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Judgment
Ramanujam, J.—At the instance of the Revenue, the following two questions have been referred to this court by the Tribunal for our opinion
:
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the capital gains realised by the
assessee on the transfer of lands on July 19, 1967, in favour of M/s. Educational Trust Company Private Ltd. was not assessable in the hands of
the assessee for the assessment year 1969-70 ?
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the only previous year in which the
surplus from the transfer of lands which took place on July 19, 1967, will had to be considered would be the financial year April 1, 1967, to
March 31, 1968, relevant to the assessment year 1968-69 ?
The assessee, in this case, is a company which publishes a Tamil daily newspaper known as ""Nellai Murasu"". For the assessment year 1969-70,
the assessee filed a return of income on July 1, 1969, showing the previous year as ending on June 30, 1968. In the profit and loss account panting
the return, the assessee had shown for the year ended June 30, 1968, not only the income from the newspaper business, but also the profit on sale
of lands of Rs. 51,307. The balance-sheet accampaigning the return also showed the value of the fixed asset at Rs. 2,68,443. The schedule of
fixed assets showed that as on July 1, 1967, there were lands of the value of Rs. 45,192.98 and the amount of Rs. 36,192.98 was shown as the
value of the lands sold during the year. The value of the balance lands was shown in the balance-sheet as Rs. 9,000 as on June 30, 1968. The
lands of which the cost was Rs. 36,192.98 were sold on June 30, 1967, for Rs. 87,500. After deducting the cost was Rs. 36,192.98 from the sale
price of 87,500, balance of Rs. 51,307 was shown as the profit on sale of lands. However, in the income adjustment statement, the assessee
excluded the profit of 51,307 on the ground that it represented profit on sale of agricultural lands and, therefore, it cannot be taxed as capital gains.
The ITO, however, held that since the lands sold were situated with in the municipal limits of Tirunelveli town, the lands sold cannot be
agricultural lands so as to enable the assessee to claim exemption from capital gains. Aggrieved by the decision of the ITO holding that the lands
sold are not agricultural lands, the assessee filed an appeal before the AAC contending that the lands sold were agricultural lands and, therefore,
the profit arising on the sole of such a land cannot be assessed as capital gains. The AAC agreed with the ITO and held that the lands sold by the
assessee were not agricultural lands.
The assessee, thereafter, went before the Tribunal contending that the lands sold are only agricultural lands. The assessee also put forward a
new plea at that stage that since the sale of lands had taken place on July 19, 1967, the capital gains, if any, could be considered for assessment
only in the previous year ended March 31, 1968, relevant to to the assessment year 1968-69, and, therefore, even if the profits arising out of the
sale of the lands could be taken to be a capital gain, it could be assessed only in the assessment year 1968-69 and not in the assessment year
1969-70, which was the subject-matter before the Tribunal. The Tribunal allowed the assessee to raise the said new point on the ground that it
goes to the root of the assessment and that it did not involve ascertainment of any fresh facts. The Tribunal then went into the fresh point raised by
the assessee that even if the profits arising out of the sale of the lands are held taxable, it could be assessed only in the previous year ended March
31, 1968, and not for the assessment year 1969-70, and agreeing with the contention of the assessee, held that the relevant previous year in with
the transfer of the capital asset took place is the previous year ended March 31, 1968, and that the assessee not having exercised its option under
s. 3(1)(b) of the I.T. Act, 1961 (hereinafter referred to as ""the At""), the capital gains, if any, cannot be assessed for the assessment year 1969-70.
In that view, it set aside the assessment of capital gains of Rs. 51,307 without going into the question as to whether the lands sold were agricultural
lands or not. Aggrieved by the view expressed by the Tribunal that the capital gains of Rs. 51,307 cannot be assessed during the assessment year
1969-70, the Revenue has sought and obtained a reference on the two questions set out above.
The main question that arises for consideration before us is as to what is the previous year in which the transfer of the capital asset had taken
place as contemplated by s. 45 of the Act. It is seen that the Tribunal has fixed the financial year with reference to the date of transfer, namely, July
19, 1967, and proceeding on the basis that the assessee has not exercised its option, held that the previous year during which the transfer took
place is the financial year April 1, 1967, to March 31, 1968, and as the date of transfer, namely, July 19, 1967, has fallen outside the assessment
year April 1, 1968, to March 31, 1969, it cannot be assessed during the assessment year in this case. The question is whether the said view taken
by the Tribunal is correct.
According to the Revenue, tough the assessee is entitled to have different previous years in respect of different sources of income as provided
for in s. 3(3) of the Act, the assessee in this case has exercised the option to have the same previous year both for its business and for capital gains
and, therefore, the assessee should be taken to have exercised its option out that the relevant previous year from July 1, 1967, to June 30, 1968. It
is also pointed out that the relevant previous year for the assessment year 1969-70, so far as the assessee''s business is concerned is the previous
year ending June 30, 1968, and that the same previous year has been adopted by the assessee itself for the capital gains also and it had submitted
the return only on that basis. The profit and loss account also shows that the assays has made up its accounts both with regard to the business as
well as the capital gains up to June 30, 1968. It is said that the assays having exercised the option by bringing the capital gains in the previous year
ending June 30, 1968, it should e taken to have exercised the option to take the previous year ending June 30, 1968, as the previous year.
Learned counsel for the assessee, on the other hand, contends that as per s. 45 of the Act, the previous year has to be determined taking July
19, 1967, that date of transfer as the basis, that on such basis, the relevant previous year will be the year April 1, 1967, to March 31, 1968, and
that, therefore, the capital gains cannot be assessed in the assessment year 1969-70 as has been now done by the ITO. Having regard to these
rival contentions, we have to determine as to what is the pervious year in which the transfer of lands in this case had taken place and whether the
capital gains arising out of the transfer of the lands could be assessed in the assessment year 1969-70.
There is no dispute between the part''s that the assessee will be entitled to have different previous years with reference to different sources of its
income as provided for in s. 3(3) of the Act. The assessee in this case has been adopting the previous year as the year ending on June 30, every
year for its business. For the assessment year 1969-70, which is the subject-matter before us, the previous year is the year ending on June 30,
1968. As already stated, though the assessee is entitled to have different previous year in respect of capital gains treating it as a different source of
income, it had returned the income by way of capital gains only in the return submitted for the period of twelve months ending on June 30, 1968,
which means that the assessee has adopted the same previous year both for capital gains as also for its business income.
Capital gains are taxed under s. 45 of the Act and that section reads as follows :
S. 45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections
53, 54, 54B, 54D and 54E, be chargeable to Income Tax under the head ''Capital gains'' and shall be deemed to be the income of the previous
year in which the transfer took place.
The section provides that income chargeable by way capital gains shall be deemed to be the income of the previous year in which the transfer
took place. ""Therefore, for the purpose of bringing into charge capital gains under s. 45, one has to determine the previous year in which the
transfer out of which capital gins arose took place. The term ""previous year"" has been defined in various ways in s. 3(1) of the Act with reference
to various situations. But we are concerned in this case only with the definition provided in ss. 3(1)(a) and 3(1)(b) and the other clauses are no
material for the purpose of our discussion. Section 3(1)(a) defines ""previous year"" as the financial year immediately preceding the assessment year
and s. 3(1)(b) says that if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of the
assessee, the twelve months ending on such date will be the previous year.
In this case, it is not in dispute that the assessment year for which assessments has been made in respect of the business income as well as the
income by way of capital gains is 1969-70. With reference to the said assessment year, the financial year under s. 3(1)(a) of the Act, immediately
preceding the assessment year will be April 1, 1968, to March 31, 1969. If the accounts of the assessee have been made up to a date within the
financial year April 1, 1968, to March 31, 1969, then at the option of the assessee, the previous year will be the twelve months ending on that
date. In this case, it is not in dispute that the assessee''s accounts have been made up to June 30, 1968, which is a date within April 1, 1968, to
March 31, 1969, and this is the previous year as per s. 3(1)(b). The assessee not only made up its accounts up to June 30, 1968, which is a date
falling within the financial year April 1, 1968, to March 31, 1969, but also submitted a return voluntarily a showing the income by way of capital
gains in the assessment year 1969-70, thus treating its previous year so far as capital gains are concerned as the year ending June 30, 1968.
Admittedly, July 19, 1967, the date of transfer falls within the previous year ending June 30, 1968, which has been adopted by the assessee for the
purpose of the income by way of capital gains also while submitting its return. As a matter of fact, from the order of the Tribunal, it is seen that the
assessee submitted return for both the business income and the income by way of capital gains for the previous year as ending on June 30, 1968. If
really the assessee wanted to have a different previous year for the income by way of capital gains apart from the year ending June 30, 1968, the
assessee would not have disclosed income by way of capital gains in the return for the assessment year 1969-70 corresponding to the accounting
year ending June 30, 1968. The assessee has also shiwn the income by way of capital gains in the profit and loss account for the year ending on
June 30, 1968, filed with the return wherein the profit arising out of the sale of the lands has also been disclosed. The sale as disclosed is stated to
has occurred during the year ending June 30, 1968. The value of the lane of the land has also even shown in the balance-sheet as Rs. 9,000 as on
June 30 1968. Therefore, it is clear that the assessee has taken the previous year ending June 30, 1968, as the previous year during which the
transaction of sale has taken place. From the conduct of the assessee in making up the accounts up to June 30, 1968, and said closing the sale as
having taken place during that year and the income by way of capital gains as having accrued during that year, it can reasonably be said that the
assessee has exercised its option available to it under s. 3(1)(b) of the Act and fixed the pervious year ending on June 30, 1968, as the previous
year for its income by way of capital gains also.
The Tribunal has, however, held that the exercise of option under s. 3(1)(b) of the Act is not available to the assessee as the assessee has not
made up its accounts to a date between July 19, 1967, and March 31, 1968. We do not see how the Tribunal could say that the accounts should
be made up to date between July 19, 1967, and March 31, 1968, and as the assessee has not done so, the option under s. 3(1)(b) is not available
to the assessee. We find that the Tribunal has taken the date of transfer, namely, July 19, 1967, as the basic point from which one has to proceed
to detriment the previous year. As already pointed out, under s. 45 of the Act, one has to find out the previous year in which the transfer took
place and it does not say that the date of transfer wail be starting point for the determination of the previous year of the assessee for capital gains.
Learned conceal for the assessee very strongly relied on the observation of the Tribunal and contended that the previous year has to be
determined with reference to the date of transfer. The contiention, if accepted, will lead to an anomalous situation where the assessee will have as
many previous years as there are transfers, and that is not the position contemplated by s. 45 of the Act.
Though s. 3(3) of the Act contemplated different previous years for different sources of income, it does not say that with reference to each sale
transaction of the assessee, there will be a different previous year. That will be extending the scope of s. 3(3) to an extent not contemplated by the
statute. Normally, previous year is determined with reference to the assessee in respect of the same sure of income as contemplated by s. 3(3). But
once the previous year is determined with reference to the assessee for capital gains, then that previous year is to be applied for all transitions of
sale which had taken place during that previous year, and the statute does not contemplate different previous years with reference to each
transaction of sale. According to the Tribunal, since the date of transfer, namely, July 19, 1967, fell within the financial year April 1, 1967, to
March 31, 1968, the capital gains arising out of the said sale cannot be assessed in the previous year July 1, 1967, to June 30, 1968. We are of
the view that even on the basis that the transaction fell within the financial year April 1, 1967, to March 31, 1968, as per s. 3(1)(a) that is the
previous year for the assessee, the date of transfer falls within that previous year. As we have already held, the assessee in this case having
disclosed the income by way of capital gains in the return for the year ending June 30, 1968, it should be deemed to has exercised the option to
adopt the previous year ending June 30, 1968, as the previous year for capital gains as well.
Learned counsel for the assessee would contend that though the assessee has disclosed the income by way of capital gains in the return filed
for the period July 1, 1967, to June 30, 1968. the assessee having claimed exemption on the said income, it should be taken that it has not offered
the income for assessment during the year July 1, 1967, to June 30, 1968. As already stated, in the return for the period from July 1, 1967, to June
30, 1968, the income by way of capital gains has been disclosed and exemption has been sought for only on the ground that the profit arose out of
the sale of agricultural lands and, therefore, it cannot be assessed as capital gains. The assessee did not exclude the income disclosed for the period
from July 1, 1967, to June 30, 1968, on the ground that it is not includible during that period. Therefore, we are not in a position to kept the
assessee''s contention that the exclusion of the income sought for by the assessee from the return will had any relevant on the question whether the
assessee exercised the option or not. As a matter of fact, the subsequent conduct of the assessee both before the ITO as well as the AAC in
putting forward the only contention that the income shown as capital gains represented the profit from sale of agricultural lands and as such it
cannot be charged to capital gains, and not advancing the contention that even if the profits arising out of the sale of the lands is taxable as capital
gains, it cannot be taxed in the assessment year, indicates that the assessee voluntarily and consciously proceeded on the basis that the capital gains
are chargeable only for the period July 1, 1967, to June 30, 1968.
Learned counsel for the assessee refers to certain decisions in support of his contention that the assessee cannot be taken to have exercised the
option available to it under s. 3(1)(b) of the Act on the facts of this case. They are Bisheshwar Singh Vs. Commr. of Income Tax, , Binodiram
Balchand Vs. Commissioner of Income Tax, and Commissioner of Income Tax, Karnataka Vs. Lachmandas Veerbhandas, . In all these cases,
there is no over act on the part of the assessee to indicate that the assessee has chosen any particular previous year for the source of income in
dispute. Therefore, the courts took the view that unless there is some conscious at on the part of the assessee from which the exercise of the option
to treat a particular year as the previous year for any particular source of income could be inferred, the assessee cannot be taken to have exercised
the option under s. 3(1)(b). But in this case the various steps taken by the assessee indicate that the income by way of capital gains arose during
the accounting year from July 1, 1967, to June 30, 1968, and, therefore, the above decisions may not be of any assistance to the assessee. Since
we have held that the date of transfer July 19, 1967, falls within the previous year July 1, 1967, to June 30, 1968, specifically adopted by the
assessee while submitting the return for the assessment year 1969-70, we have to hold that the Tribunal is in error in holding that the capital gains
cannot be assessed during the year 1969-70. We, therefore, answer the questions raised in the negative and in favour of the Revenue.
The assessee will pay the cost of the Revenue. Counsel''s fee Rs. 500.
In this case, the Tribunal, as already stated, has not gone into the question as to whether the lands sold are agricultural land as contended by
the assessee or whether they are non-agricultural lands as contended by the Revenue. Therefore, the matter will stand remitted to the Tribunal for
rendering a decision on the said question.