H.G. Jamal Mohideen Sahib vs Fifth Income Tax Officer

Ramaprasada Rao, J.—The petitioner is an assessee on the file of the 5th Income Tax Officer, City Circle II, Madras. For the assessment

year 1960-61 he sustained a business loss of Rs. 47,059 but gained capital gains during the year. Though the Income Tax Officer determined such

capital gains at one figure, on appeal, the capital gains had been reduced to a sum of Rs. 75,000. On the basis of the order of the Appellate

Assistant Commissioner, the respondent recomputed the income for the assessment year 1960-61 as follows :

Rs.

Property : 1,118

Share income (Loss) 47,059 (-)

Other sources : 1,312

Net loss 44,629

Capital gains : 75,000

Total capital gains 30,371

Rs.

income tax on Rs. 30,371 @ 42536 1,291.86

Surcharge 64.59

Special surcharge 193.77

Total capital gains tax payable 1,550.22

The petitioner is aggrieved against the computation made by the Income Tax Officer, as according to him, it does not satisfy the prescription in

Section 17(6) of the Income Tax Act, 1922, which provision is applicable to the facts of the instant case. Section 17(6) is a sub-section to Section

17 which is the provision for determination of tax payable in certain special cases. One such special case is where an assessee who is ordinarily

assessable under the Act has acquired capital gains during the taxable year. In those circumstances, a special provision is made and the direction is

issued to the authorities by the legislature as to how the total income in such cases have to be reckoned. Though total income as is ordinarily

understood under the other provisions of the Act has a distinct meaning and significance by itself, yet the expression has to be interpreted in the

peculiar situation that has arisen in this case in the light of Section 17(6) of the Act. It would be, therefore, anachronistic to import the normal

popular meaning of the words "" total income "" into the text of the special provision, Section 17(6) of the Income Tax Act, 1922.

Section 17(6) reads as under :

Where the total income of an assessee, not being a company includes any income chargeable under the head '' Capital gains '', the tax, including

super-tax, payable by him on his total income shall be-

(i) Income Tax and super-tax-payable on his total income as reduced by the amount of such inclusion, had such reduced income been his total

income, plus

(ii) on the whole amount of such inclusion, Income Tax equal to the amount which bears to the Income Tax which would have been payable on his

total income as reduced by two-thirds of the amount of such inclusion the same proportion as the whole amount of such inclusion bears to such

reduced total income.

We are not concerned with the proviso and, therefore, it is not extracted. Sub-clause (6) of Section 17 is divided into two parts. Section 17(6)

(i) expressly relates to Income Tax and super-tax payable on the total income of the assessee as reduced by the amount of capital gains. In

addition to such taxes so ascertained under the first sub-clause, Income Tax is also payable on the whole amount of such inclusion which obviously

refers to the unabsorbed capital gains because in a case where the assessee''s total income under the other heads results in profits, no question of

absorption of capital gains would arise because it would be arithmetically added on to such total income under other heads. But, if the income

under other heads results in a loss though algebraically, if capital gains are added on to it, it would be understood ordinarily as an addition, yet, in

reality it is an absorption of such capital gains into such total income which is a loss. If this is borne in mind, then Sub-clause (ii) of Clause (6) of

Section 17 can be interpreted and properly understood.

The phrase "" on the whole amount of such inclusion "" in Sub-clause (ii) lias to be understood in a peculiar sense, in case the total income under

other heads of an assessee results in a loss. I have already used the words "" absorbed capital gains"". Such absorbed capital gains have to be

excluded from the computation. In the problem under consideration, when Rs. 75,000 was added on to the loss incurred by the assessee, then the

capital gains included by such process would be Rs. 30,371 and the capital gains absorbed would be the balance. Therefore, the expression "" on

the whole amount of such inclusion "" in the second sub-clause has to be understood as the net capital gain arrived at after absorption of the same

by that having been set off against the loss incurred by the assessee. In the instant case, such an amount would be Rs. 30,371. It is not in dispute

that the rate applied on Rs. 30,371 is in anyway incorrect, but what is suggested is that "" on the whole amount of such inclusion "" cannot be Rs.

30,371 at all. To illustrate, it is said that if strictly the language has to be understood in the ordinary sense then no tax is payable in the instant case

at all. The contention, runs : If the loss is X and if the capital gain is Y (Y greater than X), then it is said that under Sub-clause (i) of Section 17(6),

the total income should be ascertained as--X plus Y--Y, which is again a minus and, therefore, no tax is payable under that particular sub-clause.

Then coming to Sub-clause (ii), it is said that the figure has to be arrived at by calculating the algebraic expression ""--X plus Y--2/3 Y"", i.e., "" --X

plus 1/3 Y "". Applying this algebraic expression to the facts of this case, it would be--44,629 plus 25,000 which would again result in minus and,

therefore, no tax is payable under Sub-clause (ii). I am unable to agree that this strained interpretation of these two sub-clauses was ever the

intention in a case where the assessee incurs a loss of income under other heads. As this is a special provision, it has to be logically and

grammatically interpreted and particularly bearing in mind the object of the statute itself, namely, to levy a tax on income. If the interpretation sought

by the petitioner is to be accepted then even though the legislature contemplated the imposition of a tax on capital gains and even though in the

instant case the capital gain was a figure which was susceptible to tax, it would not be brought to tax if the formula suggested by the petitioner was

to be accepted. That would be going against the intendment of the legislature. A harmonious construction is always necessary to further the objects

of the Act which is mainly to impose tax and bring to tax amounts which are liable to tax. In this view also, the principle earlier set out by me and

which has also been referred to by the learned counsel for the department in the circular issued by the Board of Revenue appears to be the logical

way to interpret Section 17(6) of the Income Tax Act of 1922. In this view the rule nisi is discharged and there will be no order as to costs.