Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 180 of 1970

Judges

Chandurkar
Desai, JJ.

Acts

s. 2(11)(ii) of the Indian I.T Act, 1922,
s. 3(1)(f) of the I.T Act, 1961,
s. 256(1) of the I.T Act, 1961,
person.8. Section 4(1)

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Smart Summary

Summary of Opinion by Chandurkar, J.

Factual and Procedural Background

The assessee (a company) had a previous year for its own income from various sources running from 1 August 1960 to 31 July 1961; the relevant assessment year for that previous year was 1962–63. The assessee was also a partner in the firm "M/s. McKenzies Ltd. & Oriental Timber Trading Corporation P. Ltd." The firm's previous year ran from 1 September 1960 to 31 August 1961; after the firm's income was assessed, the assessee's share of the firm's income for that period worked out to Rs. 1,47,378.

In assessment proceedings before the Income-tax Officer (ITO) the assessee contended that its share of the firm's income accrued on 31 August 1961 (after the assessee's accounting year ended 31 July 1961) and therefore should be assessed in assessment year 1963–64. The ITO rejected that contention.

On appeal the Additional Commissioner of Income-tax (AAC) held — relying on the decision in CIT v. M.S. Sheik Rowther ([1962] 46 ITR 259 (Ker)) — that the share income should be assessed in 1963–64. The ITO challenged the AAC's order in an appeal to the Income-tax Appellate Tribunal. The Tribunal agreed with the AAC (also relying on Rowther) and held the share income assessable in 1963–64.

The revenue referred the following question to the High Court under s. 256(1) of the Income-tax Act, 1961: whether the assessee's share of profit from the firm for 1 September 1960 to 31 August 1961 was assessable in assessment year 1962–63 or in 1963–64.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the share of profit received by the assessee-company from the firm for the year 1 September 1960 to 31 August 1961 was assessable in the assessment year 1962–63 or in the assessment year 1963–64?

Arguments of the Parties

Assessee's Arguments

The assessee contended that its share of the firm's income "accrued" on 31 August 1961 — i.e., after the assessee-company's accounting year ended on 31 July 1961 — and therefore that share should be assessed in assessment year 1963–64, not 1962–63.

Revenue's Arguments (as advanced by Mr. Pandit)

Mr. Pandit submitted that both the assessee-company's other income and the share income from the firm fell to be assessed in assessment year 1962–63.
He argued that the AAC and the Tribunal overlooked the fact that the assessment year relevant to both previous years (the assessee's and the firm's) was 1962–63, and that the mere fact that the firm's previous year ended later (31 August 1961) did not require the share income to be assessed in the subsequent year (1963–64).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. M.S. Sheik Rowther, [1962] 46 ITR 259 (Ker)	The Kerala High Court held that where the firm's accounting year ended after the assessee's accounting year and the relevant assessment years therefore differed, there was nothing in the earlier statute's definition (s. 2(11)(ii) of the 1922 Act) which required assessment in the earlier assessment year; the High Court concluded that if the firm's period ended after 31 March, assessment could be made only in the following year.	The present Court distinguished Rowther: Rowther's ratio applied where the assessment years for the firm's income and the assessee's other income were different. In the present case both previous years fell in the same financial year (1961–62) and the assessment year for both incomes was 1962–63; therefore Rowther was not applicable.

Court's Reasoning and Analysis

The court examined the relevant statutory definitions and charging provisions and then applied those provisions to the facts.

1) Definition of "previous year": The court relied on s. 3(1)(b) of the Income-tax Act, 1961 to describe how a taxpayer may adopt a twelve-month period ending on a date within the financial year as the "previous year" for the purposes of assessment. The court also analysed s. 3(1)(f), which provides that where an assessee is a partner in a firm and the firm has been assessed, the assessee's previous year "in respect of the assessee's share in the income of the firm" is the period determined as the previous year for assessing the firm's income. The effect is that the partner's share income is tethered to the firm's previous year for assessment-year purposes.

2) Charging provision: The court referred to s. 4(1), which charges income-tax for an assessment year "in respect of the total income of the previous year or previous years" of a person. The court emphasised that s. 4(1) permits bringing to tax income from different previous years in the same assessment year.

3) Application to the facts: In the present matter both relevant previous years (the assessee-company's own previous year of 1 Aug 1960–31 Jul 1961 and the firm's previous year of 1 Sep 1960–31 Aug 1961) fell into the same financial year (1961–62), so the assessment year for both incomes was 1962–63. Because s. 4(1) allows aggregation of income from different previous years into the same assessment year, the mere fact that the firm's previous year ended one month after the assessee's did not prevent the share income from being assessed in 1962–63.

4) Distinguishing the precedent: The court explained that the AAC and the Tribunal had relied on the Rowther decision, but that case involved different assessment years for the two streams of income (the firm's accounting year produced an assessment year one year later than the assessee's other income). Since Rowther turned on that difference in assessment years, its ratio did not apply where (as here) both previous years produced the same assessment year.

5) Conclusion of analysis: Because both incomes were properly within assessment year 1962–63, the AAC and the Tribunal were in error in holding otherwise.

Holding and Implications

Holding: The reference is answered by holding that the share of profit received by the assessee-company from the firm for 1 September 1960 to 31 August 1961 was assessable in assessment year 1962–63.

Implications and direct effects:

The court found that both the AAC and the Appellate Tribunal erred in holding that the share income could not be brought to tax in assessment year 1962–63.
The practical effect on the parties is that the assessee's share of the firm's profit for the stated period is to be assessed in assessment year 1962–63, and the assessee is ordered to pay the costs of the reference.
The opinion distinguishes the earlier Rowther decision on its facts; the Court's decision does not purport to lay down a broader novel principle beyond applying the existing statutory definitions (s. 3(1)(b) and (f)) and the charging section (s. 4(1)) to the facts before it.

This summary has been prepared strictly from the contents of the provided opinion and does not add facts or inferences that are not present in the text.

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Commissioner Of Income-Tax, Bombay City-Ii v. Mckenzies Ltd.

Chandurkar, J.:— The assessee derived income from various sources in the previous year which commenced from 1st of August, 1960, and ended on 31st of July, 1961. The relevant assessment year for this previous year was 1962–63. The assessee was also a partner in the firm of “M/s. McKenzies Ltd. & Oriental Timber Trading Corporation P. Ltd.” The previous year of the partnership firm was 1st September, 1960, to 31st August, 1961, and in the relevant assessment year 1962–63, after the income of the firm was assessed to tax, the assessee's share income from the firm for the said previous year, that is, 1st September, 1960, to 31st August, 1961, worked out to Rs. 1,47,3781 In the assessment proceedings before the ITO, the assessee had contended that the share income from the firm accrued on 31st August, 1961, that is, after the close of the relevant accounting year of the assessee, on 31st July, 1961. Therefore, according to the assessee, the share income should be included in the assessment for the assessment year 1963–64 and not 1962–63. This contention was rejected by the ITO.

2. In appeal, the AAC taking the view that the facts in the case of the assessee being similar to the facts in the decision in CIT v. M.S Sheik Rowther, [1962] 46 ITR 259 (Ker), held that the share income had to be assessed in the assessment year 1963–64 and not in 1962–63. The ITO challenged this order of the AAC by an appeal before the Income-tax Appellate Tribunal. The Tribunal seems to have taken the view that the previous year in respect of other sources of income of the assessee ended on 31st July, 1961, and since the previous year in respect of the share income from the firm was 1st September, 1960, to 31st August, 1961, the share income cannot be said to have accrued or arisen to the assessee within the previous year adopted by it for the purposes of assessment. The Tribunal also took the view that the decision in Rowther's case, [1962] 46 ITR 259 (Ker) would govern the case of the assessee and, therefore, the share income of the assessee from the firm was assessable in the hands of the assessee in the assessment year 1963–64.

3. Arising out of this order of the Tribunal, the following question has now been referred to this court under s. 256(1) of the I.T Act, 1961, at the instance of the revenue:

“Whether, on the facts and in the circumstances of the case, the share of profit received by the assessee-company from the firm of ‘Messrs. McKenzies Ltd. & Oriental Timber Trading Corporation ‘, for the year September 1, 1960, to August 31, 1961, was assessable in the assessment year 1962–63 or in the assessment year 1963–64?”

4. Mr. Pandit appearing on behalf of the revenue has argued that both the AAC and the Appellate Tribunal have overlooked the fact that the share income of the firm and the income of the assessee-company from other sources both accrued in the relevant assessment year 1962–63 and, according to Mr. Pandit, merely because the previous year of the firm ended on 31st August, 1961, that is, after the end of the previous year of the assessee-company, the share income need not necessarily be included in the assessment year subsequent to the assessment year 1962–63.

5. On a perusal of the relevant provisions of law it appears to us that the Tribunal has overlooked the important fact that the assessment year in respect of both the previous years, that is, the previous year of the firm and the previous year of the assessee-company was 1962–63. The relevant clause in s. 3 which defines “previous year “is cl. (b) of s. 3(1), which reads as follows:

“For the purposes of this Act, ‘previous year’ means,—…

(b) if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of the assessee, the twelve months ending on such date.”

6. So far as the assessee-company was concerned, the previous year, as already pointed out, would be 1st August, 1960, to 31st July, 1961, and the relevant assessment year in respect of this previous year, it is not disputed, would be the assessment, year 1962–63. Clause (f) of s. 3(1) deals with the previous year in the case of an assessee who is a partner in a firm and cl. (f) states that “previous year” means, where the assessee is a partner in a firm and the firm has been assessed as such, then, in respect of the assessee's share in the income of the firm, the period determined as the previous year for the assessment of the income of the firm. The effect of cl. (f) is that whatever is the previous year for the assessment of the income of the firm, is statutorily made the previous year of the partner in respect of his share in the income of the firm. Thus, if an assessee has income from other sources, he may have a different previous year. But if he lis a partner in a firm whose income has been determined, then so far as the share income is concerned, the assessment year in respect of such income Will be the same as the assessment year of the firm. The question is, where such is the position, that is, where an assessee has a different previous year in respect of his other income and the previous year in respect of his share income from the firm is the same as the previous year of the firm, must the income of the assessee by way of his share in the income of the firm be brought to tax in a later assessment year if the previous year in respect of the firm-income ends after the previous year in respect of his other sources?

7. It is necessary to refer to s. 4, which is the charging section, and the main part of s. 4(1) reads as follows:

“Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-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 or previous years, as the case may be, of every person.”

8. Section 4(1) refers to the total income of the previous year or previous years. It is, therefore, made permissible by s. 4 to bring to tax income from different previous years in the same assessment year. In the instant case, as already pointed out, the assessment year in respect of both the previous years is 1962–63. The fact that the previous year of the firm ended on 31st August, 1961, after the previous year in respect of the other income of the assessee ended on 31st July, 1961, did not make any difference so far as the assessment year is concerned. In respect of both the incomes though the previous years were different, the assessment year would be 1962–63. As pointed out, it was permissible under s. 4 to bring to tax income of different previous years in the same assessment year. If in respect of both the incomes the assessment year was 1962–63, those incomes could properly be brought to tax in the assessment year 1962–63.

9. The AAC and the Tribunal seemed to have relied on the decision in Rowther's case, [1962] 46 ITR 259 (Ker). The facts of that decision clearly showed that the relevant assessment years in respect of the share income and income from other sources were different. The accounting year of the firm of which the assessee was a partner closed on 30th April, 1958, and the assessee's share income was, therefore, determined for the year ending 30th April, 1958. The relevant assessment year of the firm was, therefore, 1959–60. The accounting year of the assessee for income from other sources was 1957–58 ending on 31st March, 1958. The relevant assessment year for this income was 1958–59. The question was whether the share income of the assessee in the firm was assessable in the assessment year 1958–59 or in the following year 1959–60. Referring to the definition of “previous year” in s. 2(11)(ii) of the Indian I.T Act, 1922, which is similar to the definition in s. 3(1)(f) of the I.T Act, 1961, the Kerala High Court took the view that there was nothing in s. 2(11)(ii) which required that the assessment should be in the year 1958–59, and so the share income was not assessable in the hands of the assessee in the assessment year 1958–59. The High Court took the view that the assessment for the year 1958–59 must be in relation to the income during a period of twelve months which ended on or before 31st March, 1958, and if the period ended at any time after 31st March, 1958, the assessment can be made only in the following year. The Tribunal seems to have overlooked an important distinguishing feature in Rowther's case, [1962] 46 ITR 259 (Ker) which distinguished it from the facts of the present case. It is no doubt [true that both in Rowther's case and in the case before us, the previous year in respect of the firm ended one month later than the previous year in respect of other sources of income of the assessee. But what is important to be noticed is that the previous year in respect of the share income from the firm ended in the financial year 1958–59 in Rowther's case, [1962] 46 ITR 259 (Ker), while in the case of income from other sources, the previous year was 1957–58. Thus, the assessment year in respect of income from other sources was 1958–59, while the assessment year for the income of the firm and share income was 1959–60. Such was not the position in the case before us. Both the previous years, that is, the previous year of the firm and the previous year in respect of other sources of income of the assessee, fell in the financial year 1961–62 and the relevant assessment year in respect of both the previous years would be 1962–63. The ratio of Rowther's case, [1962] 46 ITR 259 (Ker) was, therefore, clearly not applicable to the case before us.

10. It is apparent, therefore, that both the AAC and the Tribunal had erred in holding that the share income of the assessee could not be brought to tax in the assessment year 1962–63. Consequently, the question referred to us must be answered by holding that the share of profit received by the assessee company from the firm of “McKenzies, Ltd. & Oriental Timber Trading Corporation Pvt. Ltd.” from 1st September, 1960, to 31st August, 1961, was assessable in the assessment year 1962–63. The reference is answered accordingly. The assessee to pay the costs of this reference.

Commissioner Of Income-Tax, Bombay City-Ii v. Mckenzies Ltd.

Summary of Opinion by Chandurkar, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's Arguments (as advanced by Mr. Pandit)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax, Bombay City-Ii v. Mckenzies Ltd.

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