agree with the Tribunal that the assessees were within their rights in claiming the financial year as the previous year for the assessmentof the income from salary for the assessment year 1964-65 We, accordingly, answer the first question in the affirmative and against the revenue.

11. As regards the second question, under paragraph 8 of the Concessions Order, the income of any previous year relevant to the assessment year 1964-65 shall be charged to tax at the Indian rate of tax, but a deduction shall be allowed from the tax so computed of an amount calculated at 60 per cent. thereof. The revenue wanted to make a deduction of 60 per cent. after deducting from the additional surcharge the compulsory deposit made by the assessee. The assessee's contention was that the deduction under paragraph 8 at 60 per cent. has to be made from tax including additional surcharge in the first instance before any deduction of the compulsory deposit. Paragraph 8 of the Concessions Order requires the tax to be determined at the Indian rate of tax in the first instance and 60 per cent. thereof should be deducted thereafter. The adjustment by way of deduction of compulsory deposit comes under a separate, enactment, namely, Compulsory Deposit (Income-tax Payers) Scheme, 1963. It is not part of the Income-tax Act. The Indian rate of tax has been defined in the Concessions Order as the rate determined by dividing the amount of income-tax and Super-tax payable on the total income under the provisions of the Income-tax Act, 1961, by the total income. There is no reference to the deduction of compulsory deposit in the Income-tax Act, 1961. In these circumstances, the Tribunal was right also in holding that the Income-tax Officer was not entitled to deduct the compulsory deposit from the additional surcharge payable and applying the concession provided under paragraph 8 only on the balance. The concession should applied on the gross additional surcharge payable and from the balance Mould be set off the amount paid as compulsory deposit. We, accordingly, answer the second question also in the affirmative and against the revenue.

12. The assessee in T. C. No. 271 of 1970 will be entitled to his costs. counsel's fee Rs. 250. No order as to costs in T.C. No. 270 of 1970.


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