P L D 1961 (W (PLP)

S. A. MAHMOOD, J.--‑This is a reference under section 66 (1) of the Income‑tax Act at the instance of Mr. A. C. Macnab, I. C. S., who was Financial Commissioner in the former Province of Punjab and having proceeded on leave preparatory to retirement in December 1946, retired from service. He did not return to British India and has been assessed on his foreign income accruing to him in the United Kingdom during the accounting year 1946‑47. 2. The Income‑tax Officer took up the matter of assessment of the income of Mr. Macnab for the assessment year 1947‑48 in respect of his income during 1946‑47 and in doing so, he added to his income from his salary from which income‑tax had been deducted at source, a sum of Rs. 36,277 being his foreign income arising in the United Kingdom. Dissatisfied with the inclusion of his foreign income in the total income, Mr. Macnab appealed unsuccessfully to the Appellate Assistant Commissioner and the Income‑tax Appellate Tribunal, Pakistan. He then moved the Tribunal under section 66 (1) of the Income‑tax Act by an application requiring it to refer to the High Court the question of law whether his foreign income could be included in the total income in computing the total world income during 1946‑47 for the assessment year 1947‑48, when he was not resident in British India during the assessment year. Though the Tribunal was of the view that the answer to the question to be referred to the High Court was obvious, it felt bound to refer the question to the High Court as a question of law did arise. The following question has been formulated and referred to this Court for opinion:-- "Whether, in view of the admitted fact that the assessee was 'resident and ordinarily resident' in the relevant 'previous year' he has been rightly treated as 'resident and ordinarily resident, within the meaning of sections 4‑A and 4‑B of the Act for purposes of assessment for the charge year 1947‑48?" 3. For a clarification of the question involved it is necessary to state that the tax levied on the salary earned by the assessee in British India and the figure of foreign income earned in the United Kingdom are not in dispute. It is also admitted that Mr. Macnab left British India on the 26th of December 1946. What is objected to is the inclusion of his income accruing in the United Kingdom on the ground that it was never received in British India and that he cannot be deemed to be a resident under section 4‑A of the Income‑tax Act. The precise contention raised before us is the same as was raised before the Income‑tax Appellate Tribunal, Pakistan, on appeal. Mr. Norman Edmunds, learned counsel for the assessee, argued that as the opening words of section 4 of the Income‑tax Act are "subject to the provisions of this Act", the obvious intention is that it is controlled by other provisions in the Act, namely, section 4‑A, that as the words "such year" accruing in section 4 (1) (b) mean not the previous year as mentioned in section 4, but any year, and as in clause (a) of section 4‑A the Legislature has chosen to say "any individual is resident in British India in any year if he" and thereby used a present tense, it clearly follows that the assesses ,q should be a resident in British India during the assessment year, when the assessment is being made and that it is not the intention that the assessee is liable if he was a resident of British India during the account year, for if this had been the intention of the Legislature the word "was" should have been used. According to him, the construction of the sentence would be grammatically wrong if what was intended was "resident during the account year" and not the assessment year. On the plain construction of sections 4 and 4‑A of the Income‑tax Act, the argument is difficult to accept. 4. Section 3 of the Income‑tax Act is the charging section. The basic feature of the Act is that the various liabilities created by it arise only when their extent is determined by the Finance Act. The machinery provided by the Act for the enforcement of a liability comes into motion only when the Finance Act determines the rate or rates of tax on the total incomes of different classes of assessees for the previous year. When these rates have been 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 assesses (Radhashyam Agarwala v. The Commissioner of Income‑tax, East Pakistan (Central Secretariat) Dacca (PLD 1960SC 187: 1960PTD371)). Thus, the rate of tax for the accounting year is fixed at the close of the previous year and the assessment has necessarily to be made after the close of that year. It arises not later than the close of the previous year, though quantification B of the amount is postponed. The fact of residence or non‑, residence becomes established, though not formally ascertained, at the close of the previous year. The legislation, therefore, purport is to tax a company which when the liability arose, specified one or other of the conditions set forth in the definition of "residence". This is the principle stated by the Privy Counsel in Wallace Brothers & Co. Ltd. v. The Commissioner of Income‑tax, Bombay City and Bombay Suburban District (PLD1948PC67: 1960PTD934). The principle is equally applicable to individuals. The total income is defined in section 2 (15) of the Act as total amount of income, profits and gains referred to in subsection (1) of section 4 computed in the manner laid down in the Act and total world income includes all income, profits and gains wherever accruing or arising except income to which, under the provisions of subsection (3) of section 4, this Act does not apply and except any capital gain which is not includible in the total income of an assessee. Section 4 (1) refers to the classes of income and provides for their assessment on a basis which differs according as the assessee is or is not "resident" or "ordinarily resident" in British India during the previous year of which the income falls to be assessed. It is accordingly with reference to that year, i.e., the previous year, that the various tests of resident or ordinarily resident as defined in sections 4‑A and 4‑B have to be applied (The Commissioner of Income‑tax, Madras v. V. E. K. R. Sayumiamurthy ((1946) I T R185.)). 5. For the purposes of the present case, section 4 (1) (b) (ii) of the Income‑tax Act provides that subject to the provisions of the Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived, which if such person is resident in British India during such year accrue or arise to him without British India during such year. This provision makes it plain that the total income of Mr. Macnab during the previous year is to include income, profits and gains from whatever source derived and is to include income accrued or arisen without British India during such year, if he was resident in British India during such year. For purposes of determining whether he was resident in India during the previous year, section 4‑A (a) (f) of the Income‑tax Act enacts that any individual is resident in British India in any year if he is in British India in that year for a period amounting in all to one hundred and eighty two days or more, and under its clause (ii) if he maintains or has maintained for him a dwelling place in British India for a period or periods amounting in, all to one hundred and eighty‑two days or more in that year, and in British India for anytime in that year,1 Mr. Macnab was resident in British India up to the 26th of December 1946 during the accounting year 1946‑4,7 and as he also maintained a dwelling place therein, he was resident in British India as defined in section 4‑A (a) (b) and (ii), and consequently under section 4 (1) of the Income‑tax Act his total income during 1946‑47 is to include income, profits and gains from whatever D source derived including those which accrued to him without, British India during such year. No other interpretation of these provisions is possible. Mr. Norman Edmunds, however, argued that as section 4‑A provides that any individual is resident in British India, it means that he has to be resident in present in the year of assessment. The word `is' in the present tense has no particular significance. The words used are "any individual is resident in British India in any year if he is in British India in that year. " These words merely define what `resident' means for the purposes of Act, and do not refer to the assessment year at all. If it has to be determined whether an individual is a `resident' in any years, then he is to be deemed to be resident if he is in British India in the accounting year, for the defined period or has maintained a dwelling house in British India. The words "that year" in it clauses (i) and (ii) refer to "any year," in its clause (a), which in turn relate to the "previous year" mentioned in sections 3 and 4 of the Income‑tax Act. If the words "is in British India in that year" are read along with clause (a) and sections 3 and 4 of the Act, there is no difficulty in concluding that residence has reference to the accounting year and not to the assessment year. The assessee s residence or maintenance of a dwelling house during the assessment year is entirely immaterial for the purpose as his total income for the accounting year has to be calculated for the years previous to the relevant Finance Act, which lays down the quantum of his liability and sets in motion provision of the Income‑tax Act. Sections 3 and 4 (1) of Income‑tax Act clearly refer to the previous years' income. The arguments of the learned counsel for the assessee taken to its logical conclusion mean that the assessee's liability to be taxed depends 'upon his residence in the country in the year in which the Income‑tax Officer happens to assess him and not to relation to the "previous year" i.e., the "accounting year" and this is an untenable position. 6. Learned counsel for the assessee also pointed out that section 2 (15) of the Income‑tax Act separately mentions total income and total world income. This provision defines total income and goes on to mention total world income. It does not advance the case of the assessee in any way. It was not argued that total world income is different from total income used in section 4(1) of the Act and that world income cannot be included in total income under section 4(1) of the Act. 7. In view of what we have stated above, our answer to the question referred to the Court is in the affirmative. The assessee shall pay the costs of this reference to the Department. M. N.Reference answered in affirmative.