Full Judgment Text
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PETITIONER:
NANIKANT AMBALAL MODY
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, BOMBAY
DATE OF JUDGMENT:
04/05/1966
BENCH:
SARKAR, A.K. (CJ)
BENCH:
SARKAR, A.K. (CJ)
MUDHOLKAR, J.R.
BACHAWAT, R.S.
CITATION:
1967 AIR 193 1966 SCR 295
CITATOR INFO :
F 1968 SC 70 (7)
ACT:
Indian Income-tax Act 1922, ss. 46, 10, 12-Outstanding fees
from legal profession received after cessation of practice-
Oash system of accounting-Receipts whether can be taxed
under s. 12 income from ’other sources’.
HEADNOTE:
The appellant an advocate who maintained his accounts on the
cash system gave up practice when he was elevated to the
Bench in 1957. Certain outstanding professional dues were
however received by him in the accounting years 1958 and
1959. These receipts were shown by him as income in his
return for the assessment years 1959-60 and 1960-61 and were
assessed by the Income-tax Officer. The appellant then went
in revision to the Commissioner of Income-tax contending
that the said receipts were not income and had been wrongly
taxed. The Commissioner having decided against him the
appellant came to this Court under Art. 136 of the
Constitution.
HELD: (i) The receipts in the present case were clearly
the fruits of the assessee’s professional activity and fell
under the fourth head of s. 6 of the Indian Income-tax Act
1922. They were however not chargeable to tax under that
head because under the corresponding computing section that
is. s. 10. an income received by the assessee who kept his
accounts on the cash basis in an accounting year in which
the profession had not been carried on at all is not
chargeable. [297 D-F]
Commissioner of Income Tax v. Express Newspapers Ltd., 53
I.T.R. 250, relied on.
(ii) The income could not be taxed under S. 12 either.
Section 12 deals with income which is not included under
any other preceding heads covered by ss. 7 to 10. If
the income is so included, it falls outside S. 12. It
follows that if, as in the present case, the income is
profits and gains of profession it cannot come under s. 12.
[301 E]
The heads of income in s. 6 are mutually exclusive and it
would be incorrect to say that as the receipts could not be
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brought to tax under the fourth head they could not fall
under that head and must therefore fall under the residuary
head ’other sources’. There is no justification for the
assumption that an income falling under one head has to be
put under another head if it escapes taxation under the
computing section corresponding to the former head. [298
A; 300 E-F]
The character of the income cannot change merely because the
assessee received it at a certain time or adopted a certain
sYstem of accounting. [301 B]
Section 4 does not say that whatever is included in total
income must be brought to tax. The income has to be brought
under one of the heads mentioned is s. 6 and can be charged
to tax only if it is so chargeable under the computing
section corresponding to
L/S5SCI
296
that head. Income which falls under the fourth head can be
brought to tax only if it can be so done under the rules of
computation laid down in s. 10. [298 G-299 B]
In re: B, M. Kamdar, 14 I.T.R, 250, not approved.
The United Commercial Bank v. The Commissioner of Income
Tax, [1958] S.C.R. 79, Salisbury House Estate Ltd., v. Fry.
15 Tax Cases 266 and Commissioner of In tax v. Cocanada
Padhaswami Bank Ltd., 57 I.T.R. 306, relied on.
Probh At Chandra Barua v. King Emperor, 57 I.A. 228,
distinguished,
Per Bachawat J. (dissenting)-
The receipts in question were chargeable under s. 12.
Any income Chargeable under a specific head can be charged
only under that head, and no part of that income can be
charged again under S. 12. But any part of a total income
of the assessee not me*sable under a specific head is
assessable under the residuary head covered by s. 12, [305
C]
The income in question was not exempt under s. 4(3). The
receipts were liable to be included in total income under s.
4. This income could not be included under s. 10 owing to
the method of accounting adopted by the assessee. Nor did
it fall under any other head. It followed that the income
must fall under the residuary head specified in s. 12, This
was not a case where the Revenue had taxed or could tax the
income under s, 10 and again sought to tax the income under
a. 12. [306 C. G-H]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos, 731-732 of
1964.
Appeals by special leave from the order dated January 29,
1963 of the Commissioner of Income-tax, Bombay City-1, in
No. 1/RP/BBY/40 and 41 of 1961.
N. A. Palkhivala, T. A. Ramachandran, S. P. Mehta and O,
C. Mathur, for the appellant.
Sarjoo Prasad, R. Ganapathy Iyer and R. N. Sachthey, for the
respondent.
The Judgment Of SARKAR, C.J. and MUDHOLKAR, J. was delivered
by SARKAR, C.J. BACHAWAT, I. delivered a dissenting opinion.
Sarkar. CJ. The assessee was an advocate of the High Court
of Bombay and was practicing his profession there till March
1, 1957 when he was elevated to the Bench of that Court. He
then ceased to carry on his profession and has not resumed
it since. As an advocate he had been assessed to income-tax
on his professional income, his accounting years for the
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assessments being the calendar years, When he was raised to
the Bench, various fees for professional work done by him
were outstanding. In the years 1958 and 1959 during no part
of which he had carried on any profession, he received
certain moneys on account of these outstanding fees.
297
His accounts had always been kept on the cash basis. The
question is. whether be is liable to pay income-tax on those
receipts.
We shall first make a few general observations. Section 6
of the Income-tax Act, 1922 specifies six sources or heads
of income which are chargeable to tax. In order to be
chargeable, an income has to be brought under one of these
six heads. S. 6 also provides that the chargeability to tax
shall be in the manner provided in ss. 7 to 12B of the Act.
Each of these sections lays down the rules for computing
income for the purpose of chargeability to tax under one or
other of the heads mentioned in s. 6. An income falling
under any head can only be charged to tax if it is so
chargeable under the corresponding computing section. The
fourth head of income in s. 6 is "Profits and gains of
business, profession or vocation" and the fifth head "income
from other sources". The fifth head is the residuary head
embracing all sources of income other than those
specifically mentioned in the section under the other heads.
Then we observe that the several heads of income mentioned
in s. 6 are mutually exclusive; a particular income can come
only under one of them: The United Commercial Bank v. The
Commissioner of Income Tax(2).
We now turn to the present case. The receipts in the
present case are the outstanding dues of professional work
done. They were clearly the fruits of the assessee’s
professional activity. They were the profits and gains of a
profession. They would fall under the fourth head, viz.,
"Profits and gains of business, profession or vocation".
They were not, however, chargeable to tax under that head
because under the corresponding computing section, that is,
s. 10, an income received by an assessee who kept his
accounts on the cash basis in an accounting year in which
the profession had not been carried on at all is not
chargeable and the income in the present case was so
received. This is reasonably clear and not in dispute: see
Commissioner of Income Tax v. Express Newspapers Ltd.(1).
Can the receipts then be income falling under the residuary
head of income and charged to tax as such? The Commissioner
of Income-tax from whose decision the present appeal has
been taken by the assessee, held that it was chargeable
under that head. He came to that conclusion on what he
thought were the general principles and also on the
authority of a certain observation of Chagla, J. in Re. B.
M. Kamdar(3). The observation of Chagla, J. does not seem
to us to be of much assistance for the decision in that case
was not based on it nor is it supported by reasons. We find
ourselves unable to agree with the learned Judge. We may
add that apart from the observation in Kamdar’s case(1),
there does not appear to be any direct authority supporting
the view of the Commissioner.
(1) [1958] S.C.R. 79.
(2) [1964] 53 I.T.R. 250:
(3) [1964] 8 S.C.R. 189.14 I.T.R. 10.
298
As to the general principles, we first observe that as the
heads of income are mutually exclusive, if the receipts can
be brought under the fourth head, they cannot be brought
under the residuary head. It is said by the Revenue that as
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the receipts cannot be brought to tax under the fourth head
they cannot fall under that head and must therefore fall
under the residuary head. This argument assumes, in our
view, without justification, that an income falling under
one head has to be put under another head if it is not
chargeable under the computing section corresponding to the
former head. If the contention of the revenue is right, the
position would appear to be that professional income of an
assessee who keeps his account on the cash basis would fall
under the fourth head if it was received in a year in which
the profession was being carried on, but it would take a
different character and fall under the residuary head if
received in a year in which the profession was not being
carried on. We are unable to agree that this is a natural
reading of the provisions regarding the heads of income in
the Act. Whether an income falls under one head or another
has to be decided according to the common notions of
practical men for the Act does not provide any guidance in
the matter. The question under which head an income comes
cannot depend on when it was received. If it was the fruit
of professional activity, it has always to be brought under
the fourth head irrespective of the time when it was
received. There is neither authority nor principle for the
proposition that an income arising from a particular head
ceases to arise from that head because it is received at a
certain time. The time of the receipt of the income has
nothing to do with the question under which particular head
of income it should be assessed.
It is then said that the receipts had to be included in the
total income stated in S. 4 and since they do not fall under
the exceptions mentioned in that section, they must be
liable to tax and, therefore, they must be considered as
income under the residuary head as they could not otherwise
be brought to tax. This contention seems to us to be ill-
founded. While it is true that under S. 4 the receipts are
liable to be included in the total income and they do not
come under any of the exceptions, the contention is based on
the assumption that whatever is included in total income
under s. 4 must be liable to tax. We find no warranty for
this assumption. Section 4 does not say that whatever is
included in total income must be brought to tax. It does
not refer at ill to chargeability to tax. Section 3 states
that "Tax...... shall be charged ..... in accordance with,
and subject to the provisions, of this Act in respect of the
total income". This section does not, in our opinion,
provide that the entire total income shall be chargeable to
tax. It says that the chargeability of an income to tax has
to be in accordance with, and subject to the provisions of
the Act. The income has therefore to be brought under one-
of the heads In s. 6 and can be charged to tax only if it is
so chargeable under
299
the computing section corresponding to that head. Income
which comes under the fourth head, that is, professional
income, can be brought to tax only if it can be so done
under the rules of computation laid down in s. 10. If it
cannot be so brought to tax, it will escape taxation even if
it be included in total income under s. 4. Furthermore, the
expression "total income" in s. 3 has to be understood as it
is defined in s. 2(15). Under that definition. total income
means "total amount of income, profits and gains referred to
in sub-s. (1) of s. 4 computed in the manner laid down in
this Act", that is, computed for the purpose of
chargeability under one of the sections from s. 7 to s. 12-
B. The receipts in the present case, as we have shown, can
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only be computed for chargeability to tax, if at all, under
s. 10 as income under the fourth head. If they cannot be
brought to tax by computation under that section, they would
not be included in "total income" as that word is understood
in the Act for the purpose of chargeability. That all
income included in total income is not chargeable to tax may
be illustrated by referring to income from the source
mentioned in the third head in s. 6, namely, "Income from
property". The corresponding computing section is s. 9
which says that tax shall be payable on income under this
head in respect of bona fide annual value of property. It
is conceivable that income actually received from the
property in a year may exceed the notional figure. The
excess would certainly be liable to be included in total
income under s. 4. It however, cannot be brought to tax as
income under the head "other sources", see Saliently House
Estate, Ltd. v. Fry(1). It is an income which cannot be
taxed at all though it is included in total income as
defined in s. 4.
In Probhat Chandra Barua v. King Emperor(1) it was no doubt
said that s. 12 which is the computing section in respect of
the residuary head of income, was clear and emphatic and
expressly framed so as to make the head of "Other sources"
describe a true residuary group embracing within it all
sources of income, profits and gains, provided the Act
applies to them, that is, provided they are liable to be
included in total income under s. 4 which deals with income
to which the Act applies. We are in full agreement with
that observation but we do not think that it affords any
support to the contention that all income liable to be
included within total, income under s. 4 must be brought to
tax. The observation must be read keeping in mind the
undisputed principle that a source of income cannot be
brought under the residuary head if it comes under any of
the specific heads, for the Judicial Committee could not
have overlooked that principle. If we do that, it will be
clear that all that the Judicial Committee said was that all
sources of income which do not come under any of the other
heads of income can be brought under the residuary head.
The words used are "embracing... all sources of income" and
not all income. It did not say that an
(1) 15 T.C. 266.
(2) 57 I.A. 228.
300
income liable to be included in the total income is
chargeable to tax as income under the residuary head if it
is not chargeable tinder a specific head under which it
normally falls. In Probhat Chandra Barva’s case(1) the
Judicial Committee was not concerned with that aspect of the
matter; the only question before it was, whether zamindari
and certain other income fell under the third head of income
from property, as the word ’property’ was understood in the
Act.
Another aspect of Probhat Chandra Barua’s case(1) requires a
mention. The question that there arose, as we have just now
said, was, whether the Income-tax Act did not impose a tax
on the income of a zamindar derived from his zamindari and
certain other properties. It was said on behalf of the
assessee that the zamindari and the other income being
income from property fell under the third head and could be
brought to tax only under the corresponding computing
section, s. 9. It was pointed out that the income could not
be charged to tax under that section because it dealt only
with income from house property which the income concerned
was not. It was then said that the income could not be
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taxed under the residuary head because it was really income
from property and could be taxed only as such. The Judicial
Committee did not accept this contention. It took the view
that the word ’property’ in the third head "Income from
property" had to be interpreted as restricted only to that
kind of property which is described in the computing
section, s. 9 and as that section deals only with house
property the income from zamindari and other properties did
not fall under the head "Income from property". It,
therefore, found no difficulty in holding that the zamindari
income was income from the residuary source. We find no
support in this case for the view that an income which is
admittedly under a specific head can be brought to tax under
the residuary head if it cannot be so brought under the
cornputing section corresponding to that head. That case
only held that zamindari income was not income which fell
under the head "Income from property" and that it could
never so fall. It provides ,no warranty for the contention
that an income from one source may, in certain
circumstances, be treated as income from a different source,
which is the contention of the Revenue in the present case.
We think it right also to observe that if the receipts in
the present case could be treated as income from the
residuary source, the position would be most anomalous. We
have earlier said that if that were so, the placing of an
income under this head would depend on the act of the
assessee, it would depend on the time when the assessee
chose to receive it. That we conceive is not it situation
which the Act contemplates. But there is another and
stronger reason to show that the Act did not contemplate it.
Suppose the assessee had kept his accounts on the mercantile
basis.
(1) 57 I.A. 228.
301
He would then have been charged to tax on these receipts in
the year when the income accrued which must have been a year
when he was carrying on his profession as an advocate. It
could not then have been said that the receipts should be
taken under the head "other sources". If we are to accept
the contention of the Revenue, we have to hold that the
method of book-keeping followed by an assessee would decide
under which head a particular income will go. If the Revenue
is right, the income of the assessee would go under the
fourth head if the method of accounting was mercantile and
it would go under the fifth head if the accounting was the
cash basis. We are wholly unable to take the view that such
can be the position under the Act. The heads of income must
be decided from the nature of the income by applying
practical notions and not by reference to an assessee’s
treatment of income: see Commissioner of Income-tax v.
Cocanada Radhaswami Bank Ltd.(1).
It now remains to see whether s. 12 justifies a view
contrary to that which we have taken. It lays down the
rules for computation of income under the head "Other
sources". It says that tax under the head "Income from
other sources" shall be payable in respect of income of
every kind which may be included in the total income if not
included under any of the preceding heads. It seems to us
clear that the words "if not included under any of the
preceding heads"-which refer to the heads considered in ss.
7 to 10-refer to income and not to a head of income. S. 12,
therefore, deals with income which is not included under any
of the preceding heads. If the income is so included, it
falls outside s. 12. Whether an income is included under
any of the preceding heads would depend on what kind of
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income it was. It follows that if the income Is profits and
gains of profession, it cannot come under s. 12. Section 12
does not say that an income which escapes taxation under a
preceding head will be computed under it for chargeability
to tax. It only says-and this is most important-that ’an
income shall be chargeable to tax under the head "other
sources" if it does not come under any other head of income
mentioned in the Act. Section 12 therefore does not assist
the contention of the Revenue that professional income which
cannot be brought to tax under s. 10 may be so brought
under s. 12.
For these reasons we have come to the conclusion that the
receipts were not chargeable to tax either under the head of
professional income or under the residuary head, It was not
said that the receipts might be brought to tax under any
other head. In our opinion, therefore, the receipts were
not chargeable to tax at all.
We accordingly allow these appeals with costs.
(1) 57 I.T.R. 306:[1965] 3 S.C.R. 619.
302
Bachwat, J. These appeals raise the question whether the
professional income of an assessee whose accounts are kept
on a cash basis, received by him during his life-time after
the discontinuance of the profession and after the close of
the accounting year in which the profession is discontinued,
is assessable to income-tax either under S. 10 or under S.
12 of the Indian Income-tax Act, 1922.
The assessee was practising as an advocate in the High Court
of Bombay till March 1, 1957 when he was appointed a Judge
of the High Court at Bombay. His method of accounting was
cash, and his accounting year was the Calendar year. The
relevant orders of the Income-tax Officer suggest that his
accounting year was the financial year ending on March 3 1,
but it is now the common case of both the assessee and the
Revenue that the accounting year was the Calendar year.
In the assessment year, 1958-59, the assessee was assessed
to income-tax in respect of the entire professional income
received by him, during the Calendar year including the
income received after March 1, 1957. It is not disputed
that the assessee was liable to pay tax in respect of the
income received by him between March 1, 1957 and December
31, 1957.
During the Calendar years, 1958 and 1959, the assessee re-
ceived the sums of Rs. 30,570 and Rs. 15,240 respectively on
account of professional fees for work done by him before
March 1, 1957. In the returns for the assessment years,
1959-60 and 196061, the assessee included the aforesaid two
sums as his income from profession. By his orders dated May
30, 1960 and October 26, 1960, the Income-tax Officer
subjected the aforesaid two sums to tax treating them as
receipts of fees for professional services rendered in the
earlier years and as part of the total income of the
assessee. On April 4, 1961, the assessee filed two revision
petitions before the Commissioner of Income-tax, Bombay City
1, under S. 33-A contending that the aforesaid two sums were
no part of his total income of the relevant accounting years
and were included in his returns through an error and asking
for their exclusion from his assessable income for the
relevant assessment years. By a common order dated January
29, 1963, the Commissioner of Income-tax held that the two
sums were assessable on general principles and also on the
authority of the decision in Re. B. M. Kamdar(1), and
rejected the revision petitions. From this order, the
assessee now appeals to this Court by special leave.
The first question is whether the two sums were assessable
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to tax under s. 10 of the Indian Income-tax Act, 1922.
Section 10(1) provides:
"The tax shall be payable by an assessee under
the head Profits and gains of business,
profession or vocation’ in respect of the
profits and gains of any business, profession
or vocation carried on by him."
(1) [1946] I.T.R. 10.
303
Section 10 applies to the profits and gains of any business,
profession or vocation carried on by the assessee.
Considering that the subject-matter of charge is income of
the previous year, the expression "carried on by him" must
mean "carried on by him at any time during the previous
year." To attract s. 10(1), it is not essential that the
assessee should have carried on the profession throughout
the entire previous year or at the time when be realised the
outstanding professional fees; it is sufficient that he
carried on the profession at any time during the accounting
year in which he realised his fees, see in re. Kamdar(1).
On the other hand, the section does not apply to the profits
and gains of any profession which was not carried on by the
assessee at any time during the previous year.
Our attention was drawn to several decisions of this Court
dealing with s. 10(2)(viii) and the second proviso to s.
10(2)(vii). In Commissioner of Income-tax v. Express
Newspapers Ltd(1) and Commissioner of Income-tax v. Ajax
Products Ltd.(1), this Court held that one of the essential
conditions of the applicability of the second proviso to s.
10(2)(vii) is that during the entire previous year or a part
of it the business shall have been carried on by the
assessee. In the Express Newspapers Ltd. case(1), at page
259, Subba Rao, J. said:
"Under section 10(1), as we have already
pointed out, the necessary condition for the
application of the section is that the
assessee should have carried on the business
for some part of the accounting year."
These observations support the conclusion that the profits
and gains of a business or profession are not chargeable
under s. 10(1), if the assessee did not carry on the
business or profession during any part of the previous year.
In the instant case, the assessee discontinued his
profession as soon as he became a Judge of the Bombay High
Court. He could not carry on the profession after he became
a Judge. It is not possible to hold that he continued to
carry on the profession merely because he continued to
realise his outstanding fees. It follows that the assessee
did not carry on his profession as an advocate at any time
during the Calendar years, 1958 and 1959. The receipts of
the outstanding professional fees during 1958 and 1959 were
not profits and gains of a profession carried on by the
assessee during those years, and were not assessable to tax
under S. 10(1).
Section 13 provides that except where the proviso to that
section is applicable, the income for the purposes of s. 10
must be computed in accordance with the method of accounting
regularly employed. by the assessee. Section 13 is
mandatory. In the instant
(1) [1946] I.T.R. 10.
(2) [1964] 53 I.T.R. 250, [1964] 8 S.C.R. 189.
(3) [1965] 55 I.T.R. 741: [1965] 1 S.C.R. 700.
304
case, as the assessee employed the cash method of accounting
and as the proviso to s. 133 did not apply, his professional
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income during 1957 and the previous accounting years had to
be computed on the cash basis. The Revenue had no option
in the matter. Had the assessee adopted the mercantile
method of accounting. the entire income of the assessee
arising from his profession before March 1, 1957 would have
been included in his assessable income for those years, and
no portion of it would have escaped assessment under s. 10.
But as the assessee adopted the cash method of accounting,
the outstanding fees could not be included in the assessment
for those years. The question is whether this income now
escapes taxation altogether. There is no doubt that by the
method of accounting employed by the assessee, he has chosen
to treat the receipts in question as income of the
accounting years, 1958 and 1959.
The Revenue claims that the income was assessable to tax
under s. 12. On behalf of the assessee, Mr. Palkhiwala
submitted that (1) the income from the defunct source of
profession, though not assessable under s. 10, continued to
fall under the head covered by s. 10 and the residuary
head under s. 12 was not attracted, (2) s. 12 covers
residual heads and not residual receipts, and (3) that if s.
12 were applied to this income, the assessee would suffer
injustice because the deductions properly allowable under S.
10 in respect of the income could not be allowed. On the
other ban(], Mr. Sarjoo Prasad appearing on behalf of the
Revenue submitted that the receipts in question were part of
the total income of the assessee for the relevant accounting
years chargeable under s. 3 read with ss. 2(15) and 4. and
as the income was not exempt from tax and as it did not fall
under S. 10 or any other head, it must be assessed to tax
under s. 12. In support of his contention, Mr. Sarjoo
Prasad relied upon the opinion of Chagla, J. in re.
Kamdar(1) at p. 58.
By s. 3 read with ss. 2(15) and 4, income-tax is charged for
every year in accordance with and subject to the provisions
of the Act in respect of the total income of any previous
year of the assessee computed in the manner laid down in the
Act, including all income, profits and gains from whatever
source derived. which accrue or arise or are received or are
deemed to accrue, arise or to be received as provided by S.
4(1) and which are not exempted under S. 4(3). The crucial
words in s. 4 are "from whatever source derived". The
nature of the source does not affect the chargeability of
the income. Section 6 sets out the heads of income
chargeable to tax. The several heads are dealt with
specifically in ss. 7, 8, 9, 10 and 12. Income is
classified under different heads for the purpose of
computing the net income under each head after making
suitable deductions. Income, profits and gains from what-
ever source derived, included in the total income fall under
one
(1) [1945] I.T.R. 10.
305
head or the other, If any part of the total income does not
fall under the specific heads under ss. 7, 8, 9 and 10, it
must fall under the residuary head under s. 12. Section
12(1) provides:
"The tax shall be payable by an assessee under
the head Income from other sources’ in respect
of income, profits and gains of every kind
which may be included in his total income (if
not included under any of the preceding
heads)."
Income, profits and gains of every kind are covered by s.
12, provided two conditions are satisfied, viz., (1) they
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are not included under any of the preceding heads and (2)
they may be included in the total income of an assessee.
Any income chargeable under a specific head can be charged
only under that head and no part of that income can be
charged again under s. 12. But any part of the total income
of the assessee not assessable under a specific head is
assessable under the residuary head covered by s. 12.
Referring to similar words in s. 12(1), as it stood before
its amendment in 1939, Lord Russell observed in Probhat
Chandra Barua v. The King Emperor(1):-
"These words appear to their Lordships clear
and emphatic, and expressly framed so as to
make the sixth head mentioned in s. 6 describe
a true residuary group embracing within it all
the sources of income, profits and gains
provided the Act applies to them i.e.,
provided that they accrue or arise or are
received in British India or are deemed to
accrue or arise or to be received in British
India, as provided by s. 4, sub-s. (1), and
are not exempted by virtue of s. 4, sub-s.
(3)."
Referring to the words "income, profits and gains" in s. 12,
Lord Russell said in Gopal Saran Narain Shigh v. Income-tax
Commissioner(1):
"The word ’income’ is not limited by the
words ’profits’ and ’gains’. Anything which
can properly be described as income is taxable
under the Act unless specially exempted. "
And Sarkar, J. said in Sultan Brothers v. Commissioner of
Incometax(1):
"Section 12 is the residuary section covering
income, profits and gains of every kind not
assessable under any of the heads specified
earlier."
Section 6 gives the short label of each head, but the actual
contents of the several heads are to be found in ss. 7, 8,
9, 10 and 12. Take the head "(iii) Income from property" in
s. 6. Section 9 shows that only income from buildings or
lands appurtenant thereto, of which the assessee is the
owner, falls under this head. Income from other properties,
e.g., land not appurtenant to
(1) [1930] L.B. 57 I.A. 228,239.
(2) [1915] L.R. 62 I.A. 207,213.
(3) [1964] 51 I.T.R. 351, 357: [1964] 5 S.C.R. 80.
306
building is outside the purview of this head and fall s
under s. 12. Again. take the head "(iv) Profits and gains
of business, profession or vocation." Section 10 on its
proper construction applies only to the profits and gains of
a business, profession or vocation carried on by the
assessee during any part of the previous year. Profits and
gains of business, profession or vocation of the assessee
which was not carried on by him during any part of the
previous year being outside the purview of s. 10 must
necessarily fall under s. 1-2.
Mr. Palkhiwala conceded that the receipts in question were
the income of the assessee. He also admitted that the
income was not exempt from tax under sub-s. (3) of s. 4. The
income was received by the assessee in the taxable
territories during the relevant previous years. The
receipts are, therefore, liable to be included in the total
income. We have found that this income cannot be included
under s. 10. It is common case that it cannot be included
under any other head. It follows that the income must fall
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under the residuary head specified in s. 12.
Section 12 dealing with the residuary head is framed in
general terms and in computing the income under this head,
requires deduction of any expenditure (not being in the
nature of capital expenditure) incurred solely for the
purpose of making or earning such income. As the income in
the present case falls under s. 12, the allowance for the
necessary expenditure must necessarily be given under this
head and not under s. 10. There is no question of the
assessee suffering an injustice by not being given the
allowances under s. 10. He cannot be given the allowances
under s. 10, as the income does not fall under that section.
Counsel rightly submitted that s. 12 covers residual heads
and not residual receipts. In this connection, he relied
upon Salisbury House Estates Ltd. v. Fry(1). That case
decided that the various Schedules of the English Income-tax
Act, 1918 are mutually exclusive, Sch. A must be applied to
the class of income falling under it and no pay of this
income is chargeable under Sch. D. This decision received
the approval of this Court in United Commercial Bank Ltd. v.
The Commissioner of Income-tax(2). On the principle of this
decision, if a particular income is taxable as income from
property under s. 9, any residual receipt from the property
in excess of the annual value assessed under s. 9 cannot be
assessed again as residual income under s. 12. This
principle has no application to the case before us. The
relevant professional income of the assessee is not taxable
under s. 10 or under any other specific head, and it must,
therefore, be taxed tinder s. 12. This is not a case where
the revenue has taxed or can tax the incomeunder s. 10 and
again seeks to tax the income under s. 12.
Mr. Palkhiwala next referred us to several English decisions
in support of his contention that the receipts of the
professional
(1) 15 T.C. 266.
(2) [1958] S.C.R. 79.
307
income after the discontinuance of the profession are not
assess- a ble to income-tax. Rowlatt, J. in Bennett v.
Ogston(1) said:
"When a trader or a follower of a profession
or vocation dies or goes out of business-
because Mr. Needham is quite right in saying
the same observations apply here-and there
remain to be collected sums owing for goods
supplied during the existence of the business
or for services rendered by the professional
man during the course of his life or his
business, there is no question of assessing
those receipts to Income Tax; they are the
receipts of: the business while it lasted,
they are arrears of that business, they
represent money which was earned during the
life of the business and are taken to be
covered by the assessment made during the life
of the business, whether that assessment was
made on the basis of bookings or on the basis
of receipts."
These bservations received the approval of the House of
Lords in Purchase v. Stainer’s Executors(1) and Carson v.
Cheyney’s Executors(1). In’ the last two cases, the Court
held that the professional earnings of a deceased individual
realised by his executor were not liable to income-tax
either under Case II or under Cases III and VI of Schedule D
of the English Income-tax Act, 1918. in Cheyney’s case(1),
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the professional earner had died in one of the assessment
years and part of his earnings had been realised by his
executor during the same assessment year. It is remarkable,
however, that in Cheyney’s case(1) at p. 265 Lord Reid said:
"In my opinion, the ground of judgment in this
House in Stainer’s case was that payments
which are the fruit of professional activity
are only taxable under Case 11 and cannot be
taxed under Case III, even when it is no
longer possible when they fall due to tax them
under Case II, and when looked at by
themselves and without regard to their source
they would fall within Case Ill. I am not
sure that I fully appreciate the reasons for
the decision, but I have no doubt that is what
was decided, and I am bound by that decision
whether I agree with it or not."
The rule in Stainer’s case(1), rests on shaky foundations
and has been subjected to criticism even in England. The
rule is subject to exceptions in England, and as pointed out
by Jenkins, L. J. in Stainer’s case(1) is subject to the
application of Rule 18 of the General Rules. The Indian
Income-tax Act, 1922 is not pair material, the scheme is in
many respects different from the scheme of the English Act,
and I think that the rule in Stainer’s case(1) is not
applicable to the Indian Act. In England, the tax is on the
I current year’s income, the Revenue has the option to
assess the
(1) 15 T.C. 374,378.
(3) [1960] 38 T.C. 240.
(2) [1951] 32 T.C. 367.
308
income on the accrual basis, and even if it chooses to make
an assessment on the cash basis, the entire accrued income
might be considered to be covered by the assessment. But
under the Indian law, the tax is on the previous year’s
income, the Revenue has no option to assess the income from
a business or profession on the accrual basis if the
accounts of the as are regularly kept on the, cash basis,
and the assessment on the cash basis cannot cover the
receipts in the subsequent years. Moreover, it is
impossible to say under the Indian law that all receipts of
outstanding professional fees after the retirement of the
assessee from profession escape taxation. Beyond doubt, the
receipt of the professional fees in the accounting year
during which the assessee carried on the profession is
assessable under s. 10, though at the time of the receipt he
has retired from the profession.
The decision in The Commissioner of Income-tax, Bombay City
1, Bombay v. Amarchand N. Shroff(1) is entirely distinguish-
able. In that case, this Court held that the income of a
deceased solicitor received by his heirs subsequent to the
previous year in which he died was not liable to be assessed
to income-tax under a. 24B as his income in the hands of
his heirs, and apart from s. 24B, no assesment can be made
in respect of a person after his death. In the instant
case, the assessee is alive,. and no question of assessment
under s. 24B arises,
Neither side relied on s. 25(1), and, in my opinion,
rightly. That sub-section gives an option to the Revenue to
make an assessment in the year of the discontinuance of the
business or profession on the basis of the income of the
period between the end of the previous year and the date of
the discontinuance in addition to the assessment, if any,
made on the basis of the income of the, previous year, The
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sub-section does not preclude the Revenue from making an
assessment on the professional income under any other
section of the Act.
Our attention was drawn to s. 176(4) of the Income-tax Act,
1961, which provides:
"Where any profession is discontinued in any
year on account of the cessation of the
profession by, or the retirement or death of,
the person carrying on the profession, any sum
received after the discontinuance shall be
deemed to be the income of the recipient and
charged to tax accordingly "in the year of
receipt, if such sum would have been included
in the total income of the aforesaid person
had it been received before such
discontinuance."
(2) [1963] Supp. I S.C.R. 690.
309
The note on cl. 178 of the Income-tax Bill, 1961 suggests
that this sub-section was passed with a view to give effect
to the following recommendations of the Direct Taxes
Administration Enquiry Committee in paragraph 7.81 (11) of
its Report:
"There is no provision in the law at present
to assess the income, received after the
cessation of practice or retirement or death
of the assessees carrying on a profession,
like, Solicitors. Advocates, Doctors,
Consulting Surveyors. Engineers etc. The law
should be amended in such a way that even on
the assessee’s cessation of his vocation or
retirement from the profession or death income
received after such cessation, retirement or
death would be taxed."
The Report does not purport to base, its opinion on any
judicial decision. The assumption in this Report that there
is no provision in the Indian Income-tax Act to assess the
entire income received after the retirement or death of
professional men cannot be wholly correct, because, beyond
doubt, the income received after the retirement in an
accounting year during any part of which the assessee
practiced his profession is assessable under s. 10 and the
income received after his death by his legal representative
during the previous year in which he practised his
profession is assessable in the hands of the legal
representative under s. 24B. Moreover, the Report is silent
on the question of the assessment of the outstanding profits
of business realised by a trader after the discontinuance of
his business. In this case, we are concerned with the
interpretation of the Indian Income-tax Act, 1922, and the
question is whether we can take into account the provision
of the later Act in interpreting the earlier Act. In Craies
on Statute Law, 6th Edn, p. 146, the law is stated thus:
"Except as a parliamentary exposition,
subsequent Acts are not to be relied on as an
aid to the construction of prior unambiguous
Acts. A later statute may not be referred to
interpret the clear terms of an earlier Act
which the later act does not amend, even
although both Acts are to be construed as one,
unless the later Act expressly interprets the
earlier Act; but if the earlier Act is
ambiguous, the later Act may throw light on
it, as where a particular construction of the
earlier Act will render the later incorporated
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Act in. effectual."
This passage is fully supported by the decision of the House
of Lords in Kirkness v. John Hudson & Co.(1). In Hariprasad
Shivshankar Shukla v. A. D. Divikar(2), this Court gave
effect to the
(1) [1955] A.C. 696: [1955] 2 All. R.R. 845.
(2) [1957] S.C.R. 121,140.
310
plain meaning of an unamended Act, though on the
interpretation given by it a later amendment would become
largely unnecessary, and quoted with approval the following
passage in the opinion of Lord Atkinson in Ormond Investment
Co. Limited v. Betts(1): "An Act of Parliament does not
alter the law by merely betraying an erroneous opinion of
it." I do not find any ambiguity in the clear terms of ss.
2(15), 3,4,6,10, 12 and 13 of the Indian Income-tax Act,
1922 and the later Act cannot be used as an aid to their
construction. On the construction of the Indian Income-tax
Act, 1922, 1 hold that the profession income of an assessee
whose accounts were kept on a cash basis received by him
during his lifetime after the discontinuance of the
profession and after the close of the accounting year in
which the profession was discontinued, is assessable to
income-tax under s. 12 of the Act.
In the result, the appeals are dismissed. There will be no
order as to costs.
ORDER
In accordance with the Judgment of the majority the appeals
are allowed with costs.
(1) [1928] A.C. 143,164.
311