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The Secretary to the Board of Revenue Income-tax Vs. Al. Ar. Rm. Arunachalam Chettiar and Brothers - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai
Decided On
Judge
Reported in(1921)ILR44Mad65
AppellantThe Secretary to the Board of Revenue Income-tax
RespondentAl. Ar. Rm. Arunachalam Chettiar and Brothers
Cases ReferredGresham Life Assurance Society v. Bishop
Excerpt:
indian income-tax act (vii of 1918) - money-lending firm--interest accruing due but not received in the year of account--whether taxable under section 9. - - and that, while it is open to the legislature for good and sufficient reason to enact that debts which have not been paid but are still outstanding shall be treated as income for the purposes of the act, the court would not be justified in attributing such an intention to the legislature, in the absence of the clearest and most express language. , 191 ,dealing with the case of two solicitors going into partnership and getting a good deal of business in the first year for all of which they would only be paid later. in such a case, the learned judge points out, there would be no profit or income for the first year for the purpose of.....john wallis, c.j.1. the only question argued before us was whether money which became due to a money-lending firm in the course of its business by way of interest in the year of account, or year on the income of which the tax is to be assessed for the current year, is to be treated as part of the assessable income for that year of account, although it was not recovered or realized by the firm in that year, either in cash or by adjustment in the accounts. 2. 'income' is defined in the 'concise oxford dictionary of current english', adapted from the great oxford dictionary and published at the clarendon press, as 'periodical (usually annual) receipts from one's business, lands, work, investments, etc.; income-tax (levied on this).' this is also the legal acceptation of the term, as appears.....
Judgment:

John Wallis, C.J.

1. The only question argued before us was whether money which became due to a money-lending firm in the course of its business by way of interest in the year of account, or year on the income of which the tax is to be assessed for the current year, is to be treated as part of the assessable income for that year of account, although it was not recovered or realized by the firm in that year, either in cash or by adjustment in the accounts.

2. 'Income' is defined in the 'Concise Oxford Dictionary of Current English', adapted from the great Oxford Dictionary and published at the Clarendon Press, as 'Periodical (usually annual) receipts from one's business, lands, work, investments, etc.; income-tax (levied on this).' This is also the legal acceptation of the term, as appears from Stroud's Judicial Dictionary and numerous definitions, some of which are there cited while others have been referred to by Mr. K.V. Krishnaswami in his argument for the petitioners. Lord Selborne's 'income signifies what comes in' is the tersest, and at the same time sufficiently indicates that the taxation of interest which has not come in is not within the scope of an Income-tax Act. The use of the word 'income' in Section 3 of the present Act, on which some reliance is placed in the reference, also seems to me to be entirely in accordance with this view. That section, which appears under the head of 'Taxable income,' provides in effect that the income which is to be taxed under the Act is income from whatever source derived if it accrues or arises or if it is received in British India, that is to say, income which accrues or arises in British India is taxable even if it is received elsewhere as in England, while income which is received in India is taxable even if it accrued or arose out of British India. With this may be compared the more stringent provisions of Schedule D of the English Income-tax Act, 1918, which make residents in the United Kingdom liable in respect of annual profits or gains accruing or arising from any trade or business, whether the same be carried on in the United Kingdom or elsewhere.

3. What we are concerned with in the present case is, not the liability of the petitioners to pay income-tax which is admitted, but the way in which the income they derive from their business is to be arrived at. That, of course, is to be ascertained by reference to the provisions of the Act regarding the particular class of income, which in this case is 'income derived from business,' but in construing these provisions and the uniform interpretation which has been put upon the corresponding provisions of the English Acts, it must always be borne in mind that in its natural and legal meaning income means periodical receipts; that an income-tax is therefore presumably a tax on annual receipts; and that, while it is open to the legislature for good and sufficient reason to enact that debts which have not been paid but are still outstanding shall be treated as income for the purposes of the Act, the Court would not be justified in attributing such an intention to the legislature, in the absence of the clearest and most express language. As observed by Warrington, L.J., in Inland Revenue Commissioner v. Blott [1920] 2 K.B., 257 , with reference both to the Super-tax Act and the Income-tax Act, 'it is income and income only which is brought into charge.'

4. The tax on income derived from business, which is the class of income with which we are dealing, has never been charged on the actual receipts of the year, which would involve postponing the levy of the tax to the following year, but has bean charged in England on the average income for the three previous years. The language of Rule 1 of Schedule D of the English Income-tax Act, 1918, which has superseded all the earlier enactments dealing with this class of income, requires the tax in respect of trade not otherwise provided for to be 'computed on the full amount of the balance of the profits or gains upon a fair and just average of three years ending, etc.'

5. In Coltness Iron Co. v. Black (1881) 6 App. Cas., 315, Lord Blackburn traces this provision back to the Income-tax Act of 1803, 43 Geo. 3 ch. 122, and observes:

Instead of saying that the duty should ha imposed on a fair and just average of the amount of the profits for three years, it is imposed 'on the balance' of such profits. I have not been able to discover any difference in the meaning of the two phrases.

6. Now, as I shall show, the uniform construction placed by the Courts on this provision, occurring as it does in an Act, the general scope of which is to impose a tax on annual income, which, as already pointed out, means annual receipts, has been that it refers to the difference between the amount of the receipts of the business for three years and the expenditure incurred in earning them. This interpretation has been accepted by the legislature, which left this somewhat old-fashioned phraseology unaltered for so many years with a full knowledge of the interpretation placed upon it by the Courts, and has even reproduced it without material alteration in the new consolidating Act of 1918. Fully accepting the view that the tax is to be assessed on the basis of the receipts for three years, the legislature has confined itself to legislating as to the deductions which are allowable on the other side of the account in order to arrive at the taxable income; and, as will be seen, the Indian Legislature in the corresponding Section 9 of the present Act has followed exactly the same course.

7. It would be endless to cite all the cases in which the profits and gains on which the tax is computed under the schedule have been held to be receipts. In Rhymney Iron Co. v. Fowler [1896] 3 Q.B., 79, 80 , the Revenue Authorities observed, in the case submitted for the opinion of the Court, that:

the balance of profits and gains had repeatedly been held in the Exchequer Courts to be the difference between the receipts and the expenditure necessarily incurred in obtaining those receipts.

8. In Gresham Life Assurance Society v. Styles (1890) 25 Q.B.D., 351 , Lord Esher described this balance as:

the difference between what was received in any three years and what it cost to obtain those receipts.

9. The rule was again laid down practically in the same terms by Lords Atkinson, Parkek and Parmoor in Inland Revenue Commissioners v. Sowthend-on-Sea Estates Company, Limited [1915] A.C., 428 .

10. Something has been said about commercial balance sheets, but in Gresham Life Assurance Society v. Styles (1890) 25 Q.B.D., 351 , Lindley, L.J., observed that the rules in Schedule D were:

very different from the rules ordinarily employed in trade in ascertaining the net profits divisible among those who carry it on.

11. Even so, as pointed out in Volume 16 of Halsbury' Laws of England, by Sir Francis Gave, the learned author of the article 'Income-tax' who left his practice at the Bar to become solicitor to the Inland Revenue and writes with much experience of the subject, the difference between the commercial and the income-tax balance sheet is not as to the receipts side but as to the deduction side of the account. He says at page 650, paragraph 1310,

The profits of a trade or business would for commercial purposes seem to be the difference between the receipts and the expenses necessary to earn them. In estimating profits, however, for the purpose of income-tax the rules specifically prohibit a variety of deductions some of which would probably form proper subjects of deduction in a commercial balance sheet.

12. The same view is taken by Kekewich, J., in Badham v. Williams (1902) 86 L.T., 191 , dealing with the case of two solicitors going into partnership and getting a good deal of business in the first year for all of which they would only be paid later. In such a case, the learned Judge points out, there would be no profit or income for the first year for the purpose of income-tax or otherwise, though there might be a good prospect of profit or income in future years, against which the partners might be justified in borrowing. Lord Moulton's method of calculating profit or loss for a particular period in In re Spanish Prospecting Company, Limited [1911] l Ch., 92 , as the difference between the valuation of the total assets at the beginning and end of the particular period, was not made with reference to the Income-tax Acts and could not be applied to them consistently with the authorities to which I have referred. The learned Advocate-General relied upon the decision of the House of Lords in Colquhoun v. Brooks (1889) 14 App. Cas., 493 , but the only question in that case was whether a resident in Great Britain was liable under the language of the English Income-tax Acts to be assessed on the profits of a business which arose or accrued in Australia and were not received by him in the United Kingdom. It was held that ho was not liable to pay any income-tax on such profits, and no question arose as to the amount at which they were to be assessed. The respondent was apparently willing to pay, if liable, upon a sum of 9,000 odd which probably was not very different from the sum which he would have been liable to pay if assessed regularly under the schedule on the average profits for the three preceding years.

13. Coming now to the Indian Statutes, under the Indian Income-tax Act, 1886, trade profits were chargeable under 'Class D--Other sources of income,' and under Section 15(1) the assessment was to be made on the income accruing during the preceding year. This was admittedly interpreted in practice, and I think rightly, as meaning the receipts of the previous year less the cost of earning them. In the Indian Income-tax Act, 1918, 'income derived from business' forms the fourth of the six classes of income specified in Section 5. By Section 9 'the tax,' that is, income-tax:

shall be payable by an assessee under the head (Income derived from business) in respect of the profits of any business carried on by him.

14. This means on the amount of the profits, and is therefore identical in scope and meaning with the provision in Schedule D of the English Act as interpreted by Lord Blackburn in the passage to which I have referred. Section 9, which is clearly modelled on Schedule D of the English Act, also follows the Schedule in regulating the deductions which are allowable on the other side of the account, the main difference being that under Section 18(5) of the Indian Act the assessment is to be on the aggregate of the assessee's income in the previous year chargeable under the head, and not as in Schedule D to be computed upon the average profits for the previous three years. Unpaid debts, whether consisting of principal sums or interest, in so far as they are bad, are allowed as deductions under the statute, and do not otherwise come into an income-tax balance sheet.

15. Having regard to the uniform interpretation placed by the Courts on the corresponding language of Schedule D and accepted by the legislature, it is not, in my opinion, open to this Court to place a different interpretation on the word 'profits' occurring in Section 9 of the present Act and to hold, as contended, that they include not only receipts but also claims for interest which have fallen due but have not been paid within the year of account and therefore form no part of the income of the year in its natural and legal sense. Such interest when it is paid will necessarily form part of the profits or receipts of the year in which it is paid, and I can see no reason for including it in the profits or receipts of an earlier year. If the present Act is found to admit of extensive evasion in India, the remedy, in my opinion, is to be found in an alteration of the law.

16. Since this opinion was written, the report of the recent decision of the Court of Appeal in National Provident Institution v. Brown [1920] 3 K.B., 35 has become available. It was there held that the words in Schedule D, 'profits on discounts' and 'profits on interest,' in the Income-tax Act must mean profits arising from discounts received on discounting transactions and profits arising from interest received on securities bearing interest, and Lord Stendale, Mr., observed:

The amount received is, in my opinion, to be taxed in the year in which it is received. Although it may be accruing over several years it only becomes taxable income in the year in which it is received.

17. These words, in my opinion, supply an answer to the reference.

Ayling, J.

18. The question referred to us is whether interest which became due to a money-lending firm in the year of account but was not, realized in cash or by adjustment in the accounts is liable to income-tax under Act VII of 1918.

19. I think the answer must be in the negative. I find it impossible to hold that the mere fact that the assessee has become legally entitled to a sum of money as interest justifies the inclusion of that sum either as 'income' or 'profits of the business' within the meaning of Section 9 of the Act. It may be found impossible to recover the amount due, and I observe that Section 9 contains no proviso for deduction of bad debts, nor is there any provision as in the English Act referred to by my brother Napier for the valuation of doubtful debts. On the other hand. I would emphasize the word 'adjustment' which I take to mean a constructive receipt. I agree with Napier, J., that if a person entitled to receive interest agrees with his debtor to let the money stand in the hands of the debtor either by way of deposit or as a fresh loan or investment that would amount to a constructive receipt or 'adjustment,' and would justify the inclusion of the sum in question as profits or income, just as much as if it had been received in cash. Such an agreement might be express or implied: but should not, in my opinion, be inferred solely from the failure to take any steps for realization.

20. This seems to me the reasonable construction of the Act as it stands. If it involves practical difficulties in working, the only remedy seems to be in amendment of the Act.

21. I think it unnecessary to add to the exhaustive discussion of the authorities by my Lord the Chief Justice and my learned brothers.

Sadasiva Ayyar, J.

22. The question referred to us by the Board of Revenue under Section 51 of the Income-tax Act (VII of 1918) is formulated vaguely thus in paragraph 3 of the letter: whether the interest in question accrued or arose in British India within the meaning of the Act. In paragraph 1 of the letter, 'the interest in question' is described as 'interest which became due in the year of account but which was not realized in cash or by adjustment in the account.' One other sentence in the Board's letter refers to 'interest accrued but not realized.' Thus taking the letter as a whole, the question referred to us might be expanded thus: whether the interest which became due in the year of account to a firm of Nattukkottai Chettis in British India but which was not realized in cash or by adjustment in the accounts is income which accrued or arose in British India within the meaning of Section 3(1) of the Income-tax Act (VII of 1918).

23. Section 3(1) uses four verbs in the clause 'to all income from whatever source it is (1) derived, if it (2) accrues or (3) arises or (4) is received in British India.' The Board of Revenue assumes in its letter that because in its opinion the income in question was not 'realized' (a fifth verb) the income was not 'received' within the meaning of the fourth verb 'is received.' As regards the verbs 'accrues' and 'arises,' they are both interpreted in the Board's letter as meaning 'becomes the subject of a right to receive.' (The word 'accrues' seems to be the more appropriate word to be used in connexion with a periodically recurring right to receive an income which is usually definite in amount, while 'arises' seems to be used more appropriately and frequently in connexion with a business in which rights arise to receive income of a more fluctuating kind and at more uncertain intervals.)

24. Very learned and subtle arguments were advanced before us on both sides based on the various shades of meaning in which the six verbs 'derive,' 'accrue,' 'arise,' 'receive,' 'earn,' and 'realize,' and the two nouns 'income' and 'profits' (with the grammatical variations of some of these words) have been used in the several English and Indian Income-tax Acts and in the numerous English decisions dealing with the provision of certain English Acts. It must be admitted that large numbers of words are not used (either in the English language, or in any other language) with such precise and exclusive meanings as to give no room for doubt as to their exact meanings in particular contexts. I may add with profound respect that the language used in the English decisions quoted to us is not free in many cases from the ambiguity involved in the use of several of the above words each with different shades of meaning. I was therefore not much impressed with arguments based upon the root meanings of such words as 'income,' 'received,' etc. In Colquhoun v. Brooks (1889) 14 App. Cas. 493, Lord Fitzgerald says:

The case stated further finds 'the amount standing to the credit of Mr. Henry Brooks in the books of the Australian firm, as representing the estimated profits due to him for the year ending April 1885 would, if realized, amount to the sum of 9,219. This sum of 9,219 was arrived at by an estimate and valuation on taking of stock on a certain fixed day, after deducting therefrom the estimate and valuation the preceding year, but as a matter of fact' only a portion of the amount had been actually realized.

25. After thus stating the case, the learned Lord proceeds:

At first sight it struck me very strongly that the respondent was chargeable here' (that is in England) 'for income-tax in respect of this sum of 9,219, though not actually received in this country, but as being income arising out of trade carried on in Melbourne, his share of the profits having been actually ascertained and fixed and accruing to him in this sense, that it was so completely under his control that by an act of his will he could have it actually transferred to his bankers here. There would be no hardship, and nothing dangerous or to be deprecated in charging the respondent on his share of profits so ascertained, but the facts of the case do not warrant our doing so. On looking critically at the findings in the case it will be perceived that there is no sufficient finding to warrant us in coming to the conclusion that the profits of the Australian firm have been so ascertained for the year 1885 as to be legitimately the subject of taxation here. It is only put that the profits due to him would if realized amount to 9,219--a sum 'arrived at by an estimate and valuation' on stock-taking on some particular day (not stated), and 'deducting therefrom the estimate and valuation of the preceding year' (also made on a day not stated), 'but as a matter of fact only a portion of the amount had been actually realized'--what the meaning of the word 'realized' there is I do not know.

26. Lord Herschell and Lord Macnaghten and Lord Halsbury (Lord Chancellor) have not in their judgments in this case expressed dissent from the above observations of Lord Fitzgerald. The decision itself depended on the answer to the question whether the profits or gains arising from the Melbourne business of Brooks fell under the fifth case of Schedule D of the English Income-tax Act, 5 & 6 Vic., ch. 35, Section 100, whose language is somewhat peculiar and special and which speaks of sums actually received in Great Britain. It was held by all the Law lords that mere 'arising' or 'accruing' of the profits in England will not do, that they must also be received in England, and that the words 'arising' and 'accruing' do not mean the same thing when used in connexion with profits or gains as the word 'received.' No doubt, the words 'accrues' and 'arises,' in Section 3 of the Indian Income-tax Act, cannot have (except in the very special circumstances referred to by Lord Fitzgerald) the same meaning and legal effect as the words 'is received.' Section 9(1) of the Income-tax Act uses the words 'income derived from business' by an assessee as synonymous with 'profits of any business carried on by him.' In Colquhoun v. Brooks (1888) 21 Q.B.D., 52 , which is the case which went up from the Court of Appeal to the House of Lords in Colquhoun v. Brooks (1889) 14 App. Cas., 493, Fry L.J., says:

I cannot read the words 'arising' or 'accruing' as meaning 'received by.

27. In In re Spanish Prospecting Company, Limited [1911] 1 Ch., 92 ., Fletcher Moulton, L.J., goes elaborately into the question what is income from profits of a business and comes to the conclusion (as I understand him) that what is treated as profits by a reasonable auditor auditing the accounts of a business for a particular year might be reasonably treated as 'income or profits' accruing or arising or received from the business for the purpose of income-tax. The learned Lord Justice deals at length with the meaning of the word 'profits' in pages 98 to 101. He says that the word has a 'fundamental meaning' but:

in mercantile phraseology the word may at times bear meanings indicated by the special context which deviate in some respects from this fundamental signification.

Then he says:

The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates.

28. And then the learned Lord Justice proceeds to show how the net assets must be valued in money and 'how difficult in practice' it may be 'to follow out the strict consequences of the legal conception'

29. The small hand-book relied on by the Advocate-General, namely, Snelling's Income-tax. Practice (see page 15) also takes the same view. I do not intend to refer to the other authorities quoted on both sides. I am not prepared, with the greatest respect, to go as far as Fletcher Moulton, L.J., and to hold that the income derived from profits (whether the derivation is by way of accruing, arising or being received) should be calculated on the basis of the usual annual 'profit and loss' account (subject of course to the special provisions of the Income tax Acts which usually impose limitations on the deductions allowable for repairs of business premises and damage or destruction of building, machinery and plant, depreciation and soon) and that such income is liable to tax as 'received' in the commercial sense, If the opinion of Fletcher Moulton, L.J., is to be followed, a business might have made no 'profits' at all in the popular sense in a particular year (or might have even incurred loss), but because the commercial value of some items on the 'assets' side, say, the business premises and the plant, had risen in price, income-tax might become leviable on 'profits' shown on paper in the 'Profit and Loss' account. I do not think, having regard to the rule that fiscal statutes should be construed strictly in favour of the subject, that the legislature should be hold to have intended to levy income-tax even in such a case in the absence of unequivocal language to that effect.

30. However, even having regard to this canon of strict construction, I am of opinion that profits which were received in a year include not only money actually received but money which (in the language of Lord Fitzgerald) had accrued or arisen in the sense that it was so completely under the assessee's control:

that by an act of his will he could have it actually transferred to his bankers.

31. The words 'accrue' and 'arise' are no doubt usually confined to moneys which are due but not received and hence are used as alternatives to 'received' in Section 3) [see also Board of Revenue, Madras v. Ramanadhan Chetty I.L.R., (1920) Mad., 75 (F.B.) ]. While moneys accrued which cannot be immediately, in a business sense, received at the will and pleasure of the assessee ought not to be said to have accrued in such a manner as to have the same legal effect as moneys received, I think that an assessee should not be allowed to evade payment of income-tax on interest and other moneys which have become due to him in such a manner that he could at pleasure receive them for reinvestment or otherwise or could get into his hands at once or within the reasonable time usually necessary to cash a cheque on a banker, or which he knows will be treated according to the usual course of business by his banker-debtor as reinvested by him (the assessee). Whether any such profits in the shape of interest or other moneys had become due to the assessee in this immediately available manner, and whether his omission to show them in his accounts as profits was consequently attributable to his intention to commit a fraud upon the income-tax revenue, are questions of fact which must be decided in each case on the facts of that case and on the custom and practice of the assessee's and his debtor's business arrangements. The argument of Mr. K.V. Krishnaswami Ayyar that only those interest-moneys which have been entered as cash-receipts in the assessee's accounts or which have actually been placed in his hands can be considered in arriving at his income for purposes of taxation goes, in my opinion, to the other extreme. If an assessee chooses to leave his interest-income with his customer, who is also a banker, and does not bring it into his accounts as income on the date it falls due, but he knows that his banker-customer would credit the money in his accounts in favour of the assessee and allow him interest thereon from the date of its accrual, or if the assessee could at any time draw upon the customer for that money and obtain actual receipt of that sum in due course of business, I think that such interest-income has accrued and arisen in that year in such a manner that the legal effect is the same as if it had been 'received' by him, and that it is liable to be charged income-tax thereon. It is well known that deposits of moneys carrying interest are made with a Nattukkottai Chetti firm not only by other Nattuktottai Chetti firms but by gentlemen earning rich incomes in other professions. Take a case where Rs. 10,000 a year is the year's interest-income from such an investment with A, a Nattukkottai Chetti firm, by B, another Nattukkottai Chetti firm, or a rich professional gentleman who has retired from his profession. A at the end of that year adds Rs. 10,000 to the credit of B in his accounts but B makes no entry in his accounts of the receipt of that money. B has some lands which yield him sufficient for the maintenance of his family and allows the interest to accumulate with the A Chetti, drawing only Rs. 500 or Rs. 1,000 out of the interest annually either for expenses or in order that no question of limitation might arise (assuming that there is any risk of that question arising in such cases). Is B to escape taxation on the Rs. 10,000 income, though that income is being credited in his favour and he knows that he could receive it in cash at any time he wishes?

32. My answer to the question, therefore, is that the interest which became due to a firm of Natukkottai Chettis in British India, which was not realized in cash or by adjustment of accounts, would be such income as would be liable to be taxed under the Income-tax Act (VII of 1918), if such interest-money had become due to the assessee in the manner and in the sense that it was so completely under his control that by an act of his will he could receive it in cash without greater trouble than is involved in drawing money from his bankers. If it has not become due in that sense, it is not such an income as would be liable to payment of tax.

33. Of course, I agree with my Lord that it is advisable that the legislature should periodically try to remove anomalies and difficulties of interpretation by amendments of the Act expressed in clear and definite language.

Napier, J.

34. This is a reference under Section 51 of the Income-tax Act (VII of 1918) which empowers the Chief Revenue Authority if in the course of any assessment a question has arisen with reference to the interpretation of any of the provisions of this Act or any rules thereunder, to draw up a statement of the case and refer it with its own opinion thereon to the High Court. The question referred to us is as to the liability to tax under the Act of interest which became due in the year of account, but which was not realized in cash or by adjustment in the accounts. The statement further sets out that Messrs. Al. Ar. Rm. Arunachala Chetti and Brothers, a Nattukkottai Chetti firm, carry on business in money-lending and other trade in several places in British India, that they were assessed for the year 1918-19 by the Collector of Ramnad on the amount of their not income in British India which, according to the assessing authority, should include interest which had accrued to them during the year of account, but had not actually been realized.

35. The relevant sections of the Act for the purpose of this reference are as follows:section 3(1) provides that:

this Act shall apply to all income from whatever source it is derived fit accrues or arises or is received in British India,' etc.

36. Section 5 is the next section:

The following classes of income shall be chargeable to income-tax in the manner hereinafter appearing.

37. Sub-section (4):

Income derived from business.

38. The next section is Section 9:

The tax shall be payable by an assessee under the head of Income derived from business' in respect of the profits of any business carried on by him.

39. Clause (2):

such profits shall be computed after making the following allowances in respect of sums paid or, in the case of depreciation, debited, namely

40. and the payments and debits allowed are set out in nine sub paragraphs. Then comes Section 14:

The aggregate amount of an assessee's income chargeable under each of the heads mentioned in Sections 6 to 11 shall be the taxable income of the assessee.

41. Reading these sections together, it is, to my mind clear that the form in which the reference is made is incorrect. It seems to me that we are not really asked any question about income as defined in the Act. What the reference requires is a ruling from us as to whether a certain sum should have been entered in the account on which the profits within the meaning of Section 9 should be computed. This mistake has led to a misappreciation of a decision of the English Court which I shall refer to later. Nor have we to consider any question arising under Section 3, for, we are not asked to say whether the income derived from business has accrued or arisen or been received within the meaning of Section 3. It is therefore, to my mind, not strictly necessary for us to consider the meaning of the word 'income' as used in the Act, for, income, for the purpose of Section 3, is income derived from business as defined under Section 9, to be ascertained under that section.

42. The question is how are the profits of the business carried on by the firm in question to be computed so as to make the resultant income derived from business chargeable under the Act? It is first necessary to see what assistance we get from Section 9 itself; and it is to be noted that no part of the section lays down what is to be put on the credit side. The whole of Clauses 1 to 9 are concerned with amounts on the debit side. Of those clauses, Clauses 1 to 5 are payments which are allowed; Clause 6 is depreciation which may be debited; Clause 7 is a resultant of depreciation and sale price of buildings, machinery and plant; Clause 8 is land revenue and local or municipal taxes paid; and Clause 9 is what may be described as an omnibus clause for other expenditure incurred solely for the purpose of earning such profits, which is in fact the main expenditure. For the credit side, as I have said, there are no statutory instructions, and it is with reference to the credit side item that we are asked to advise the Board. So far for the Act.

43. Then as to the rules made under the Act, Section 43 gives power to the Governor-General in Council, and by delegation to the Local Government, to make rules for the ascertainment and determination of any class of income. I have examined them and find that there is no assistance to be procured from the rules.

44. Further, there are no decisions of any Courts in India to which our attention has been drawn which could throw any light on this subject, and we are driven to English decisions under the English Income-tax Acts. These acts are in pari materia, but as their provisions are somewhat different, it is necessary before examining the decisions to see what the Acts provide. The Acts are the Income-tax Act of 1842 as amended by the Income-tax Act of 1853. The relevant sections of these Acts are Section 2 and Schedule D of 16 & 17 Vic., Ch. 34, which has been substituted for the corresponding section and schedule of 5 & 6 Vic., Ch. 35. One curious feature of the Acts is that though they are called Income-tax Acts, the phrase 'income tax' is never used in any part of the Act, nor is the word 'income' applied to the resultant to be charged, though in the Customs and Inland Revenue Act, 1888, the tax payable under Schedule D is called income-tax. What is granted to Her Majesty under these Acts are 'duties on profits arising from property, professions, trades and offices.' Section 2 of the later Act provides that:

for the purpose of classifying and distinguishing the several properties, profits and gains for and in respect of which the said duties are by this Act granted, and for purposes of the provisions for assessing, raising, levying and collecting such duties, respectively the said duties shall be deemed to be granted and made payable yearly for and in respect of the several properties, profits and gains respectively described or comprised in the several schedules contained in the Act;

45. And the schedules are set forth. Schedule D is the relevant schedule. It applies to trade and professional profits which correspond to Clauses 4 and 5 of Section 5 of the Indian Act, namely, income derived from business and professional earnings. The language of Schedule D is as follows:

For and in respect of the annual profits or gains arising of accruing to any person residing in the United Kingdom from any profession, trade, employment or vocation, etc.

46. What is chargeable here therefore is 'annual profits or gains 'just as under Section 9 of the Indian Act, 'profits of any business.' The further provisions of the Income-tax Act of 1853 with respect to Schedule D are Sections 48, 49 and 50 of which Section 50 is alone of importance. This section provides that:

In ascertaining, estimating, or assessing the profits of any person chargeable under Schedule D of this Act, either upon appeal or otherwise, it shall be lawful to estimate the value of all doubtful debts due or owing to such person; and in the case of bankruptcy or insolvency of the debtor, the amount of the dividend which may reasonably be expected to be received on any such debt shall be deemed to be the value thereof and the duty chargeable under the said schedule shall be assessed and charged upon the estimated value of all such doubtful debts accordingly.

47. I can find nothing in the Indian Act which at all corresponds to this section, but it is one to be borne in mind in considering what are 'profits' under Schedule D of the English Act, for it seems to presume that debts due and owing shall be items in an account for the purpose of arriving at profits and gains and permits the assessee to value them in his account at a figure lower than the face value where they are doubtful debts. Returning to the principal Act, Section 100 contains the rules for assessing and charging duties under Schedule D. Section 100 provides that:

the duties hereby granted contained in the Schedule marked D, shall be assessed and charged under the following rules, which rules shall be deemed and construed to he a part of this Act, and to refer to the said last-mentioned duties.

48. Under this section, the duties are provided for in respect of trade in what is called 'First case', and in respect of professions in what is called 'Second case.' The first rule in the first case is as follows:

The duty to be charged in respect thereof shall be computed on a sum not less than the full amount of the balance of the profits or gains of such trade 'on a average of three years.

49. The third rule is:

In estimating the balance of profits and gains chargeable under Schedule D, or for the purpose of assessing the duty thereon, no sum shall be set against or deducted from or allowed to be set against, or deducted from, such profits or gains, on account of any sum expended' (for various purposes set out), 'nor on account of any capital withdrawn, nor on account of, or under pretence of, any interest which might have been made on sums if laid out for interest, nor for any debts except bad debts (nor for certain other matters set out in the rule).

50. It is to be noted that the method of computing profits here is the exact opposite of that employed in the Indian Act. Section 9 of the latter, as already pointed out, provides what may be debited for the purpose of computing profits, whereas this rule under Section 100 of the English Act provides what may not be debited. But the material for assessment after the proper deductions is the same in both cases. It is 'the balance of profits' or gains in the English Act; 'the profits of any business' in the Indian Act. And as we are not asked to advise on any question of a debit item it is unnecessary to examine the differences between the English and the Indian Act on this point. Apart too from Section 50, there is no instruction in the English Act as to what must be put on the credit side of the account.

51. Turning now to the cases, I will first deal with the decisions under the Income-tax Acts. The first relevant case is the Mersey Docks v. Lucas (1888) 8 App. Cas., 891. This was a reference by the Commissioners under powers analogous to those under which the reference in our case is made. The particular point under consideration need not be considered, but in his judgment the Lord Chancellor, at page 903, states that the question arises under Schedule A of the Act and enters into a discussion as to what are profits received from certain properties. He lays down that the manner in which those profits were to be disposed of under the private Act was not a matter for consideration, but that the profits of the concern must be:

all the net profits of the concern after deducting the necessary outgoings without which those proceeds could not be earned or received.

52. Again, on the same page, he says that the word 'profits' as here used, means the 'incomings of the concern after deducting the expenses of earning and obtaining them.' Again, at page 906, he uses the same phrase. Lord Blackburn, who concurred, states that the same result will arise from the construction, of Schedule D. We have, therefore, here a definition of 'profits' for income-tax purposes: the net proceeds of the concern, or the incomings of the concern, after deducting the outgoings necessary for earning them or the expenses of earning and obtaining them. It is obvious that this definition of 'profits' will apply, whatever be the method under which the proper debits are to be ascertained.

53. The next case I. wish to refer to is Colquhoun v. Brooks (1888) 21 Q.B.D., 52 and I do so not because I think it has any bearing on the question of profits but because it has been referred to by the Board of Revenue, and in my opinion, a wrong inference drawn from the language used in it. The Board of Revenue, in their reference, say:

The question to be decided is whether the interest in question accrued or arose in British India,

and go on:

the words 'accrued' or 'arose' have nowhere been defined in the Act but in the Judgement of Fry. L.J. in Colquhoun v. Books (1888) 21 Q.B.D., 52 these words were interpreted as general words descriptive of a right to receive.

54. It is true that the decision in this case, which eventually went to the House of Lords, did turn on the question as to whether a certain income 'accrued or arose in the United Kingdom.' But that is not the point in this case at all, as I have already said, and the view of Fry, L.J., on the construction of the words 'accrued or arose' has no bearing whatever on this question. The words which the Court was construing were words of Schedule D, 'arising or accruing to any person ', etc., and with reference to these words, Fry, L.J., said:

the tax is in respect of 'profit or gains arising or accruing. I cannot read those words as meaning 'received by'... I think that the words 'arising or accruing' are general words descriptive of a right to receive profits.

That is the sole question decided by Fry, L.J., and it is obvious that it has nothing to do with the question of profits. The case has really no bearing on the question before us.

55. The next case is Russell v. Town and County Bank (1888) 13 App. Cas., 418 . That was a decision as to the propriety of a certain debit for rent of business premises which contained dwelling accommodation for the Bank Agent. The only point of importance in this case is the definition of 'profits '. Lord Herschell, at page 424, says:

The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts.

Lord Fitzgerald says:

Profits 'I rend on authority to be the whole of the incoming's of a concern after deducting the whole of the expenses of earning them--that is, what is gained by the trade.

The learned Lord is here obviously referring to the language of Lord Selborne in Mersey Docks v. Lucus (1883) 8 App. Cas., 891 .

56. The next case is Gresham Life Assurance Society v. Styles [1892] A.C., 309 . In that case the learned Lord Chancellor stated that:

the word 'profits' is to be understood in its natural and proper sense--in a sense which no commercial man would misunderstand.

and that the framers of the Act could never have assumed that the cost of the articles sold to the trader should not be taken into account before you arrive at what was intended to be the taxable profits.

Lord Herschell said that the words 'profits and gains' should be construed according to their ordinary significance; and in another passage said:

the only thing to be regarded is the fact of expenditure and the purpose for which it had been incurred.

57. Another case referred to in argument was the Gresham Life Assurance Society v. Bishop [1902] A.C., 287. This turned on the construction of the words 'received in the United Kingdom' within the meaning of the Income-tax Act of 1842, Schedule D (fourth case), which allows duty to be charged in respect of interest arising from foreign securities on the full amount of the sums which have been or will be received in Great Britain. It is not a decision on profits, but it is of value on the meaning to be given to the word 'receipts' and I will deal with it later. So far, therefore, we have nothing but receipts or incomings to be put on the credit side. So far then for the income-tax cases. The decisions appear to me to be all based on the assumption that an assessee should prepare a statement of receipts or incomings setting against them the outgoings necessary for earning receipts including also depreciation to the extent permitted by the Act, and that this account should be annually prepared and be the basis on which the taxable income should be ascertained.

58. It was suggested, however, by the learned Advocate-General that such an account was not the proper method of ascertaining the profits, and he has very strongly relied on the judgment of Fletcher Moulton, L.J., in In re Spanish Prospecting Co., Ltd. [1911] 1 Ch., 92 . In this case, two persons agreed to serve the company at a fixed salary which they were not to be entitled to draw except out of the profits. The question was what were the profits. It arose in liquidation, and the dispute was with regard to certain debentures which had been included in the yearly balance sheets of the company as unvalued assets. In liquidation the debentures realized a sum of over three thousand pounds and the claimants contended that these were undrawn profits arising from the business of the company out of which they were entitled to be paid, in the course of his judgment, the learned Lord Justice discusses the meaning of the word 'profits' and says that the word 'profits' implies a comparison between the state of a business at two specified dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates and the increase of the assets at the later date represents in strictness the profits of the business during the year in question.

To render the ascertainment of profits of a business of practical use it is evident that the assets, of whatever nature they may be, must be represented by their money value. But as a rule these assets exist in the shape of things or rights and not in the shape of money. The debts owed to the company may be good, bad or doubtful.

and

Profits may exist in kind as well as in cash.

59. The learned Advocate-General now relies on these statements as indicating that the debts good, bad or doubtful must be shown on the credit side of an account. Now the first observation I would make about this case is, that the learned Lord Justice states, on page 101, that:

The actual profit; and loss accounts of the company do not in any way bind the Crown in arriving at the tax to be paid

and therefore clearly he was not considering the profits as meant in an income-tax sense. This method of computing profits is, in the language of the learned Lord Justice, totally unsuited for computation for income-tax purposes. The balance sheet must of course contain a valuation of the whole of the property of the undertaking, including, as stated by the learned Lord Justice, debts owing to the company, good, bad or doubtful. It must also include debts accruing due, and on the debit side must be placed debts considered bad or doubtful. One may venture to doubt whether many of the trading companies do in act prepare their statements of profits for the year in the manner suggested by the learned Lord Justice. It is admittedly not the method contemplated by the Companies Act. Article 106 of the standing articles of association provided in table A of the First Schedule of the Companies Consolidation Act (1908) provides that:

once at least in every year the directors shall lay before the company in general meeting a profit and loss account for the period since the preceding account

and it is common knowledge that this account is an account of the actual transactions of the company during the preceding year. Article 97 provides that:

no dividend shall be paid otherwise than out of profits;

and the learned author of Buckley's 'Law and Practice under the Companies Acts' states the law to be as follows:

The 'profits of a business are the excess of revenue receipts over expenses properly chargeable to revenue account. For the purpose of ascertaining profit available for the dividend, capital account and revenue account are to be treated as separate accounts. The credit balance of a revenue account is applicable for dividend.

60. This language very nearly reproduces the words used by the learned Lords in the income-tax cases above referred to and the learned author relies strongly on the case of Lee v. Neuchatel Asphalts Company (1889) 41 Ch.D., 1. That was a decision of the Court of Appeal, and the Court, held there that there was nothing in the Companies Act to prohibit a company from calculating its profits and paying a dividend out of them without providing a sinking fund to meet depreciation in the value of wasting property, such as a mine. Lindley, L.J., draws a clear distinction between a capital account and a revenue account, and speaking of the latter says:

If your earnings are less than your current expenses you must not cook your accounts so as to make it appear that you are earning a profit, and you must not lay our hands on your capital to pay dividend. But it is, I think, a misapprehension to say that dividing the surplus after payment of expenses of the produce of your wasting property is a return of capital in any such sense as is forbidden by the Act.

61. It is dear, therefore, that both Lindley, L.J., and the very eminent editor of Buckley's Law and Practice under the Companies Act regard a revenue account as the proper basis for the ascertainment of profits under the Companies Act.

62. The same view was expressed in the case of Badham v. Williams (1902) 86 L.T., 191 by Kekewich, J. There the question arose on a partnership and the learned Judge points out the difference between the balance sheet and the profit and loss account with regard to money accruing due but not actually received. He takes the case of six months' bills in payment for goods not maturing until the year after that for which the account was being made up and asks:

Are such bills to be considered so much cash for the purposes of the business of the year?

and answers:

For the purposes of the balance sheet, no doubt, they would estimate that there is an outstanding asset which they hope to realize; but for the purpose of ascertaining the profit and Joss it seems to me that they must consider only what they have received, because those bills will only come in when met at maturity

in the next year. It is to be noted that in this case the learned Judge refers specifically to the profit and loss for the purposes of income-tax returns and says that

the income-tax return is a return of the actual receipts less such expenditure as is chargeable against those receipts.

63. It seems to me that 'profit' in a commercial sense differs very little from the meaning given to it in the income-tax cases quoted above, though there may be debits which are not permissible under the provisions of Income-tax Acts. 1 can see no practical difference between 'the receipts or incomings after deducting the necessary out-goings without which profits could not be earned or received or after deducting the expenses of earning and obtaining them', and 'the excess of revenue receipts over expenses properly chargeable to revenue account', as stated by the learned author, to be the profits of a business under the Companies Acts.

64. The net result of all these cases is that on the credit side must be put receipts or incomings and it only remains to consider what these words cover.

65. That actual cash need not be received is of course obvious. The receipt of any form of negotiable security would of course be receipt. But the more difficult question is whether any, and if so, what form of constructive receipt is a receipt for the purposes of the Act. In Gresham Life Assurance Society v. Bishop [1902] A.C., 287, this very question was dealt with by Lord Lindley. He states as follows, at page 296:

First, let us consider what is meant by the receipt of a sum of money. My Lords, I agree with the Court of Appeal that a sum of money may be received in more ways than one e.g., by (he transfer of a coin or a negotiable instrument or other document which represents and produces coin, and is treated as such by business men. Even a settlement in account may be equivalent to a receipt of a sum of money, although no money may pass; and I am not myself prepared to say that what amongst business men is equivalent to a receipt of a sum of money is not a receipt within the meaning of the statute which your Lordships have to interpret

(i.e., Income-tax Act). Then referring to the Scottish case of New Mexico Co. (1894) 34 R., 98 , the same learned Lord states on page 298, that that case:

was very peculiar. Money received by the Company's agents abroad was clearly and unmistakably treated by the company as remitted to and received by it here, and money here was treated by the company as remitted abroad in exchange for it. The exchange was effected by a book entry; but that entry was the business mode of carrying out cross-remittances which it would have been unbusiness like and really childish to have effected in any other way.

66. Applying this last observation, apart from the complication introduced by the word 'abroad,' it seems to me to come to this: that as between two parties where money has to be paid and received by both, an exchange effected by a book entry would amount to payment and receipt. In Larocque v. Beauchemin [1897] A.C., 358 , their Lordships had to construe the words 'paid in cash' and in the judgment of the Board their Lordships relied on and applied the decision in Spargo's case (1873) 8 Ch. App., 407 . That was a decision in liquidation of the Harmony and Montague Tin and Copper Mining Co., and turned on the meaning of the phrase 'payment in cash within Section 25 of the Companies Act, 1867. Spargo subscribed for thirty-one shares in the company and instead of paying in full in cash was credited in the books of the company with a sum of 2176 for the purchase of the lease of the mine in respect of the amount of 2176 part of the amount due by him for his purchase of shares. James, L.J., laid down as follows:

67. Anything which amounted to what would be in law sufficient evidence) to support a plea of payment, would be a payment in cash within the moaning of this provision;

and Mellish, L.J., 'reiterated what he had stated in Fothergill's cases (1873) 8 Ch., App., 270 :

If the circumstances relied on would in an action for the money duo upon shares be evidence only in support of a plea of accord and satisfaction, this section would prevent their being a good defence; but that if they would support a plea of payment, then the 25th section did not prevent their being a good defence.

He then continues.

Nothing is clearer than that if parties account with each other, and sums are stated to be due on one side, and sums to an equal amount due on the other side on that account, and those accounts are settled by both parties, it is exactly the same thing as if the sums due on both sides had been paid. Indeed, it is a general rule of law, that in every case whore a transaction resolves itself into paying money by A. to B, and then handing it back again by B to A, if the parties meet together and agree to set one demand against the other, they need not go through the form and ceremony of handing the money backwards and forwards.

68. This form of constructive receipt is therefore clearly permissible. So, if a person entitled to receive money agrees with his debtor to let the money stand in the hands of the debtor, either by way of deposit or as a fresh loan or investment, that would, in my opinion, amount to receipt. No transaction of this character is indicated in the case submitted to us, and I am therefore of opinion that the amount in question need not be taken into account by the assessee for the purposes of his statement of profits and gains and is not therefore chargeable under the Act.

Krishnan, J.

69. The question referred to us for our decision by the Revenue Board under Section 51 of the Income-tax Act VII of 1918 is whether a person carrying on a money-lending business is liable to be assessed to income-tax on interest which has accrued due to him in the year of account but which has not been realized by him by payment, or adjustment in the accounts, or otherwise In other words, the question is whether such interest becomes liable to taxation on accrual, as the learned Advocate-General contends for the Government, or only on its realization, as the learned vakil for the assessee contends.

70. The decision turns upon the construction to be placed on the relevant sections of the Act. The first section on which the learned Advocate-General insisted is Section 3, Clause (1), and it is an important provision to consider, as it defines the scope and applicability of the Act. That clause says:

Save as hereinafter provided this Act shall apply to all income from whatever source it is derived if it accrues or arises or is received in British India or is under the provisions of this Act deemed to accrue or arise or to be received in British India.

71. This clause defines the scope of the Act, and unless a sum of money can be brought within the words of the clause I think it cannot be taken into consideration for purposes of taxation under the Act. A lengthy argument was addressed to us by the learned Advocate-General about the meaning of this clause but to my mind its meaning is perfectly plain. It makes the Act applicable to all incomes which would fall under one or the other of the heads mentioned in the latter part of the clause. Not only incomes which accrue and are received in British India, which form the bulk of taxable incomes, but also incomes which accrue in British India but are received outside British India, and incomes which though accrued outside are received here, are all brought by it within the purview of the Act and become taxable under the taxing sections. Sections 3t and 33 are examples of the former class of incomes. The Advocate-General tried to persuade us to read the clause as implying that an income becomes liable to taxation as soon as it has accrued in British India and contended that it was not necessary that it should be received by the assessee at all to create the liability. I think his argument is untenable as it entirely ignores the governing word in the clause, 'income,' Till a sum of money can be said to have become an 'income' it is clear to me that the Act will not apply to it.

72. I fully agree that the words 'accrues or arises' do not imply a receipt at all but only a right to receive as pointed out by Fry, L.J., in Colquhoun v. Brooks (1888) 21 Q.B.D., 52. The two words seem to denote the same idea but one is perhaps more appropriate than the other in particular cases. Their meaning is, as observed by the Full Bench in Board of Revenue v. Ramanadhun Chetty I.L.R(1920) ., Mad., 75 , 'to become a present or enforceable right to demand.' In fact the words are used in contradistinction to the words 'is received' in the clause itself. Though this is so, it is clear from the section that before the Act can apply what has so accrued or arisen must have become an income. The section cannot be read as applying the Act to a sum of money which has become payable to a person but which has not become his 'income' yet. That the Act applies only to 'incomes' is made further clear by the heading of the chapter which says 'Taxable income,' and by Section 5, which says 'the following classes of income shall be chargeable to income-tax' and also by the taxing section, Section 14, which also speaks of taxable income.

73. The question then is what really is the meaning of the term 'income' as used in the Act and whether it involves the idea of receipt in some form or other or not. The word is not defined in the present Act, though the expressions 'agricultural income' and 'total income' are defined in Section 2. Those definitions however throw no light on the exact connotation of the term 'Income.' In the absence of a statutory definition, we must take its ordinary meaning in the English language as its proper legal meaning as well for construing the Act. The learned Chief Justice has adopted the meaning given to it in the concise Oxford Dictionary, viz., 'periodical (usually annual) receipts from one's business, lands, work, investments, etc.,' I think that definition is correct and I adopt it. That this is also its legal acceptation is clear from Stroud's Judicial Dictionary. I think the word clearly implies the idea of receipt, actual or constructive. We cannot speak of a sum of money which is expected to be paid as an income; however well founded the expectation may be, it is still only an expectation. There is nothing in Section 3, or anywhere else in the Act, inconsistent with this meaning of the term. In the case of incomes taxable at the source under the Act, the taxation is made simultaneously with the payment or receipt of the amount due by the payee when it becomes his income; the case is thus not against the view I am taking of the meaning of 'income.' What exactly would amount to a receipt, to make a sum due to a person his income, is a different question and I shall deal with it later. The present case however refers to a particular kind of income from a money-lending business; Section 5, Clause (4) which mates income derived from business chargeable to income-tax, and Section 9 Clause (1), which says that 'the tax shall be payable by an assesses under the head of 'income derived from business' in respect of profits of any business carried on by him' apply to it. The Advocate-General argued that whatever implication there might be in the term 'income' the term 'profits' as used in Section 9 included earned or estimated but unrealized profits as well, and in the case of a money-lending business it included interest accrued due but unrealized; and he relied strongly on Colquhoun v. Brooks (1889) 14 App. Cas., 493 and In re Spanish Prospecting Company Limited [1911] 1 Ch., 92, in support of his argument.

79. Before considering the cases cited, I may observe that as by Section 3 the Act is made applicable only to incomes and as that term implies, as I think, a realization of the sum due it is difficult to hold that by the use of the expression 'profits' in Section 9 the legislature has extended the scope of the Act to unrealized sums as well in the case of business ventures, which would be the result of accepting the Advocate-General's argument. No doubt the term 'profits' is not a term of very precise and definite significance. It is used in different meanings in different connexions. The profits of a business are ascertained in various ways for various purposes. But as the learned Chief Justice has shown in his judgment, the word has always been understood in England, for income-tax purposes, to mean the difference between the receipts of a business and the expenditure incurred in earning them. I need not refer to the authorities as he has done so. This meaning is consistent with our Act, and will avoid the difficulty I have pointed out at the beginning of this paragraph, and I think it should be accepted by as. The ordinary meaning of the term as used for commercial purposes in ascertaining profits, as on a revenue account, is also much the same, the difference in ascertainment of profits for income-tax and commercial purposes being only in the ascertainment of the nett profits and not the total profits. The deductions allowable for income-tax purposes to arrive at nett taxable profits are only those allowed by the Act and are not the same as would ordinarily be allowed in a commercial account; but the credit side is the same in both.

80. The term 'profits' as used in Section 9 does not, in my opinion, properly apply to unrealized amounts at all. The fact that some firms include estimated profits in their balance sheets for payment of dividends to shareholders is of no importance in this connexion; when they so deal with unrealized profits they are really substituting for such a purpose the capital in their hands for profits, hoping to recoup it from profits when they are realized. Such practice cannot affect the proper meaning of the term 'profits,' particularly for income-tax purposes.

81. Our attention has not been drawn to any provision of the Act to show that the term 'profits' as used in it, is intended to include earned but unrealized profits. The deductions allowed to be made under Section 9 from profits lend no support to the Advocate-Generals contention, On the other hand, the D Form, prescribed under the Act for returns to be submitted by assessees, refers to 'income received from business' and the use of the word 'received' supports the view I am taking.

82. I shall now turn to the case of Colquhoun v. Brooks (1889) 14 App. Cas., 493 , cited by the Advocate-General. Admittedly, the decision in the case has no bearing on the present case but certain observations of Lord Fitygerald are relied on, which are no doubt not dissented from by the other learned Lords, The facts of the case are set out by Naher, J., and the relevant passages by Sadasiva Ayyar, J., and I need not repeat them. Lord Fitzgerald was dealing with the income of Mr. Brooks and not with that of his firm. Though the firm had not apparently realized the profits, it would appear from the judgment that it had taken such profits into consideration in ascertaining the profits due to each partner, and so far as Mr. Brooks was concerned his share of the profits had been actually ascertained and fixed at 9,219 and the amount was apparently entered in the book of the firm to his credit, so that, as his Lordship observes;

It was so completely tinder his control that by an act of his will he could have it actually transferred to his bankers here (in England).

83. Apparently, his Lordship treated the money as received in Melbourne and was at first sight inclined to treat it as received in England also, as Mr. Brooks could have it transferred to England at his will and pleasure, but ultimately his Lordship held with the other learned Lords that the sum could not be treated as received in England. That I understand to be the effect of his judgment; 1 do not understand his Lordship to have laid down that a person was liable to pay income-tax on a sum not realized by him. His Lordship does not Hay so and there is nothing in what His Lordship says that even implies it. The case, therefore, does not support the Advocate-General in any way.

84. Much reliance was also placed by the learned Advocate General on the judgment of Moulton, L.J., in In re Spanish Prospecting Company, Limited [1911]1 Ch.,92, and his observations on what constituted profits of a business. The facts of this case are set out by Napier, J., and I need not repeat them. The learned Lord Justice it will be observed was not dealing with an income-tax case at all nor even with a case of a company which was a going concern but with the case of a company which was in liquidation. The ascertainment of profits of such a company is clearly different from their ascertainment in the case of a going concern for revenue purposes or for income-tax purposes. In the former case, one would no doubt take the total value of the property of the Company when wound up, including the increased value of the stock in trade and other properties belonging to the Company and all the realizable outstandings, and deduct therefrom the capital invested, to ascertain the total profits of the venture. As the company had come to a stop the calculation of profits had to be made on the footing that all its assets and ontstandings had been realized. Manifestly such a method cannot apply in making up a revenue account of a going concern to ascertain profits. In such an account the unearned increment resulting from a rise in prices in the market never forms a proper item at all: it is never entered as an item by any auditor in a revenue account of a going concern, though it may no doubt be a proper item in a capital account made up to ascertain the financial position of the business. When a company is wound up the account made up is really much the same as a capital account, as the whole of its assets are taken as realized. His Lordship's observations cannot in my view be applied at all to a going concern, or to an income-tax case, and do not thus apply to the present case.

85. I have referred to these two cases as they are the cases which the learned Advocate-General relied on most strongly. I do not propose to refer to the other cases cited, and the analogous English law of income-tax, as they have all been referred to by the learned Chief Justice and I think it unnecessary for me to refer to them again.

86. In the course of the argument I put to the Advocate-General an extreme case to test his contention and to see how far he was prepared to go. It was this: A invested a lakh of rupees in a money-lending business and lent out the whole amount in the first year at 12 per cent interest. At the end of the year Rs. 12,000 accrued to him as interest but none of his debtors paid him anything. The next year he unfortunately lost the whole of the capital and his interest, by his debtors becoming unable to pay. Is A liable to pay income-tax to the Government on Rs. 12,000 or not? The Advocate-General had to contend, and did contend, that A was liable to pay, even though he had not realized any profit at all from his venture but had actually lost the whole of his capital. It seems to me that very clear and definite language in a taxing act is necessary to make us hold that a person is liable under such circumstances. The Income-tax Act being a fiscal enactment has to be construed strictly against the Crown, and I can see no provision in. our Act to make a person liable to pay tax on unrealized incomes or profits. On the other hand all its provisions indicate to my mind that it is only realized income or profits that is taxable.

87. The question what would amount to receipt or realization of an income for the purpose is not one that properly arises on this reference, for in the case stated by the Board it is expressly mentioned that the interest in the present case was neither received by the assesses nor realized by adjustment of accounts or otherwise. But as ray learned brothers have dealt with the point I shall briefly state my opinion on it. Actual payment of cash by the payer to the payee is of course not necessary to constitute a receipt or realization. Generally speaking, I think it may be said that wherever the pays' deals with a sum of money due to the payee in any manner according to the directions or instructions of the payee, so as to obtain a valid discharge for himself, and the payee obtains the benefit thereof, would be a case of realization by the payee. The payment by a firm of the share of the profits due to a partner into a bank, or to his credit in the firm's own books according to his instructions, would amount in my view, to a realization by him and that I think was apparently the case of Mr. Brooks in Colquhoun v. Brooks (1889) 14 App. Cas., 493 already referred to with reference to the money in Melbourne. Payment by a bank of interest earned by a fixed deposit to a person's current account in the bank itself would also amount to a receipt by him as held in Mathews v. Cork County Council [1910] 2 I.R., 521 . Again, in the case put by the Board, of a Nattukkottai Chetti not drawing the interest that has accrued to him but leaving it with the payer to be added to the capital and to carry interest itself would also be a case of realization in the view I am taking. Reference may also be made to the judgment of Lindley, L.J., in Gresham Life Assurance Society v. Bishop [1902] A.C., 287 on the point. In each case when the question arises it will have to be decided on its facts whether there has been a receipt or not.

88. Although actual receipt of cash is not required to constitute a realization of the income or profit in my view, I am clearly of opinion that a sum of money unrealized in any manner by the assessee is not liable to be included in the amount for which he is taxable under the Income-tax Act, VII of 1918. The tax can be levied during the year when the income or profit is realized, and the Crown therefore loses nothing in having to wait. I therefore agree that our answer to the reference must be in the negative.

89. Respondents' costs will be paid by Government within three months from this date. Pleader's fee will be Rs. 250.


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