1960 PLP 371 (PTD)

"For the purposes of this section and of the rates of tax imposed thereby, the expression `total income' means total income as determined for the purposes of Income‑tax or super- tax, as the case may be, in accordance with the provisions of the Income‑tax Act, 1922, and the expression `earned income' has the meaning assigned to it in clause 6 (AA) of section 2 of that Act." Some five months later, namely, on 24th August, 1951, the Central Board of Revenue issued the following notification :‑ "In exercise of the powers conferred by clause (b) of clause (11) of section 2 of the Income‑tax Act, 1922, (XI of 1922), the Central Board of Revenue is pleased, in the case of all assessees who carried on business in jute during the season 1950‑51 in East Bengal, not having carried on any such business in that Province before the 1st October, 1949, to determine the previous year for the purpose of their assessment for 1951‑52 in respect of that business to be the period of twelve months ending on the 30th June, 1951." By a notice the assessee was required to submit his return for the period commencing from the date on which he had started the new business upto 29th June 1951, that is, for the period for which he had made up his accounts according to Rathajatra year. He, however, added a note saying that the return should be treated as one for the next following year, namely, 1952‑

53. Together with he return he submitted an application under section 26‑A of the income‑tax Act for the registration of his firm alleging that the firm consisted of several partners with defined shares among whom profits of the business had been distributed. The Income‑tax officer, however, made the assessment on the income for the previous year as it had been defined by the notification of the Central Board of Revenue and rejected the application under section 26‑A on the ground that there was no firm and that the assessee was the sole proprietor of both the businesses. The assessee appealed to the Tribunal attacking the assessment on the ground that the Central Board of Revenue had no jurisdiction to determine his previous year which had already been determined by the law when the Finance Act come into force. By a carefully considered order and following an earlier decision of their own the Tribunal held the notification to be ultra vires, cancelled the assessment and rejected the application for registration on the ground that there being no previous year for the assessment 1951‑52 the application was infructious and misconceived. Not satisfied with the correctness of the Tribunal's order the Commissioner of Income‑tax required the Tribunal to state and the Tribunal stated the following two questions for the opinion of the High Court under subsection (1) of section 66 of the Income‑tax Act: (1) whether the notification dated the 24th August 1951 issued by the Central Board of Revenue was legally operative in making the assessment for the year 1951‑52 on all jute cases which had not carried on any such business in East Bengal before the 1st of October 1949 ? (2) If the notification of the Central Board of Revenue dated the 24th August 1951 was legally operative for all new jute cases for the assessment year 1951‑52, whether there was any justification for setting aside the order under section 26‑A? The High Court answered the first question in the affirmative and the second in the negative. These appeals question the correctness of both these answers. It will be evident that the second question arose out of the order made on the application for registration and requires a reply only if the notification of the Central Board of Revenue be held to be valid. As to the first question, namely, whether the impugned notification which was issued by the Central Board of Revenue after the Finance Act had come into force and almost in the middle of the year of assessment, there should be no difficulty in answering it if the general scheme of the income‑tax and its relation with the Finance Act is fully comprehended. The basic feature of the Income‑tax Act is that the various liabilities created by it arise only when their extent is determined by the Finance Act. Section 3 of the Income‑tax Act declares :‑ "Where any Act of Parliament enacts that income‑tax shall be charged for any year at any rate or rates tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm of members of the association individually". The machinery provided by the Act for the enforcement of a liability comes into motion only when the Finance Act determines the rate or fates of tax on the total incomes of different classes of assessees for the previous year. When these rates have beer specified, then by virtue of section 3 tax at those rates has to be charged for the assessment year in question in accordance with the provisions of the Income‑tax Act in respect of the total income, of the previous year of different classes of assessee. If there be no Finance Act, tire; income‑tax Act remains a dormant statue but with the passing of the Finance Act it comes at once into activity and the machinery created by it immediately gets into gear to enforce the liabilities of different classes of assessees. Another point, equally basic, to be remembered in connection with the Income‑tax Act is that once the liabilities of the assessees have come into existence they cannot be altered in quantum, extent or character except by direct retrospective legislation. Thus the sole issue to be determined in this case is whether with the passing of the Finance Act the liability of the assessee had become deter minable under the Income‑tax Act as it then stood, and to this question there can be only one answer, namely, that the assessee had become subject to the liabilities and entitled to the benefits of the Income‑tax Act on 1st April, 1951, when the Finance Act came into force. The assessee's was a new business and the year adopted by him for his accounts extended over a part of the previous financial year and over a substantial part of the current assessment year. The Income‑tax Act defines the previous year as follows :‑ "(11) 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 twelve 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; Provided that where an assessee has once been assessed in respect of a particular source of income, profits and gains, he shall not in respect of that source exercise this option so as to vary the meaning of the expression `previous year' as then applicable to him except with the consent of the Income‑tax Officer and upon such conditions as the Income‑tax Officer may think fit ; or (b) in the case of any person, business or company or class of person, business or company, such period as may be deter mined by the Central Board of Revenue or by such authority as the Board may authorise in this behalf ; or (c) 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 to the last day of the period determined under sub‑clause (b), or, if the accounts of the assessee are made up to some other date than the 31st day of March and the case is not one for which a period has been determined by the Central Board of Revenue under the sub- clause (b), 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 and the next following 31st day of March, it shall be deemed that there is no previous year; and when the assessee is a partner in a firm, `previous year' in respect of his share of the income, profits and gains of the firm means the previous year as determined for the assessment of the income, profits and gains of the firm". It is agreed before us that the relevant provision which determines the previous year in this case is clause (c), the only difference between the assessee and the Department being whether the proviso to this clause is or is not applicable. The assessee's case is that as his business had been set up in the financial year preceding the year for which assessment had to be made, the previous year meant the period from the date of the setting up of the business to the date to which his accounts had been made up. The assessee had the option to adopt either the period ending on 31st day of March or the period ending on the date to which he had made up his accounts. He adopted the latter course as he was entitled to and since the date to which his accounts extended fell after the 31st day of March 1951 the Income‑tax Officer was bound by the Proviso to bold that the assessee had no previous year for the 1951‑52 assessment and that the period for which he had made up the accounts shall be considered to be the previous year for the next succeeding assessment year, namely, 1952‑

53. The only reply that is forthcoming to this contention is the bare assertion that under clause (b) the Central Board of Revenue had the authority to determine in the case of any person or business any period that it liked as the previous year because of the unqualified words used and that in the present case the Board did determine that period. The further result that is sought to be deduced from this proposition is that because a period was determined by the Central Board of Revenue, the assessee had no option to determine his own year, such option by the words of clause (c) being limited only to where "the case is not one for which a period has been determined by the Central Board of Revenue under sub‑clause (b)." The argument has an apparent plausibility but if it is examined with reference to the precise legal position that arises on the passing of a Finance Act and which we have attempted to explain in an earlier part of this judgment, the fallacy underlying it cannot escape detection. We have to apply clause (c) to the position as it existed on 1st April, 1951, and not to the position as it existed when the assessment was made. On 1st April 1951 no period had been determined by the Central Board of Revenue under clause (b), but the assessee's liability had become determinable on that day. Therefore in the absense of any orders by the Board under clause (b) the assessee was entitled to choose his own year of account provided it did not exceed twelve months and this option of his was absolute because no order of the Board of Revenue restricting or curtailing it existed. It was, therefore, immaterial whether he was assessed on 1st April 1951 or on 31st March 1952, because the liability as determined by the Income‑tax Act read with the Finance Act continued to be the same throughout the period unless it was altered retrosectively by an Act of tile legislature. Though the precise point relating to the power of the Central Board of Revenue to change a previous year after the Finance Act has come into force has never come up before any superior Court except in an indirect manner in the inadequately argued case of Messrs Nanak Chand‑Fateh Chand v. The Commis sioner of Income‑tax Punjab and North‑West Frontier Province (2 I T C 167) there are stronger cases which in principle govern the present case. The leading case on this construction of the Income‑tax Act is the judgment of Lord Thankerton in the Privy Council case Maharajah of Pithapuram v. Commissioner of Income‑tax, Madras (A I R 1945 P C 89). In that case several years before the year of assessment the assessee had trans ferred certain assets to his daughters under revocable transfers. The Income‑tax (Amendment) Act VII of 1939 amended the Indian Income‑tax Act, 1922 by providing that income from the assets thus transferred shall be deemed to be the income of the transferor. For the assessment year 1939‑40 the income from the assets transferred by the appellant was included in his own income for the previous year and the contention raised before the Privy Council was that income from the transferred assets was not liable to such inclusion because the transfers had been made long before the Amending Act VII of 1939 which governed the assessment for the year 1939‑40 was passed. The Privy Council repelled this contention and held that the income for which exemp tion was claimed was rightly taxed. The following observations which influenced the decision in that case and which have a direct reference to the point involved in the present case, occur in the short judgment of Lord Thankerton :‑ "In the first place, it is clear to their Lordships that under the express provisions of section 3 of the Income‑tax Act, 1922, the subject of charge is not the income of the year of assess ment; but the income of the previous years" . . . . . . "In the second place, it should be remembered that the income‑tax Act, 1922, as amended from time to time, forms a Code, which has no operative effect except so far as it is rendered applicable for the recovery of tax imposed for a particular fiscal year by a Finance Act" . . . . . . "By subsection (1) of section 6, Finance Act, 1939, income -tax for the year beginning on 1st April, 1939, is directed to be charged at the rates specified in Part I of Schedule 2, and rates of super‑tax are also provided for, and by subsection (3) it is provided that: `For the purpose of this section and of Schedule 2, the expression `total income' means total income as determined for the purposes of income‑tax or super-tax, as the case may be, in accordance with the provisions of the Income‑tax Act, 1922.' . . . . . . This can only refer to the Income‑tax Act, 1922, as it stood amended at the date of the Finance Act, 1939, and necessarily includes the alterations made by the Amending Act, which had already come into force on 1st April 1939." It will have been noticed that the language of the Finance Act applicable to the assessment year of the present case is precisely the same as that of the Finance Act which determined the decision of the case before the Privy Council, the only difference between the two being that whereas in the present case on 1st April 1951 the Board had not issued any order under sub clause (b) and the assessee was therefore entitled to choose his own year, in the case before the Privy Council an amendment had come into force on the date of the Finance Act's coming into force and the income of the previous year had been assessed in accordance with that amendment, though the transactions affected were several years old. The only Indian case directly in point is Scindia Steam Navigation Co. Ltd., Bombay v. The Commissioner of Income‑tax, Bombay, reported in (A I R 1955 Bom. 230) where with his usual versatility in Income‑tax matters, Chagla, C. J. has discussed the inter‑relation of the Finance Act and section 3 of the Indian Income‑tax Act, the exact nature of the liability that arises immediately on the coming into force of the Finance Act and how that liability remains unaffected throughout the assessment year, except by retrospective legislation. In the present case it cannot possibly be contended that the order by the Central Board of Revenue was an act of the legislature affecting rights or liabilities which had already come into existence by the passing of the Finance Act. One result, one need not necessarily use the word "absurd" for it, of the step taken by the Central Board of Revenue was that some of the assessees falling in the same class had become liable to be assessed on one basis while others whom the Income tax Officer chose to assess after the Board's notifications were assessed on an entirely different basis. The second result, actual though by no means inevitable, was that the department itself felt confounded during the next assessment year because for 1952‑53 no assessment was made as the previous year in the case of assessees affected by the notification became undiscoverable. We hold that the High Court was wrong in the view it took and that the answer to question number 1 should have been in the negative. As already stated, in view of this answer it is unnecessary to return an answer to question number 2, and it is sufficient to state that the Tribunal were right in holding that in the case of this assessee there was no previous year for the assessment year 1951‑52, and that the application for registration was superfluous. The costs of this Reference will be borne throughout by the Department. M. N./A. H. Reference answered.