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Commissioner of Income-tax Vs. Narayanan and Vadivel thevar - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 98 of 1965 (Reference No. 34 of 1965)
Judge
Reported in[1969]74ITR616(Mad)
ActsIncome Tax Act, 1922 - Sections 2(11) and 25(1)
AppellantCommissioner of Income-tax
RespondentNarayanan and Vadivel thevar
Appellant AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Respondent AdvocateS. Swaminathan and ;K. Ramagopal, Advs.
Cases ReferredIn Dhandhania Kedia & Co. v. Commissioner of Income
Excerpt:
.....(1) of income tax act, 1922 - whether status of assessee could be treated as registered firm for broken period - provision contemplates accelerated assessment of income of dissolved firm even before end of accounting year - discretion vests with income tax officer (ito) - assessee cannot as matter of right demand premature assessment - ito expected to exercise his power in reasonable way - assessment for broken period could not in any sense be regarded as accelerated - no need for ito to resort to section 25 (1) - held, status of firm was that of unregistered one. - - he rejected the assessee's stand that the registration granted for the assessment year 1960-61 enured for the broken period ended march 31, i960, as well. the tribunal further observed that whether section 25(1) of.....veeraswami, j.1. whether the status of the assessee could be treated as a registered firm for the broken period between july 1, 1959, and march 31, 1960, the accounting year ending on june 30. the assessee was constituted as a firm of partnership on july 1, 1957. it continued to carry on its business until march 31, 1960, when it was dissolved. on june 21, 1960, a return was filed for the assessment year 1960-61, that is to say for the accounting period ended june 30, 1959. along with it an application for renewal of registration for that assessment year was also filed. on the dissolution of the firm, a further return was filed within the prescribed date. the precise date of this return is not clear. on the basis of these returns, separate assessments were made, one on march 30, 1962, for.....
Judgment:

Veeraswami, J.

1. Whether the status of the assessee could be treated as a registered firm for the broken period between July 1, 1959, and March 31, 1960, the accounting year ending on June 30. The assessee was constituted as a firm of partnership on July 1, 1957. It continued to carry on its business until March 31, 1960, when it was dissolved. On June 21, 1960, a return was filed for the assessment year 1960-61, that is to say for the accounting period ended June 30, 1959. Along with it an application for renewal of registration for that assessment year was also filed. On the dissolution of the firm, a further return was filed within the prescribed date. The precise date of this return is not clear. On the basis of these returns, separate assessments were made, one on March 30, 1962, for the assessment year 1960-61 and the other on May 23, 1962, for the period of nine months in the next assessment year. Renewal of registration having been granted on the application therefor, which was dated June 21, 1960, the firm for the first assessment year was treated as a registered one. For the assessment year 1961-62, there being no application for renewal of registration, the Income-tax Officer assessed the firm treating it as an unregistered one. He rejected the assessee's stand that the registration granted for the assessment year 1960-61 enured for the broken period ended March 31, I960, as well. The Appellate Assistant Commissioner concurred in that view and pointed out that the assessee having closed its books of accounts on June 30, 1959, and the previous year having ended on June 30, 1959, the correct assessment year for the broken period of nine months would be 1961-62 for which the assessee had not applied for renewal of registration. The Tribunal, however, differed and held that in the assessee's case, both the previous years, that is, the assessee's usual previous year and the period from the end of that previous year to the date of dissolution, fell within the assessment year 1960-61 and hence the registration granted for 1960-61 was equally applicable to the period July 1, 1959, to March 31, I960. The Tribunal further observed that whether Section 25(1) of the Income-tax Act, 1922, applied or not, 'the year of any period ending on March 31, 1960, could never be the previous year for the assessment year 1961-62'. The Tribunal rightly pointed out with reference to Section 25(1), that it applied to cases where the business was discontinued and provided for what was called an accelerated assessment and that it was also well established that the power given was a discretionary one to be used where loss of revenue was anticipated if the assessment was not made in the year of discontinuance itself and then said :

' The section contemplates an assessment in addition to the assessment, if any, made on the basis of the income of the previous year. In this case the assessment having been made for 1960-61 and the Income-tax Officer having chosen to act under Section 25(1) the assessment he makes from the end of the previous year to the date of discontinuance would be an addition to the assessment already made, that is, 1960-61. It cannot be for 1961-62, there having been no assessment for this year. '

2. In other words, the Tribunal's view in effect appears to be that for the purpose of Section 25(1) there is an extended previous year which would include in this case the previous year ended June 30, 1959, and the succeeding period of nine months at the end of which the firm was dissolved, or two previous years fall within the same assessment year.

3. The actual reference before us is :

'Whether, on the facts and in the circumstances of the case, theTribunal was right in holding that the income from July 1, 1959, to thedate of dissolution should be assessed as income of the previous year relevantfor the assessment year 1960-61 and that the firm should be registered forthis assessment year ?'

4. We are clearly of opinion that the Tribunal's view is not correct. On the facts themselves, it is evident that there was no room for application of Section 25(1). That provision contemplates accelerated assessment of income of a dissolved firm even before the end of the accounting period, and that is conceived for the beneficial exigency of the revenue which is a liability cast on the assessee prematurely with a corresponding advantage secured for the revenue. Even so, to make such an assessment is discretionary and the Income-tax Officer may well choose in a given case not to exercise the power. In such a case, we do not think that the assessee can, as a matter of right,demand a premature assessment, though before the relative accounting year is out, the Income-tax Officer is expected to exercise the discretion vested in him in a reasonable way. In this case, the assessment for the previous year ended June 30, 1959, was completed by the end of March, 1962, and the assessment for the broken period ended March 31, 1960, was made in May, 1962. That would make it clear that the assessment for the broken period could not in any sense be regarded as an accelerated one. There was no need for the Income-tax Officer to resort to Section 25(1) when he was assessing the income for the broken period as late as in May, 1962. By that time the Finance Act, 1962, had come into force. The Income-tax Officer could, therefore, legitimately treat the broken period as of the previous year ended June 30, 1960, and bring the income to tax on that basis. That is what he did. If that be the case, there having been no application for renewal of registration for the assessment year 1961-62, the Income-tax Officer was also justified in assessing the firm in its status as an unregistered one. We do not, therefore, agree with the Tribunal that, even apart from the applicability of Section 25(1), the Income-tax Officer was perforce to treat the broken period as referable to the previous year ended June 30, 1959, that is to say, as if that previous year had stood enlarged to cover the period of 21 months.

5. Had Section 25(1) been applied, even then, we do not think that the position would, in any way, be different. We have already mentioned the objective of that provision which is but enabling in its purpose. To achieve that purpose, it authorises a departure from the normal scheme of charge envisaged by the Act which is charging the income of the previous year to tax at the rate prescribed by the relative Finance Act for the particular assessment year. While the charge is always on the total income of the previous year, which can only be made after the close of that year, Section 25(1) permits an assessment in or before the expiry of the previous year itself, in addition to the assessment of the income of the earlier previous year preceding the particular accounting year. That we think is the only effect of Section 25(1). Obviously there cannot be two previous years in respect of a particular source of income in the same assessment year. That would be clear from the definition of 'previous year' which is always the twelve months ending on the 31st day of March, next preceding the year for which the assessment is to be made, unless the period is extended by a special order of the Income-tax Officer under the proviso to Section 2(1l)(i)(a). It is true that there can be no previous year before the expiry of twelve months of the extended period under the said proviso, and without reference to the previous year, the normal scheme of charge cannot be applied. But, in view of the specific provisions contained in Section 25(1), their implication appears to be that the broken period in the previous year may itself be deemed as theprevious year for the purpose only of making an accelerated assessment in the course of that year itself in which there is dissolution of the firm, and thus there is a stoppage of the source of the income. The definitions would normally govern, but if they do not accord with the subject or context, the special sense may govern. While, as we said, the charge is on the income of the previous year which means that the assessment has to be up to the end of the previous year, there is an exception embodied by Section 25(1) for the purpose of making the accelerated assessment in the course of the previous year itself. What is the rate to be applied to such a case is a matter in doubt not free from difficulty, but that does not, in our opinion, enable us to interpret Section 25(1) as implying an enlarged previous year for the same assessment year, that is to say, the previous year taking in the subsequent broken period at the end of which there is dissolution. We do not think that the words 'in addition to the assessment' in Section 25(1) would warrant such an implication. Those words have reference only to the factual position, namely, that the accelerated assessment would be in addition to the assessment made on the income of the previous year, and do not have the effect of two previous years clubbed together in one assessment year or two assessment years rolled into one. On the view we have expressed of the scope and effect of Section 25(1), it should follow that it does not bring about any difference to the assessment year to which the broken period belongs. The result is that the firm should, for the broken period, have to be regarded as an unregistered firm and assessed in that status.

6. The Tribunal in one part of its order appeared to draw strength for its view by stating that no separate form has been prescribed in the case of renewal of registration certificate. It was inclined to think that it was, therefore, clear that the certificate issued for the assessment year 1960-61 would have effect for the end of an assessment year meaning thereby that the broken period also fell within the assessment year 1960-61. In making that observation, the Tribunal has overlooked the separate rules prescribing the procedure for renewal applications and also prescribing the form of renewal certificate. The certificate that was actually issued to the, assessee for the assessment year ending on March 31, 1961, could not naturally enure for the next assessment year.

7. Certain cases were referred to during the debate before us at the Bar which we may now briefly deal with. But before doing so, we may observe that none of them had to do with the precise point which this reference has raised but they are useful, if we may say so with respect, in appreciating the precise effect of Section 25(1). Commissioner of Income-tax v. K. Srinivasan & K, Gopalan, [1953] 23 I.T.R. 87 was decided by the Supreme Court with reference to Section 25(4), More particularly, it held that the expression'end of the previous year' in Sub-sections (3) and (4) of tne section meant the end of an accounting year (a period of full 12 months) expiring immediately preceding the date of discontinuance or succession. The firm there had been assessed to tax under the Indian Income-tax Act, 1918, its year of account being a period of 12 months ending June 30, of each year. Its income for the accounting year ended June 30, 1938, was charged to tax in the assessment year 1939-40. The partnership business was transferred as a going concern to a private limited company with effect from March 1, 1940. For the assessment year 1940-41 the assessee claimed non-liability to tax on its income from June 30, 1938, to February 29, 1940, under Section 25(4). Differing from the revenue, the Tribunal as well as this court (Satyanarayana Rao J., Viswanatha Sastri J. differing) allowed that exemption. The view of this court was that expressed by the senior learned' judge, Satyanarayana Rao, the other learned judge, Viswanatha Sastri, being of opinion that the assessee would be entitled to exemption only in respect of the income from July 1, 1939, to February 29, 1940. The view of Viswanatha Sastri J. was sustained by the Supreme Court and this was done on an interpretation of the scope of the expression ' end of the previous year ' in Sub-sections (3) and (4) of Section 25. In the course of dealing with that matter, the Supreme Court touched on Section 25(1) and observed :

' Before proceeding further it is convenient to make a few observations regarding the proposition stated by Satyanarayana Rao J., that Section 25(1) provides for cumulative assessment in cases of discontinuance of business. The words of the section do not justify this conclusion. They do not empower the Income-tax Officer to make a cumulative assessment in respect of profits earned in two different accounting periods or entitle him to merge the profits of two years into one total sum and apply to them the rate of one of the financial years. All that the section authorises the Income-tax Officer to do is that it gives him an option to make a premature assessment on the profits earned up to the date of discontinuance in the year of discontinuance itself instead of in the usual financial year. This assessment he is entitled to make in addition to the normal assessment for the financial year of discontinuance ....

In other words, the sub-section imposes a liability of premature assessment on the assessee. It confers no benefit on him. '

8. We do not think that these observations of the Supreme Court as to the effect of Section 25(1) are, in any way, of assistance to the assessee in this reference. On the other hand, in our opinion, they support the view we have expressed of the scope of the sub-section. The same view as was expressed by the Supreme Court in Commissioner of Income-tax v. K. Srinivasan & K. Gopatan as to the effect of Section 25(1) has been reiterated in Esthuri Aswathiah v. Commissioner of Income-tax, : [1966]60ITR411(SC) though this case was decided in a different context. In that case too, the assessee adopted June 30, as the end of the accounting year. He was assessed to tax for the assessment year 1951-52 for the accounting year ending June 30, 1950. He filed a return for the assessment year 1952-53 covering a period of 21 months commencing from July 1, 1950. This change in the accounting period was duly sanctioned by the Income-tax Officer but subject to the condition that the total income for the period of 21 months would be chargeable to tax at the rate applicable to it. The actual point that was decided by it was that the total income for the period of 21 months should be assessed at the rate specified in the relevant Finance Act for that total income and the Income-tax Officer could not apply the rate applicable to the income of the last period of 12 months. Repelling the contention that the Income-tax Officer could grant the sanction on condition that the assessee should have two previous years in respect of the same assessment year, one consisting of a period of nine months from July 1 to March 31, and the other of a period of 12 months from April 1 to the next succeeding March 31, the Supreme Court observed :

' This is an impossible contention. There cannot be two previous years in respect of the same assessment year. The charge under section 3 for any assessment year is in respect of the income of the previous year. The Concept of two previous years in relation to the same assessment year is repugnant to Section 3, In Dhandhania Kedia & Co. v. Commissioner of Income-tax, : [1959]35ITR400(SC) this court pointed out that it is a contradiction in terms to speak of six previous years in relation to any specified assessment year. Mr. Srinivasan is not right in submitting that Section 25(1) contemplates two previous years. Section 25(1) provides that in case of discontinuance of any business, profession or vocation in any assessment year, the Income-tax Officer may in that year make an accelerated assessment in respect of the income of the period between the end of the previous year and the date of such discontinuance, in addition to the usual assessment in respect of the income of the previous year. Section 25(1) contemplates the usual assessment in respect of the income of the previous year and a special and separate assessment in the same assessment year in respect of the income of the broken period between the end of the previous year and the end of the discontinuance ; it does not contemplate, as counsel submitted, assessments in the same assessment year in respect of two previous years. '

9. Section 25(1) is thus a special provision and has been designed to meet a particular exigency, namely, in cases of dissolution or stoppage of business which is the source of income, in the middle of an accounting year, there should be authority for the revenue to make an accelerated assessment in its own interest even before the expiry of the accounting year, The implication is not that for that purpose it provides two previous years with reference to the same assessment year but what it does is to authorise, in addition to the assessment of the income of the previous year, to bring to charge the income of the broken period commencing from the end of the previous year and before the close of the accounting year to which the broken period belongs. From the standpoint of Section 3, this provision is undoubtedly an exception to the general rule that the charge to tax is on the income of the previous year and is to be made after the end of the accounting period at the rate to be prescribed by the relative Finance Act. We do not think that it is necessary to say more with regard to Section 25(1) in the context of the present reference. We are satisfied that, on any view of the matter, there is no warrant for the Tribunal's conclusion that the broken period of nine months was referable to the assessment year 1960-61 which alone was covered by the certificate of registration.

10. The question is answered in favour of the revenue with costs. Counsel'sfee Rs. 250.


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