General Commercial Corporation Ltd., Madras vs Commr. of Income Tax, Madras

Rajagopalan, J.—Under the directions of this Court given on ""an application by the assessee u/s 66 (2) or the Indian Income Tax Act, the Appellate Tribunal referred the following question to this Court:

Whether in the circumstances of this case, the previous years as determined by the Tribunal for the assessment years 1948-49 and 1949-50 are correct.

The assessee firm, the General Commercial Corporation Ltd., took over the assets of a partnership concern, styled General Commercial Corporation, treated those assets as the capital of the firm and commenced business on 7-4-1947. The first set of accounts of the assessee firm was made up to 7-5-1948, that is, for a period of 13 months from the commencement of the business. Whether the assessee firm wound up its business or not in 1948 is not clear, but the Tribunal found that on 7-5-1948 the entire stock of goods of the assessee firm was taken over by the new firm styled the General Commercial Corporation (India) Ltd. The Income Tax Officer upheld the claim of the assessee firm that it was not liable to be assessed in the assessment year 1948-49 on the ground, that it had no "previous year" as defined by Section 2 (11) of the Income Tax

Act. For the assessment year 1949-50, the Income Tax Officer excluded the period from 7-4-1947 to 7-5-1947 and worked out the loss for the period from 7-5-1947 to 7-5-1948 for the purpose of assessment.

The Commissioner of Income Tax exercised his powers u/s 33-B of the Act and directed revision of the assessment for both the years. He held that the period from 7-4-1947 to 31-3-1948 should be treated as the accounting year, that is, "previous year", for the assessment year 1948-49.

On appeal, the Appellate Tribunal confirmed that order. It is the correctness of that order that has been canvassed under the question referred to this court.

The contention of the assessee was that for the assessment year 1949-50, the firm should be assessed on the previous year, that is, from 8-5- 1947 to 8-5-1948 u/s 2 (11) (a) of the Act, and that as the assessee was entitled to the benefit of the proviso to Section 2 (11) (c) the assessee was not liable to be taxed in the assessment year 1948-49.

Section 2 as it stood in the relevant assessment years ran:

"Previous year" means (in respect of any separate source of income, profits and gains), (a) the twelve months ending on the 31st day of March next preceding the year for which the assessment is to be made, or if the accounts of the assessee have been made up to a date within the said 12 months in respect of a year ending on any date other than the said 31st day of March, then at the option of the assessee, the year ending on the day to which his accounts have so been made up. (Note: Proviso omitted)"".

The relevant portion of Section 2 (11) (c) ran:

Where a business, profession or vocation has been newly set up in the financial year preceding the year for which the assessment is to be made, the period from the date of the setting up of the business, profession or vocation to the 31st day of March next following ..... or if the accounts of the assesses are made Up to some other date than the 31st day of March ....... then at the option of the assessee the period from the date of the setting up of the business, profession or vocation to such other date: Provided that when such other date does not fall between the setting up of the business, profession or vocation & the next following 31st day of March, it should be deemed that there is no previous year.

Section 2 (11) (c) was amended by Act 25 of 1953 and the relevant portion of the amended Section 2 (11) (c) runs:

Where a business, profession or vocation has been newly set up in the financial year preceding the year for which the assessment is to be made, the period from the date of the setting up of the business, profession or vocation to the 31st day of March next following ........ or if the accounts of the assessee are made up in respect of a period not exceeding twelve months from the date of the setting up of the business, profession or vocation and the case is not one for which a period has been determined under Sub-clause (b), then at the option of the assessee, which shall be the period from the date of the setting up of the business, profession or vocation to the date to which his accounts have been so made up.

Thus the new words inserted u/s 2 (11) (c) by the Amending Act in 1953 were that the option should be exercised within 12 months of the setting up of the business.

Mr. Rama Rao Sahib, learned counsel for the department, urged that the Amending Act of 1953 only clarified the idea that underlay Section 2(11) (c) in so far as the assessable period had to be considered, and that on a proper construction of Section 2(11) (c), as it stood before the amendment in 1953, the assessee could not claim the benefit of the latter part of Section 2 (11) (c) and of the proviso to that part, as the assessee had made up his accounts not for a period of a year but for a period of 13 months. While the principle of construction of the provisions of a fiscal statute is that any ambiguity in the language of the section should be resolved in favour of the tax payer and not the State, it is not permissible for a court to create an ambiguity by interpretation as a preliminary to the grant of relief to the tax payer to which he would not otherwise be en titled.

As Mr. Rama Rao Sahib contended, any construction of Section 2 (11) (c) and the proviso thereto, as they stood before the amendment of 1053, should be consistent with the general scheme of taxation that underlies the Income Tax Act, and the words of Section 2 (11) (c) should not be isolated from their context for the purpose of construction. The Act provides that no portion of an accounting period escapes assessment in the assessment year; and it also provides that no period higher than a year (in the circumstances provided for by Section 2 (11), the accounting year may not always coincide with 12 calendar months calculated according to the Gregorian calendar should be considered for purposes of assessment in any given assessment year.

Learned counsel for the Assessee referred to the report of the Income Tax Investigation Commission. At page 147 of that report, the Commission observed:

The definition of the words "previous year" In relation to a new business requires clarification, so that in certain contingencies profits made during certain months may not escape assessment. If a new business is started on 1-7-1945, it is started in the financial year 1945-46. Under Clause (c) of the definition, it is open to the owner of such business to say that for the assessment year 1946-47 his accounts are made up as on 30-6-1946.

That date does not fall between 1-7-1945 (when the business started) & 31-3-1946; accordingly, under the proviso there is no previous year for him for the assessment year 1946-47. For the assessment year 1947-48 Clause (c) would not apply, as the business was set up before and not in the financial year (1946-47) preceding the assessment year. Therefore, Clause (a) will apply and the assessee may ask to be assessed on profits from 1-1-1946 to 31-3-1947 with the result that profits from 1-7-1945-(when the business started) to 1-4-1948 will escape assessment. Proviso to Clause (a) would not help as till then he had never been assessed.

It is therefore necessary to link up the option under Clause (c) with the option under Clause (a). The option under clause (c) should be exercisable within 12 months of setting up the business. To give effect to these suggestions, the following amendments are recommended:

(i) in the proviso to Clause (a) of Section 2 (11), after the words "Income, profits and gains", insert. the words or has exercised option under Clause (c)""; and (ii) in Clause (c) of Section 2 (11), after the words, "at the option of the assessee" insert the words "which shall be exercised within 12 months of setting up the business".

These recommendations were implemented by the Amending Act of 1953.

When the reasons given by the Commission for the proposed amendments are examined, it will be seen that while the idea was to link the option to be exercised u/s 2 (11)(c) with the proviso to Section 2 (11) (a), and define the period within which the option is to be exercised, the question, what was the accounting period to be taken into account for purposes of assessment to Income Tax, was still left to be governed by the provisions of Section 2 (11) (c) as they stood without the amendment. In our opinion, the contention of Mr. Rama Rao Sahib that Section 2 (11) (c), as it stood before the amendment, to which we have already referred, is consistent with the general principles of the Income Tax Act, outlined above is correct. The view taken by the Commissioner of Income Tax and by the Tribunal is, in our opinion, correct.

As the accounts were not made up for a year after the commencement of the business, the assessee was not entitled to invoke the latter part of Section 2 (11) (c). If that part of Section 2 (11) (c) could not apply, obviously the assessee could not invoke the benefit of Section 2 (11) (c) and contend that the assessee had no previous year at all within the meaning of the Act for the assessment year 1948-49. If so, only the first part of Section 2(11)(c) would apply, that is, for the assessment year 1948-49 the accounting, period is from the date of the commencement of the business to 31-3-1948. That was the view of the Commissioner of Income Tax and of the Tribunal, which in our opinion, is correct. For the assessment year 1949-50, it is Section 2 (11) (a) that will apply. Our answer to the question framed by the Tribunal is in the affirmative and against the assessee. As the assessee has failed, he should, pay the costs of the respondent, Rs. 250.