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In Re: Assessment of Behari Lal Mullick - Court Judgment

LegalCrystal Citation
SubjectDirect taxation
CourtKolkata
Decided On
Reported inAIR1927Cal553,103Ind.Cas.609
AppellantIn Re: Assessment of Behari Lal Mullick
Cases Referred and Whelan v. Henning
Excerpt:
- rankin, c.j.1. this is a reference made under section 66 of the indian income tax act of 1922 by the commissioner of income tax, bengal. two questions are referred to us and i will take them separately. the first question is as follows:is an assessment for a year valid in law when the source of income is non-existent in that particular year? is not section 3 itself a bar to making an assessment in such a case? is not the phrase of which he is the owner in section 9 a bar to making an assessment in the case of house property?2. the assessment in the course of which this question of law arises was the assessment made upon one behari lal mullick for the income-tax year 1924-25. the assessee was owner of a house property and land owner living apparently an 8 durpa narain tagore street in.....
Judgment:

Rankin, C.J.

1. This is a Reference made under Section 66 of the Indian Income Tax Act of 1922 by the Commissioner of Income Tax, Bengal. Two questions are referred to us and I will take them separately. The first question is as follows:

Is an assessment for a year valid in law when the source of income is non-existent in that particular year? Is not Section 3 itself a bar to making an assessment in such a case? Is not the phrase of which he is the owner in Section 9 a bar to making an assessment in the case of house property?

2. The assessment in the course of which this question of law arises was the assessment made upon one Behari Lal Mullick for the income-tax year 1924-25. The assessee was owner of a house property and land owner living apparently an 8 Durpa Narain Tagore Street in Calcutta - a dwelling house in which he had a one-third share. The 'previous year' with which we have to deal is 1923-24 and the assessee in his 'statement of total income during the previous year' declared the amount of profits or gains or income during the previous year as having accrued to him from two sources numbered respectively 4 and 9 in the form provided by Rule No. 19 of the Rules made by the Board of Inland Revenue under Section 59 of the Act. In respect of 'property' as shown in detail in Schedule A, he declared the income to have been Rs. 3,116. Two items of property are included in this : (a) certain house property at 191, Harrison Road, which was let out to tenants and for which in 1923-24 the assessee actually received as rent Rs. 3,900 : and (b) the dwelling-house in Durpa Narain Tagore Street, the annual letting value being put down as Rs. 1,724. These two items when certain deductions have been made account for the figure Rs. 3,116. The source No. 9 in the form was declared to have yielded in 1923-24 an income of Rs. 8,306. This was ground-rent received by the assessee for certain bustee lands at 14 Mechuabazar Street, let out to tenants.

3. The claim made by the assessee was that the house property at Harrison Road and the bustee land at Mechuabazar Street had been mortgaged by him and that although in the 'previous year,' i.e., 1923-24, he had derived income therefrom as aforesaid he had in the year of assessment, i.e., 1924-25, received co income therefrom in fact by reason that a mortgage suit had been brought against him and the properties were sold on the 16th of August 1924. He claimed accordingly that in 1924-25 he had no source of income and was not liable to be assessed for the income-tax year 1924-25.

4. The learned advocate who appears before us on behalf of the assessee contends in effect that the principle of the decisions under the English Income Tax Acts in Brown v. National Provident Institution [1921] A.C. 222 and Whelan v. Henning [1926] A.C. 293 is applicable to the Indian Income-Tax Act of 1922 with the result that if an assessee has no income in the year of assessment from a particular source, no income-tax is due from him notwithstanding that in the 'previous year' he did, in fact, derive an income from that source.

5. The income-tax authorities who have dealt with the case do not appear to have examined into the facts or come to a final and definite conclusion as to whether in respect of (a) the dwelling-house, (b) the house property, or (c) the bustee lands the assessee is really entitled to say that he had no income whatever in the year of assessment. They reject the contention that the principle of Brown's case [1921] A.C. 222 applies to the Indian Act of 1922 and at the request of the assessee have referred this question to the Court framing it at the assessee's request in the terms stated above.

6. Ordinarily a case for the opinion of a Court of law should be stated on the basis of a careful finding of facts. In this way only is it possible to avoid the raising of questions, academic or misleading, and in this way only is it possible for a Court of law to deal usefully or correctly with any questions of law. In the present case, however, it is apparent from the form of the return prescribed by Rule No. 19 that on the view taken by the income-tax authorities, they are not bound or entitled in any year of assessment to make an enquiry into the income of any year save the 'previous year' and that they cannot be called upon to conduct an enquiry into the income of two years with a view to ascertain what sources of income persisted throughout both the years.

7. Learned Counsel for the Board of Inland revenue is anxious to have a determination from us upon the question whether the principle of Brown's case [1921] A.C. 222 applies in India under the present Act and he is prepared to admit with reference to this particular assessment upon this particular assessee whatever facts are necessary to raise this highly important question. I will assume accordingly to take the clearest case that whereas in the 'previous year,' i.e., 1923-24, the assessee received an income from ground-rent of the bustee lands, he has in the year of assessment derived no income whatever from that source.

8. For the purpose of understanding the law upon this question under the English Acts prior to the Finance Act 1926, it makes no difference whether we examine the Act of 1842 (5 and 6 Vict. Chap. 35) or the Act of 1918 (8 and 9 Geo. V, Chap. 4). Upon a true construction of either Act the tax for each income-tax year was charged upon the income of that year. The assessee bad to make his return and the assessment upon him had to be made at a time when a large portion of that year had still to run. To ascertain the amount of future receipts many rules were provided. What the assessee in England bad to return as the true figure upon which he was liable to pay was a national or statutory income computed with reference to any one source in a way which might depend upon special circumstances. Save in one special type of case (which may be shortly referred to as case 3 of Schedule D) it never was and on the face of the English statute its could not well be doubted that the statutory income upon which assessment in any particular year was made was an income which the legislature deemed the assessee to have received in the year of assessment. On the words of the English Acts, it is in almost every case as plain as express language can be that the legislature imputed the statutory income to the assessee by way of computation or measurement of his income for the year of assessment. Accordingly the English Acts and the rules of computation which they applied to the various possible sources of income were construed upon the principle that in no year of assessment did the legislature intend to impose the tax in respect of income derived in previous years. If in the year of assessment the assessee had derived some income from a particular source, the amount for purposes of taxation might have to be computed at least provisionally by reference to his income from that source in one or more of the years immediately preceding. If, however, the assessee in the year of assessment derived no income from a source which in the previous years had yielded income, the statutory rules as to computation of the present and future by reference to the past did not apply so as to impute to the bar of assessment an income which did not exist at all. The basis and subject-matter of the tax was the income in the year of assessment. As a matter of law this is true because it 1s the true construction of the English statutes and for no other reason. In Brown's case [1919] 2 K.B. 97, Rowlatt, J., put this matter in the simplest words:

There is no doubt that the general scheme of the income-tax is that it is payable in respect of a source of income existing in the year of assessment, though the amount is often measured by the results of previous years.

9. The contention of the Board, of Inland Revenue before us upon this reference is that in 1922 the Indian legislature, which in previous Income-tax Acts had clearly followed the English Acts in the general scheme and in the principle of putting the tax upon the income derived during the year of assessment, intentionally departed from that principle and determined in each year to levy the tax not upon the income of the year of assessment, i.e., the current year, whereof a part is un-expired at the time of assessment, but on the income of the previous year and that under the Indian Act of 1922 the income of the previous year appears not as a standard by which the next year's income is to be computed, nor as a measure nor as an element is one average, but as being itself the subject-matter of the tax. However familiar one may be as lawyer or as patient with the English principles, one cannot profess in either capacity that there is anything absurd, impossible or unjust in levying income-tax upon the actual receipts of a completed year in the year which follows. One can see readily enough that there may be grave difficulties in changing from the one system to the other, difficulties too in combining taxation of a simply retrospective nature in respect of the profits of the preceding year with a system of deduction as the source in the year of assessment at the rate imposed for that year : also that, as Rowlatt, J., pointed out in the case already cited Brown's case [1919] 2 K.B. 497,

a postponed tax like this hag the inconvenience of letting the tax-payer go in the year when he has the income, and taxing him when he has parted with it, perhaps by bankruptcy, or of losing the tax altogether when the tax-payer has escaped by death.

10. It may be on the other hand, that the Indian legislature has seen its way to impose the income-tax directly upon actual receipts to get rid of national or statutory incomes altogether, to avoid so far as possible the labour of subsequent adjustments and the inconvenience of refunds of tax by a scheme which gives to the taxpayers a substantial time between the end of the year the income of which is charged and the time at which they are required to pay.

11. These considerations, of course, are for the legislature, and the only question for the Court is as to the meaning of what the legislature has said. I refer to them, in the first place, because they are matters on which it is specially necessary that the Income-tax Act of 1922 should be carefully scrutinized, and in the second place, because it is desirable to notice that until it is first decided whether or not the tax is a retrospective tax on the past year nothing can be gained by the reflection that the income-tax is a tax on income or that a nonexistent income cannot be charged or made to yield revenue. There is, however, one principle often appealed to in the English cases which is even more clearly applicable to the Indian than to the English Acts, namely, that the income-tax is one tax and not an aggregate of different taxes.

12. For the present purpose the proper starting-point is the Indian Income Tax Act (7 of 1918). By Section 14 Sub-section (2) it was provided that:

there shall be levied in respect of the year beginning with the first day of April 1918, and in respect of each subsequent year, by collection in that year and subsequent adjustment as hereinafter provided income-tax upon every assessee in respect of his taxable income in that year at the rate specified in Schedule I.

13. The amount of the taxable income of an assessee was determined by the machinery described in Section 17 which provided for a return to be made in a prescribed manner of the total income during the previous year. By Section 18 the collector, if satisfied that such return is correct and complete, was directed to assess:

the sum payable by the assessee for the year in which the return is made on the basis of such return.

14. By Section 19 when the collector had ascertained the total income actually received by or accrued to the assessee in the previous year, be was to compute the income-tax which would have been payable if it had been levied in such previous year with reference to the amount of the income so ascertained and the law then in force; and the difference between the sum so computed and the aggregate of the sums already paid by or on behalf of the assessee in respect of income-tax for such previous year was to be paid by or refunded to the assessee. This system of adjustment involved a running account between the Government and the tax-payer, a provisional assessment being first made on the income of the preceding year and the assessment being adjusted and corrected when the income in the year of assessment had been ascertained. There, can, therefore, be no doubt that the tax was laid upon the income of the year of assessment and the principle affirmed in Brown's case [1921] A.C. 222 was given full effect. Sections 5 to 11 inclusive correspond roughly to the schedules of the English Acts. They state the classes or heads or income to which the Act applies and make provision in respect of each for specific allowances or exclusions.

15. Now, the Act of 1922 (11 of 1922) purports to consolidate and amend the law relating to income-tax and super-tax. Strictly speaking, it does not of itself impose the tax at all. This is to be done by the Finance Act of the year. Section 7 of the Finance Act (12 of 1922) provides:

Income-tax for the year beginning on the first day of April 1922 shall be charged at the rates specified in Part I of the Third Schedule.

and specifies that 'total income' in this schedule means 'total income' as defined in Clause (15) of Section 2 of the Indian Income-tax Act, 1922. The third Schedule gives rates of income-tax specifying different rates:

When the total income is Rs. 2,000 or upwards, but is less than Rs. 5,000 : when the total income is Rs. 5,000 or upwards, but is less than Rs. 10,000.

and so forth; in other words, it provides a graduated scale according to the amount of the 'total income.' Provision having been made by the Finance Act in this manner, Section 3 of the Income-tax Act is attracted. Section 3 is as follows:

Where any Act of the Indian Legislature enacts that income-tax shall be charged for any year at any rate or rates applicable to the total income of an assessee, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act, in respect of all income, profits and gains of the previous year of every individual company, firm and Hindu-undivided family.

16. It will be noticed that the tax to be charged 'for' any year is 'in respect of' the income of the previous year. Sections 6 to 12 have the same function as Sections 5 to 11 in the Act of 1918. They state the heads of income which are chargeable and authorize specific allowances or exclusions. It will be observed that the words 'total income' which occur in the Finance Act are defined as the total amount of income, profits and gains from all sources to which this Act applies continued in the manner laid down in Section 16, and it is clear that Section 16 which deals with certain specific exemptions has meaning only with reference to the amount of the income of the 'previous year.' Section 18 which deals with deductions as the source on 'salaries' and 'interest on securities' provides by its fifth clause that credit is to be given to person from whose income the deduction was made for that deduction in the assessment, if any, made for the following year. Section 22 which imposes the duty of making a return prescribes that it is to be a return of the total income during the previous year. There is nothing in this section which suggests that it is any part of the duty of the income-tax officer to make enquiry into the receipts or probable receipts of the assessee during the current year. Section 25 deals with the case where any business, profession or vocation is discontinued. It differentiates strongly between such businesses according as they were commenced before or after the commencement of the Act. As regards the latter the first clause empowers the income-tax officer to accelerate the ordinary course of things and to make an assessment on the profits of the period between the end of the previous year and the date of discontinuance without waiting until the following year. In such a case the assessee may at once be charged not only with the tax in respect of the profits of the previous year, but also with the tax in respect of the profits of the broken period. When, however, a business was in existence and paying tax prior to the Act of 1922, we find it provided that the assessee need pay no tax on the profits of the broken period and may further claim, if it suits him, to escape tax upon the profits of the previous year by paying tax upon the profits of the broken period only. The reason why a different treatment is given to businesses commenced before 1922 which are discontinued after that year is because such businesses will really have paid income-tax twice on the profits of the year 1921-22, or, to put the matter in other words, they would have, apart from special provision, to pay tax on the profits of one year more than the previous system. This section, like Section 3, uses the words 'in respect of' which are also the crucial words in Sections 7 to 12 inclusive. In my opinion, Section 25 is incapable of being interpreted otherwise than as a provision to prevent injustice being caused by the tax being made for the first time a simply retrospective tax. The absence of all provisions for adjustment (see Section 68) and a complete avoidance of any phrase which would suggest that the purpose of the Act is to measure or compute finally or provisionally the amount of the income received during the year of assessment produces a striking contrast between the Indian Act of 1922 and English Acts.

17. It is quite true that the sections which describe the heads of income reproduce the language of the Act of 1918 without changing from the present to the past tense. The language of Sections 6, 7, 10 and 11 of the Act of 1918 affords little room for any such change. But just as in the Act of 1922 agricultural income continues to be defined as rent or revenue derived from land which is used for agricultural purposes, so the property to be taxed is still described as property 'of which he is the owner' (Section 9) and allowance under the head business is made for rent paid for the premises in which such business is carried on (Section 10). So too by Section 14 the tax shall not be payable by an assessee in respect of any sum which he receives as a member of a Hindu undivided family. It seems to me to be reasonably clear in Sections 9 and 10 that though the present tense is used throughout, the sections are to be applied to the state of facts in the 'previous year' or in the case of an exceptional assessment under Section 25(1) a completed portion of the year of assessment. They afford no reasonable ground for a contention that the particular sources numbered (iii) and (iv) must persist throughout two years in order to be chargeable. It is here that it is important to remember that the income-tax is one tax as Section 3 shows it to be.

18. There are doubtless some difficulties in this view with reference to the tax on 'salaries' which is payable by deduction at the source. If the Finance Act of any year imposes a tax upon the income of the previous year, then in these cases the tax seems to be deducted before it is authorised or imposed. Section 18 says it is to be 'leviable in advance by deduction at the time of payment.' The draftsman does not seem to be in sight of the difficulty. Leviable in advance of what? In advance of its imposition? The tax is to be deducted apparently at the rate laid down by the current Finance Act. In respect of the income of this year the Finance Act of next year may impose quite different rates or (theoretically) no income-tax at all. Section 18 uses the words

in respect of income chargeable under the following heads : (i) salaries and; (ii) interest on securities.

19. When any given Finance Act is passed it is too late to levy in advance income-tax 'in respect of' such income of the previous year. What seems logically necessary is an addition to Section 3 to make it read in effect:

Where any Act of the Indian legislature enacts that income-tax shall be charged for any year at any rate or rates applicable to the total income of an assessee,

(1) tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions of this Act in respect of all income, profits and gains of the previous year of every individual company, firm and Hindu undivided family;

(2) tax at that rate shall be deducted in accordance with and subject to the provisions of this Act from all salaries payable in that year on account of the income-tax, if any, to become chargeable in respect thereof for the following year; and

(3) tax at the maximum rate shall be deducted in accordance with and subject to the provisions of this Act from all interest upon securities payable in that year on account of the income-tax, if any, to become chargeable in respect thereof for the following year.

20. Still, however, one may criticise the language of Section 18. This is the only meaning which in my judgment can be given to it having regard to the language and the scheme of the Act. In my judgment the first question put to us for our opinion must be answered in favour of the Inland Revenue and against the assessee.

21. As the facts of the present case have not been fully investigated, it may be well to add that this judgment is not to be taken as an opinion that the assessee has no grievance. If he was the owner of the house property and bustee lands before 1922 and paid tax thereon under the Act of 1918, then in 1922-23 he paid tax for the second time on the income of 1921-22, and if he has to pay for the year 1924-25 it may therefore be that he is paying for one year more than he would have done under the 1918 Act. This will be so if in 1924-25 he received no income from these sources. If he has lost his property by a mortgage sale in 1924, then although neither Section 25 nor any other section of the Act of 1922 protects him, the case may be a very hard one and he may have special claim to some consideration at the hands of the Inland Revenue authorities.

22. The second question is stated as follows:

Is an amount of interest due on a mortgage debt but not actually paid an allowable item of expenditure under head 'house property income' under Section 9 of the Act.

23. In my opinion this question should be answered in the affirmative, i.e., in favour of the assessee. Apart from the consideration that a taxing statute should be construed, if possible, by confirming oneself to the ordinary meaning of the words used and that there is special objection to any construction which puts a burden upon the subject when the intention of the legislature to impose it is not clear, I think that Sections 9 and 10 of the Act of 1922 must be construed on the footing that when the legislature means 'paid' it says 'paid.' In Section 10 there is a special definition of the word for the purposes of that section. In Section 9 certain 'allowances' are authorized by way of deduction from 'the bona fide annual value' of the property - itself a hypothetical figure. The first two allowances have reference to repairs and do not depend upon proof of any actual expenditure. The third and the fourth are expressly made to depend upon what has actually been paid. The sixth is defined only by a limit and the seventh is left to the discretion, as regards amount, of the income-tax officer. In this context I am of opinion that the absence of the word 'paid' in the fourth clause is not without significance. I am not satisfied that the legislature has intended to charge on the basis of the sum which a hypothetical tenant would give save upon the assumption made in favour of the assessee that the real income of an incumbrancer is the difference between the yearly value and the interest. Though I desire in no way to pronounce upon the policy, convenience or equity of the matter, I cannot ignore the fact that there may be many reasons for making this assumption. If this be the right construction of the statute, I do not think that any exercise of the rule-making power conferred by Section 59 can affect the question : still less do I think that the headings to Schedule A of the form prescribed by Rule 19 are to be taken as rules.

24. In my opinion the assessee is entitled to the allowance in respect of interest on the mortgage.

25. As we were asked by counsel for the Inland Revenue to treat this as a test case and as the assessee has succeeded on one of the two questions, I think that the assessee's costs before us should be paid by the Inland Revenue.

C.C. Ghose, J.

26. I agree.

Buckland, J.

27. As I am in entire accord with the learned Chief Justice as to the effect of the more general aspects of the matter which he has discussed and of the sections of the Income-tax Acts to which he has referred, I propose to limit myself to an examination of the sections which bear directly upon the question which we have to decide.

28. The essential point of difference between the contentions advanced on behalf of the assessee and the Grown respectively lies in the questions whether the amount of tax payable in the current year has to be computed by reference to the assessee's income for the previous year though payable in respect of the assessee's income for the current year, or whether it is payable in respect of the assessee's income for the previous year though payable in the current year. In the former case the previous year's income is but a basis of computation which gives rise to the contention that if in the current year the assessee has no income, no tax is payable. The view put forward on behalf of the Grown makes it immaterial whether the assessee has any income in the current year. If the Crown's view prevails, the assessee, though he must pay the tax in the current year, for which he is assessed, pays in respect of his income for the previous year and the state of his income for the current year is negligible.

29. But for such resemblances as are to be found between the Indian Income-tax Acts of 1918 and 1922 and between the former of these and the Income-tax Act, 1918 (8 & 9 George V, Chap. 39), and were the assessee's Advocate limited to the Act of 1922, most of the materials upon which his argument has been founded would not be available to him.

30. There is no difference between the definition of 'previous year' in the two Indian statutes. The difference between the few Acts lies in the reference in the material sections of the Acts to the period so defined or, to state it otherwise, in the purpose for which the words 'previous year' are introduced into such sections.

31. By Section 14 of the Act of 1918 it is provided that

there shall be levied in respect of the year beginning with the 1st day of April 1918...income-tax upon every assessee in respect of his taxable income in that year;

that is to say, income-tax must be paid 'in respect of' the income for the current year.

32. Section 17 of the same Act requires a return of the assessee's income for the previous year, and under Section 18 the sum payable for the year in which the return is made may be assessed upon the basis of such return. Nothing could be clearer than that the previous year's income is introduced solely as a means of ascertaining by reference to it the amount of tax payable in the current year in respect of the income of the current year. It would be a careless form of expression to say that the income for the current year is estimated by reference to the income of the previous year, but the notion of an estimate is not altogether absent, for the result is that the amount of tax payable in respect of an unascertained income is arrived at by reference to an income, the amount of which is ascertainable.

33. Section 3 of the Act of 1922 provides:

Where any Act in the Indian legislature enacts that income-tax, shall be charged for any year...tax...shall be charged for that year...in respect of all income, profits and gains of the previous year....

34. This takes no account of the income of the previous year as a basis of assessment only, for not only cannot that be imported into the use of the words 'in respect of' as suggested in the course of argument, but the words 'in respect of' as denoting that which is to be taxed have been used frequently both in English and Indian statutes. The words involve nothing in the least degree obscure, and they cannot have one effect in Section 14 of the Act of 1918 and another in Section 3 of the Act of 1922. It is to be observed that the section provides that income-tax shall be charged, not in respect of the income of that year, i.e., the current year, as one would have expected to find had the legislature intended to express that which the assessee contends it has expressed, but 'for' that year. It is unnecessary to say that 'in' must be read for 'for;' either word would produce the same result.

35. It is impossible upon an analysis of Section 3 to hold that the previous year's income is but the basis of assessment on which the tax has to be paid in respect of the income for the current year. Fundamentally the determination of the question rest exclusively upon the construction of that section, for there is no other which deals with it directly.

36. Comparing the result attained with that under the Act of 1918 to which I have referred, one finds that under the Act of 1922 the income by reference to which the amount of tax payable in the current year has to be ascertained and in respect of which such tax when ascertained is payable are one and the same and being income for the previous year is an income the amount of which is ascertainable. Any notion of an estimate is absent, indeed there is no reason for it.

37. I agree as to the answers to be given to the questions submitted to us for revision.


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