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Judgment
Alfred Henry Lionel Leach, C.J.—This reference has been made by the Commissioner of Income Tax, Madras, in accordance with a
direction given to'' him by this Court u/s 66(3) of the Indian Income Tax Act, 1922.
The reference involves the interpretation of Section 25(3) of the Act.
The petitioner and his brothers were members of an undivided Hindu family, and when joint the family carried on a money-lending business in
India and in the Federated Malay Slates. The business was of long standing and had been assessed to Income Tax under the Act of 1918. On the
2nd June, 1938, the joint status was severed. Thereafter the members of the family continued the business in the same places as partners. The
financial year with which this reference is concerned commenced on the 13th April, 1938. On the 22nd December, 1939, the petitioner claimed
that the income of the family from the 13th April, 1938, to the 2nd June, 1938, was not liable to be taxed by reason of the provisions of Sub-
sections (3) and (4) of Section 25. The Income Tax Officer accepted the petitioner''s statement that there had been a partition, but he rejected the
contention that the family was not liable to pay the tax on the profits earned between the 13th April and the and June, 1938. The petitioner
appealed to the Appellate Assistant Commissioner who agreed with the Income Tax Officer. The petitioner then asked the Commissioner to make
a reference to the Court u/s 6.6.(2) and as the Commissioner refused to do so, the petitioner moved the Court for an '' order under Sub-section
(3) of that section directing the Commissioner to make a reference. The Court directed the Commissioner to refer for decision the following
question:
Whether the income of the family from the 13th April, 1938, to the and June, 1938, is not liable to be taxed by virtue of Section 25(3) of the
Income Tax Act? "" In his statement of the case the Commissioner has suggested that the application of the petitioner made to the Income Tax
Officer on the 22nd December, 1939, was out of time, and it is necessary to decide this question as well, because naturally the Court is not
prepared to embark upon an academic discussion of the question referred if the petitioner has delayed beyond the period allowed by law in raising
his objection. To decide the question of limitation .regard must be had .to the provisions of Sub-section (5) as well as the provisions of Sub-section
(3) of Section 25. Sub-section (3) reads as follows:
Where any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income Tax Act, 1918, is
discontinued, then, unless there has been a succession by virtue of which the provisions of Sub-section (4) have been rendered applicable, no tax
shall be payable in respect of the income, profits and gains of the period between the end of the previous year and the date of such discontinuance,
and the assessee may further claim that the income, profits and gains of the previous year shall be deemed to have been the income, profits and
gains of the said period. Where any such claim is made an assessment shall be made on the basis of the income, profits and gains of the said
period, and if an amount of tax has already been paid in respect of the income, profits and gains of the previous year exceeding the amount payable
on the basis of such '' assessment, a refund shall be given of the difference.
Sub-section (5) states:
No claim to the relief afforded under Sub-section (3) or Sub-section (4) shall be entertained unless it is made before the expiry of one year from
the date on which the business, profession or vocation was discontinued or the succession took place, as the case may be.
The Commissioner says that by his application of the 22nd December, 1939, the petitioner was claiming ""relief"" under Sub-section (3) and as
the application was made more than one year from the date on which the family ceased doing business? as a family the sands had rim out. On the
other hand, the petitioner says that the word "" relief"" in Sub-section (5) has, so far as Sub-section (3) is concerned, reference only to the words
and the assessee may further claim that the income, profits and gains of the previous year shall be deemed to have been the income, profits and
gains of the said period "" which are to be found therein. He points to the fact that Sub-section (3) states emphatically that a business on which a tax
was charged under the provisions of the Act of 1918 shall not be chargeable in respect of the income of the period between the end of the
previous. year and. The date of discontinuance and he says that ""relief"" cannot be contemplated in this connection because it must be presumed
that the Income Tax Officer will Carry out his duties in accordance with the provisions of the Act. Besides being exempt from tax during this
peviod the assessee is allowed to claim a refund if an amount of tax has already been paid in respect of the income of the previous year exceeding
the amount payable on the basis of the income received in the year of discontinuance. He is entitled to recover the whole of the difference. It is said
that it is here that a provision for relief is necessary and Sub-section (5.) has been inserted in order to impose a time limit.
In my judgment the petitioner''s contentions are sound. The Legislatuue could only contemplate the Income Tax Officer doing his duty and
therefore would not consider it necessary to provide for "" relief''"" against an illegal order. The provisions to be found in the Act with regard to
appeal and reference are there for that purpose. Under the Act of 1918 an assessee paid the tax for a particular year on the income actually
earned in that year. The Act of 1922 effected a great change. An assessee now pays the tax in the year of assessment on the income earned in the
previous year. Sub-section (3) of Section 25 of the present Act is designed to prevent the injustice of double taxation and in order to do this it is
necessary to give the assessee a refund should his income in the year of discontinuance be less than his income for the previous year. It seems to
me that it is only in this connection that the word ""relief"" is used in Sub-section (5).
Turning now to the main question, in Commissioner of Income Tax, Madras v. Karuppiah (1937) 2 M.L.J. 43 : L.R. 64 IndAp 102 : ILR
(1937) Nag. 191 (P.C.) this Court held that where a partner carried on the business of the partnership after its dissolution he succeeds to the
business within the meaning of Section 26(2) and can be assessed to tax in respect of the profits of the business for the previous year. This decision
applies in the present case and the partnership must be deemed to have succeeded to the business of the family. This is not disputed, but the
petitioner says that Sub-section (3) of Section 25 stands alone and that the word ""discontinued"" should not be read as ""cessation"" of business.
Here reliance is placed on the decision of the Bombay High Court in Commissioner of Income Tax, Bombay v. P.E. Polson ILR (1942) Bom. 216
where this argument was accepted. The Bombay High Court considered that the word ""discontinued"" by itself, and if not controlled by the context,
would cover a discontinuance by disposal.
I find myself unable to share this opinion. In the first place, the same word is used in Section 44 which says that where a business, profession or
vocation carried on by a firm or association of persons has been discontinued, or where an association of persons is dissolved, every person who
was at the time of discontinuance or dis-solution a partner or a member shall, in respect of the income, profits and gains of the firm or association,
be jointly and severally liable to assessment under Chapter IV and for the amount of tax payable. This section clearly deals with a case of cessation
of business. The word ""discontinued"" in Sub-section (3) of Section 25 cannot be given a different meaning from the meaning it has in Section 44
unless the context in Sub-section (3) demands it, and I can find nothing in subsection (3) which would warrant the Court departing from this well
accepted rule of construction. On the other hand, I consider that the words "" then, unless there, has been a succession by virtue of which the
provisions of Sub-section (4) have been rendered applicable"" which follow the word ""discontinued"" in Section 25(3) give strong indication that the
word ""discontinued"" there means ""cessation"". As already pointed out, Sub-section (3) has been inserted merely for the purpose of preventing
double taxation.
Full support for this opinion is to be found in the judgment of Scrutton, J., in Bartlett v. Inland Revenue Commissioners (1914) 3 K.B. 686
where it was held that if the owner of a business sells it to a company, the business is not discontinued within the meaning of Section 24(3) of the
Finance Act, 1907, which provides. that where a profession, trade, or vocation is discontinued, a person charged or chargeable with Income Tax
in respect of that profession, trade or vocation shall be chargeable on the actual amount of the profits or gains arising from the profession, trade or
vocation in that year. It was there argued that the appellant''s trade having been discontinued in the year, he was only Chargeable on the actual
amount made in that year, and . there was no power to go back to the three years'' average. In dealing with this contention Scrutton, J., said:
The answer to that appears to me to be very simple. The trade was not discontinued in the year. The trade was sold to a company and continued
during the whole year.
In the present case the business was continued by the same persons, not as members of a joint family, but as partners.
For these reasons, I hold that the income of the family from the 13th April, 1938, to the 2nd June, 1938, is liable to be taxed by virtue of
Section 25(3), and I answer the reference accordingly. The Commissioner is entitled to his costs, which I would fix at Rs. 250.
Patanjali Sastri, J.
I agree that the reference should be answered as suggested in the judgment just delivered by my Lord. In view, however, of the different
opinion expressed by the Bombay High Court in P.E. Polson, In re,1 which was strongly pressed upon us by the assessee''s learned counsel, I
wish to add a few observations.
The question is whether Section 25(3) of the Indian Income Tax Act, 1922, as amended by the Indian Income Tax (Amendment) Act, 1939,
providing for certain reliefs in cases of discontinued business, etc., charged to tax under the Indian Income Tax Act, 1918, applies when a Hindu
undivided family carrying on business becomes disrupted and the members continue the business thereafter as partners; in other words, does the
discontinuance which the provision has in view refer only to the closing down or extinguishment of a business, etc., or cover succession to a
business which is continuing. The question of discontinuance or succession was of special importance in England in view of the basis of taxation
being different in either case vide Rules 8(2) and 11 of the Rules applicable to Cases I and II, Schedule D of the Income Tax Act, 1918 and the
terms have acquired well-recognised meanings in Income Tax usage. (See Bartlett v. Inland Revenue Commissioners ILR (1942) Bom. 216 and
M. Faraday and others v. Carter. They have accordingly been adopted in the Indian Income Tax Act, 1922, as denoting two different situations
for which the Act makes separate provisions in Sections 25 and 26, and before the Amendment Act of 1939 was passed the Courts in this
country, including the Bombay High . Court had uniformly held that ""discontinuance"" for the purpose of Section 25 did not cover mere change of
ownership. (See Commissioner of Income Tax, Bombay v. Sanjana and Co., Ltd. I.L.R.(1925) 50 Bom. 87 HANUTRAM BHURAMAL Vs.
COMMISSIONER OF Income Tax, BIHAR AND ORISSA., , HANUTRAM BHURAMAL Vs. COMMISSIONER OF Income Tax,
BIHAR AND ORISSA., . But it is argued--and the argument was accepted by the Bombay High Court in the case already referred to--that the
amendments introduced in Sections 25 and 26 by the Act of, 1939 now compel a different interpretation of the term in Section 25(3). It seems to
me, however, with all respect, that the well-marked distinction for purposes of assessment between discontinuance and succession has not been
obliterated by the recent amendments and that it would lead to considerable confusion in working the Act if the provisions specifically relating to
the one were understood as applicable to the other. For instance, Section 25(1) provides for an accelerated assessment when a business, etc.,
which was not at any time charged under the Act of 1918 is ""discontinued "", evidently as a safeguard against risk to revenue which the delay in
assessing a person who is no longer in business involves as such person might disappear or become insolvent before the normal time for
assessment arrives. Now if ""discontinuance"" is to be understood as covering change of ownership--the word must obviously have the same
meaning in both Sub-section (1) and subsection (3)--the special procedure indicated in Section 25(1) would become applicable to cases of
succession, for which, however, specific provision is made in sec-tion 26(2) for an apportioned assessment in the normal course, i.e., in the year
following the succession, with different safeguards for the protection of revenue in the contingencies aforementioned. This would result in an
incoherent scheme of assessment.
Turning now to the amendments introduced by the Act of 1939 on which the assessee''s learned counsel relies in support of his contention, it is
true that Section 26(2) has been amended so as to provide, in the case of a succession in business, etc., for the assessment of the predecessor and
the successor each in respect of his actual share of the profits of the previous year, instead of, as before, assessing the successor in respect of the
profits earned even by the predecessor. The predecessor having thus been made liable for tax in respect of his share of profits in the year of
succession, it is only fair that he should be relieved from this burden, in cases where his business, etc., had been charged under the Act of 1918,
for precisely the same reason as in the case of discontinuance of a business, etc.,so charged, namely, to redress the hard-ship involved in the
assessment of the profits of the year 1921-22, twice over, once in that year as the income thereof on adjustment under the Act of 1918, and once
in the next year as the income of the previous year under the Act of 1922. Hence the enactment of the new Sub-section (4) of Section 25
extending the benefit conferred u/s 25(3) to cases of succession to a business, profession, etc., charged under the Act of 1918. This provision,
however, would make it possible for the relief in respect of the double assessment referred to above being claimed more than once if the change of
ownership occurred after 1st April, 1939, once by the predecessor at the time of succession and once by the successor when the latter closes
down the business in any subsequent year. This had to be provided against, as such relief has to be granted only once and that to the predecessor
who suffered the double assessment, and Section 25(3) was accordingly amended so as to exclude the successor from its benefits when he
discontinues the business subsequently as, so far as he is concerned, he will have suffered tax only for the exact number of years for which he has
carried on the business. Hence the insertion of the words "" then unless there has been a succession by virtue of which the provisions of subsection
(4) have been rendered applicable "" after the word ""discontinued"" in Sub-section (3). The learned Judges in P.E. Poison, In re1, apparently
thought that this exception applied only where succession and subsequent discontinuance both occurred in the same year as they referred to it as
contemplating a case "" very unlikely to occur but at the same time possible."" But the exception clearly covers a wider ground and operates to
exclude the successor from the benefits of the subsection whenever he may discontinue the business.
Such being the objects and reasons of the relevant amendments introduced in 1939, I find it difficult, with all respect, to see why they should
be regarded as having the effect of widening the scope of the term ""discontinuance"" in Section 25(3) so as to cover cases of succession. It is true
that after the amendments the predecessor in the case of a change of ownership is put on the same footing as if he had closed down his business on
the date of succession for purposes of relief in respect of the double assessment of the profits of 1921-22. But this is done by enacting the new
Sub-section (4) of Section 25 which provides such reliefs subject to the condition that the predecessor is one who was carrying on the business,
profession, etc., at the commencement of the Amendment Act. To ignore this condition and to bring the case of a succession occurring before the
commencement of that Act within the purview of Section 25(3) as covered by the word "" discontinued ""seems to me opposed alike to sound
canons of construction and to the scheme of assessment laid down in the principal Act. It�must be remembered that in England a provision for
apportionment of the tax burden between the predecessor and the successor in cases of succession (rule 9 of the rules applicable to cases I and II,
Schedule D, of the Income Tax Act, 1918, corresponding to Section 2, Taxes Management Act, 1800) has been in existence side by side with a
provision for relief in cases of discontinuance Rule 8(2) of the same rules corresponding to Section 25(3), Finance Act, 1907, but this has not,been
considered to warrant the wider interpretation of the word ''discontinued'' favoured by the Bombay High Court (see Bartlett v. Inland Revenue
Commissioners ILR (1942) Bom. 216 and M. Faraday and Ors. v. Carter (1914) 3 K.B. 686 already referred to).
The question of limitation raised by the Commissioner of Income Tax turns on the proper interpretation of the newly introduced Sub-section
(5) of Section 25 which provides:
That no claim to the relief afforded by Sub-section (3) or Sub-section (4) shall be entertained unless it is made before the expiry of one year from
the date from which the business, profession or vocation was discontinued or the succession took place as the case may be.
It will be seen that Sub-sections (3) and (4) of Section 25, provide for two concessions in respect of a business, etc., charged under the Act of
1918, namely, (1) an exemption from tax of the income of the period between the end of the previous year and the date of the discontinuance or
succession and (2) an adjustment, at the option of the assessee, of the tax levied on the income of the previous year with reference to the profits of
the said period and a refund of the excess tax if any, already collected. In the present case the petitioner sought only concession (1). To obtain that
concession, the assessee does not have to call upon the Income Tax Officer to do anything. The Act exempts the income of the period in question
and the Officer has merely to take note of the exemption and abstain from assessing such income; while for concession (2) the assessee has to
make a ""claim"" before the Officer, as it involves the Officer doing something, namely, an assessment of the income of the said period and
adjustment of the tax paid on the income of the previous year with reference to the income so assessed and a refund of the excess tax, if any,
already paid. If the Income Tax Officer has to take action in this manner for granting this relief, it stands to reason that a time limit should be
imposed for a claim to be made in that behalf, as the task of making a proper assessment for the relevant period might become increasingly difficult
with the lapse of time. But what reason could there be for imposing a time limit for asking the Income Tax authorities to abstain from doing a thing
which the Act directs them not to do? A time limit for this purpose would, indeed, mean that the Income Tax authorities would be free to disregard
the plain duty imposed on them by the Act, leaving the assessee without a remedy, if only they assess and levy the tax on the exempted profits,
either u/s 23 or Section 34, after the expiry of the time limited. It seems to me that a construction of Section 25(5) which leads to such anomalous
results ought not to be readily accepted. It is said that the word ""relief"" is wide enough to cover both the benefits afforded under Sub-sections (3)
and (4). It may be so in ordinary usage uncontrolled by context, though the assessee may well retort that not much relief is afforded to him when
the Crown, having already taxed him for as many years as he carried on the business, merely abstains from taxing once more. But in the context of
Section 25 I am of opinion that it would be a reasonable construction of the words ""claim to the relief afforded under Sub-section (3) or Sub-
section (4)"" to hold that they refer only to the relief by way of adjustment of the tax levied on the income of the previous year and the consequential
refund, if any, for which the assessee has to make a ""claim"" under Sub-sections (3) and (4). The plea of limitation cannot therefore prevail. I concur
also in the order for costs.