Commissionr of Wealth-tax vs P.R. Shanmugam

Ramanujam, J.—Since these two tax cases arise out of the common order of the Income Tax Appellate Tribunal and as they involve

practically the same issue, they are dealt with together.

The assessee, apart from having a money-lending business, had income from property, partly residential and partly let out as also share income

from four firms in India. The assessee in this case has been assessed in the status of an individual and a resident and ordinarily resident in the

assessment years 1964-65 to 1968-69. These assessment proceeded on the basis that the previous year in each case is the Tamil year.

For the assessment year 1969-70, the assessee filed his return of income on September 10, 1969, showing the previous year as Tamil Year

ending with March 12, 1969. The assessment was completed under the provisions of s. 143(3) of the I.T. Act, 1961 (hereinafter referred to as

the Act""), and the previous year mentioned in the assessment order is the year ended April 12, 1969. As regards the residence, the ITO observed

The assessee who left India on April 8, 1968, has not so far returned to India. As he was also completely absent from India during the accounting

year, the residential status declared in the return, i.e., ''non-resident'', will be accepted"". Thus, for the assessment year 1969-70, the assessee was

assessed as a non-resident and, consequently, the foreign income was left out of consideration. Subsequent to the completion of the assessment for

the assessment year 1969-70, the internal audit party who scrutinised the assessment files has pointed out on January 9, 1972, that the assessee

had left for Singapore on April 8, 1968, and returned only on April 15, 1970, and that the assessee had derived income from various sources and

the relevant accounting period ended with reference to the year 1972-73, were as under :

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Serial Source Last date of the Income

No. accounting year

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Rs.

Property-residence 12-4-1972 1,256

and let

Own business 12-4-1972 (-)50

Share income

from firms

Pattukottai 31-12-1971 16,639

Mannargudi 31-12-1971 12,702

Madurai 31-12-1971 14,766

Thanjavur 12-04-1971 16,048

Tiruchirapalli 30-06-1971 12,047

Other sources 12-04-1972 3,562

The audit report further pointed out that according to s. 6(5), if a person was resident in India in a previous year relevant to the assessment year

in respect of any one source of income, he was to be deemed to be resident in Indian in the previous year relevant to the assessment year in

respect of each of his other sources of income and, therefore, for the assessment year 1969-70, the assessee should be taken to be resident as he

had been in India for more than 30 days in respect of most of the sources of income in the previous year which ended on December 31, 1968, and

further he had maintained a dwelling house and that, therefore, treating the assessee as a resident and ordinarily resident for the assessment year

1969-70, his foreign income of Rs. 7,283 plus certain interest on foreign deposits should be considered to have escaped assessment. Taking note

of the said audit report, the ITO issued a notice under s. 148 to the assessee to bring in escaped income. The assessee filed a return in compliance

with the said notice with a covering letter wherein he had pointed out that the provisions of s. 6(5) were not applicable as the assessee had already

exercised an option for the previous year as the Tamil Year and this option by the assessee could not be altered by resort to the provisions of s.

3(1)(f) of the Act which authorised the adoption for the share income the previous year for which the firm itself was assessed and that, therefore,

there was no escapement of income. The ITO did not accept the said contention and made a revised assessment on March 22, 1974, holding that

the provisions of s. 6(5) were clearly attracted, that the assessee was a resident and ordinarily resident since in the previous year ending on March

31, 1968, that the assessee was in India for more than 30 days and has also maintained a dwelling house and, therefore, in respect of all sources of

income, the assessee would be a resident.

The assessee appealed to the AAC contesting the validity of the reopening of the assessment treating the assessee as a resident and ordinarily

resident on the ground that is was a mere change of opinion on the part of the ITO. The AAC agreed with the ITO that the assessee would have to

be treated as resident for all sources of income in view of the provisions of s. 6(5) of the Act and that the reopening of the assessment under s.

147(b) was legal.

The assessee appealed to the Income Tax Appellate Tribunal contesting the decision of the AAC upholding the validity of the reopening of the

original assessment and also the reassessment on merits. The Tribunal upheld the validity of the reopening of the assessment but cancelled the

reassessment holding that the assessee was to be treated as non-resident for the assessment year in question as has been done in the original

assessment.

Aggrieved by the said decision, the Revenue has sought and obtained a reference to this court on the following question of law :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in cancelling the reassessment made under the Income

Tax Act, 1961, on the assessee for the assessment year 1969-70 ?

For the same assessment year, assessee was originally assessed under the W.T. Act as a non-resident. Subsequently, proceedings were initiated

for reopening the assessment and for treating the assessee as having a residential status. The reopening of the assessment was challenged before

the AAC who upheld the reopening of the assessment as well as the adoption of the status of the assessee as a resident. The matter was taken in

appeal to the Tribunal. The Tribunal, while upholding the reopening of the assessment, cancelled the reassessment on the ground that the assessee

should be treated as a non-resident and not as a resident.

Aggrieved by the decision of the Tribunal, the Revenue obtained a similar reference to this court on the following question of law :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in cancelling the reassessment under the Wealth-tax

Act for the assessment year 1969-70 ?

From the facts stated above, it will be seen that both for purposes of Income Tax and wealth-tax, the status of the assessee was returned as

non-resident"" and the same was accepted by the ITO for the following reason :

The assessee who left India on April 8, 1968, has not so far returned to India. As he was also completely absent from India during the accounting

year, the residential status declared in the return, i.e., ''non-resident'' will be accepted.

Subsequently, during the internal audit, it was pointed out that the assessee had share income from firms and the previous year of those firms

ended on December 31, 1971, and that the assessee had been a resident in India during the firms previous year as he had been in India for more

than 30 days and had also maintained a dwelling house. There is no controversy as regards the factual position. During the previous year of the

firms (accounting year ended December 31, 1968), relevant to the assessment year 1969-70, in respect of his share income, the assessee was in

India for more than 30 days as he had left India only on April 8, 1968, and he had admittedly a residence in India. However, the controversy

between the parties is as to whether merely from the fact that during the previous year relevant to the assessment year as regards the firm, the

assessee was a resident, he could be treated as a resident in respect of all sources of income, relying on the provisions of s. 6(5).

The learned counsel for the Revenue mainly relies on the provisions of s. 3(1)(f) and s. 6(5) in support of his stand that as the assessee is a

resident in the previous year with reference to the share income from the firms he should be taken to be a resident in respect of all sources of

income. The learned counsel for the assessee, however, contends that notwithstanding the said provisions of the Act, the assessee having opted to

adopt the Tamil years as the previous year, that should be taken to be the previous y year for all sources of income and it is not open to the

Revenue to change that previous year taking note of the previous year of the firms from which the assessee received income. It is in the light of the

said rival contentions we have to consider the scope and ambit of the relevant provisions of the Act.

""Previous year"" has been defined in s. 3. Clause (a) s. 3(1) provides that normally the financial year immediately preceding the assessment year

should be taken to be the previous year. Clause (b), however, proceeds on the basis that where the accounts 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. Clause (c) provides

that in cases not falling under clause (a) or clause (b) the previous year may be determined by the Board or by any authority authorised by the

Board in that behalf. Clauses (d) and (e) provided for the determination of the previous year in the case of business or profession newly set up.

Clause (f) which is relevant in this case is extracted below :

Where the assessee is a partner in a firm and the firm has been assessed as such, then, in respect of the assessee''s share in the income of the firm,

the period determined as the previous year for the assessment of the income of the firm.

Clause (g) related to life insurance business. For the purpose of this case, the relevant clauses to be considered are clauses (a), (b), (c) and (f)

of s. 3(1). Section 3(3) provides that subject to the other provisions of s. 3, an assessee may have different previous years in respect of separate

sources of his income. Section 6 deals with residence in India. Section 6(1)(b) provides that if an individual maintains a dwelling house in India for

a period of 182 days or more in that year and has been in India for thirty days or more in that relevant previous year, then, he should be taken to

be a resident. Sub-section (5) of s. 6 which is relevant in this case is as follows :

If a persons is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be

resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income.

The above provisions in s. 6(5) has created a fiction and if a person has been a resident in India in the previous year relevant to the assessment

year in respect of any of his sources of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in

respect of each of his other sources of income. In this case, though in relation to other sources of income the assessee''s previous year was the

Tamil year in relation to his share income from partnerships, the previous year the year which ended on December 31, 1968. During that previous

year the assessee has been a resident for he has been in India from January 1, 1968, to April 8, 1968, which is more than 30 days and he had a

dwelling house. In respect of one source of income, that is the share income from partnership, the assessee should be deemed to be a resident in

India in the previous year relating to the assessment year in respect of that source of income. In this case, combined reading of ss. 3(1)(f) and 6(5)

makes it clear that if the assessee whose one of the sources of income is share income in a partnership in whose previous year the assessee was a

resident, then he should be deemed to be a resident for all sources of income.

However, the learned counsel for the assessee contends that s. 6(5) will not stand attracted as the assessee''s previous year was the Tamil

New Year and that cannot at all be altered with reference to clause (f) of sub-s. (1) of s. 3. According to him, clause (f) will apply only to an

assessee whose only source of income from a firm and not to a case where the assessee has several sources of income and in respect of those

sources the previous year has been fixed under s. 3(1)(c). The learned counsel for the assessee points out that once at the option of the assessee a

particular previous year has been adopted under s. 3(1)(b) or determined by the Board or by any authority authorised by the Board under clause

(c) of s. 3(1), then it cannot be altered taking advantage of clause (f). This submission of the assessee has been accepted by the Tribunal and the

question is whether the Tribunal is right in doing so.

According to the Tribunal, in assessee''s case, the previous year has been determined as per instructions issued by the Central Board of Direct

Taxes and such determination is final and conclusive notwithstanding s. 3(1)(f). It is no doubt true, the assessee in this case has been allowed to

adopt Tamil year as the previous year under s. 3(1)(c), since he will not fall either under clause (a) or under clause (b). But the question is whether

previous year determined in respect of the assessee under s. 3(1)(c) is immutable as has been treated by the Tribunal.

According to the Tribunal, s. 3(1)(c) has got an overriding effect on the other clauses of s. 3(1) because of s. 3(4) which provides that where

an option has once been exercised of the previous year by the assessee or the assessee has once been assessed, then in respect of the same

source the assessee cannot vary the meaning of the expression ""previous year"" except with the consent of the ITO. We do not see how clause (c)

of s. 3(1) will have an overriding effect over the other clauses therein. According to the usual canons of construction, the various clauses in a

statutory provision should be read harmoniously so that each clause will have its full operation. The Tribunal has chosen to read s. 3(1)(f) as being

subject to s. 3(1)(c) when the statute has not provided that the operation of clause (f) of s. 3(1) is subject to s. 3(1)(c). Even, according to the

Tribunal, there can be more than one previous year if the requisite conditions are satisfied for different sources of income and the assessee is not

right in his submission that there can only be one previous year for the purpose of assessment and that position is clear from s. 3(3) and also from

s. 6(5). However, the Tribunal has taken the view that when a particular previous year has been fastened on the assessee as under s. 3(1)(c), it

cannot be altered on the basis of another statutory provision, namely, s. 3(1)(f) in respect of the share income. The following observations of the

Tribunal contains its reasoning for holding the provisions in s. 3(1)(c) to be an overriding provision.

The provisions of section 3(1)(f) are not stated to be operative notwithstanding anything in any of the other provisions relation to ''previous year''.

As far as this particular assessee is concerned, since the previous year has been fixed by the Board for the assessee except in respect of sources

falling under sections 3(1)(a) and 3(1)(b) regarding which the Board''s powers u/s 3(1)(c) are excluded. It overriding the provisions of section 3(1)

(f) which prescribe a previous year only for a particular source of income. We come to this conclusion in the interpretation that the larger will

always include the smaller and the wider the narrower, so also the previous year stipulated u/s 3(1)(c) being one for the assessee is wider in its

scope and larger in its extent and would cover the narrower concept u/s 3(1)(f) which governs only a particular source of income of an assessee.

We are at a loss to understand the reasoning of the Tribunal contained in the above extract. Admittedly, s. 3(1)(f) has not been made subject

to s. 3(1)(c). Therefore, s. 3(1)(f) will have its own operation and the operation of s. 3(1)(f) cannot be curtailed with reference to s. 3(1)(c). If s.

3(1)(f) is made subject to s. 3(1)(c), then the operation of s. 3(1)(f) can be curtailed or limited with reference to s. 3(1)(c). Therefore, we are not

in a position to agree with the reasoning of the Tribunal that s. 3(1)(c) overrides the provisions of s. 3(1)(f) which prescribed the previous year for

a particular source of income. We do not see how a clause appearing in a section can be taken o override the other clauses in the same section

without the statute itself giving any such overriding effect for a particular clause.

Even assuming that the Tribunal''s reasoning is correct that the assessee is entitled to have previous year determined as per s. 3(1)(c)

notwithstanding the fact that for one source of income there was a different previous year, still we do not see how that will stand in the way of s.

6(5) being given effect to. Section 3(3) contemplates the assessee having different years in respect of different sources of income. Though the

assessee is assessed for the previous year determined under s. 3(1)(c), still for the purpose of determining the residential status of the assessee, we

have to find out, whether in respect of any source of income, the assessee was a resident in the previous year relating to that source Section 6(5)

clearly states if in relation to one source of income the assessee is resident, he will be deemed to be a resident in Indian in relation to all his other

sources of income. When construing s. 6(5) in the matter of determination of the residential status of an assessee, the determination of the previous

year for the assessee for purposes of the assessment under s. 3(1)(c) will not be material. After determination of the residential status with

reference to s. 6(5) which takes note of the assessee''s residence in India in relation to one source of income, the assessee''s residence in India in

relation to one source of income, the assessee will naturally be assessed in the previous year assigned to him under s. 3(1)(c). Therefore, the fact

that the assessee had a previous year for the purpose of assessment in the earlier years under s. 3(1)(c) will not stand in the way of the application

of s. 6(5) for the purpose of determination of his residential status. In this view of the matter, we are not inclined to agree with the decision of the

Tribunal that the assessee should be taken to be a non-resident for the assessment year 1969-70, both for the purpose of Income Tax and for the

purpose of wealth-tax.

The view taken by us as to the interpretation of s. 3(1)(f) gets support from the decision of the Bombay High Court in Commissioner of

Income Tax, Bombay City-ii Vs. Mckenzies Ltd., . In that case, the assessee derived income from various sources in the previous year relevant to

the assessment year 1962-62, which commenced on 1st of August, 1960, and ended on July 31, 1961, and also income as a partner in a firm, the

previous year of which was September 1, 1960, to August 31, 1961. Since the previous year of the firm from which the assessee received share

income and the previous year in respect of the other income of the assessee were different, the question arose whether the assessee''s share

income from the firm was assessable in the assessment year 1962-63 or in the assessment year 1963-64. The court took the view that clause (f) of

s. 3(1) of the I.T. Act, 1961, lays down that ""previous year"" in the case of an assessee who is a partner in a firm which has been assessed as such

means, in respect of the assessee''s share in the income of the firm, the period determined as the previous year for the assessment of the income of

the firm, that the effect of that clause is that the previous year for the assessment of the income of the firm is statutorily made the previous year of

the partner in respect of his share in the income of the firm even if the partner has income from other sources, for which he may have a different

previous year, and that having regard to s. 4 of the Act which brings to tax in the same assessment year, the incomes of an assessee though they

arise in a different previous year, both the incomes can be assessed in the year 1962-63, which is the previous year for the income of the assessee

from other sources.

It must be borne in mind that under the earlier I.T. Act of 1922, the position was that if an assessee had several sources of income outside

India, he can escape tax in respect of one or more of those sources by claiming to be non-resident in respect of such source or sources of income

on the principle that an assessee is entitled to have separate accounting periods of his choice in respect of each source of income. However, in the

1961 Act, the doctrine of ""resident for one source, resident for all sources"" has been introduced and its importance lies in its application to non-

residents. To give effect to this doctrine, by s. 6(5), the statute has provided that where an assessee has got different sources of income and if he is

a resident in the previous year with reference to one source of income, he should be deemed to be a resident with reference to all source of

income. This statutory object cannot be nullified by stating that the assessee''s previous year in relation to other sources of income cannot be

altered by the application of s. 6(5). When the statute with an avowed object has brought in a deeming provision to make a person resident for one

source of income as a resident for all sources of income, then the deeming provision cannot be ignored by stating that he is not a resident in respect

of the other sources of income.

In this view of the matter, we have to answer the questions referred to us in both the cases in the negative and against the assessee. The

assessee will pay the costs of the Revenue. Counsel''s fee Rs. 500 (one set).