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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • M.N Chandurkar
  • M.H Kania, JJ.
Acts
  • provisions of the Indian I.T Act of 1922,
  • INCOME TAX ACT 1961
  • s. 256(1) of the I.T Act, 1961
  • Indian I.T Act, 1922,
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Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • M.N Chandurkar
  • M.H Kania, JJ.
Acts
  • provisions of the Indian I.T Act of 1922,
  • INCOME TAX ACT 1961
  • s. 256(1) of the I.T Act, 1961
  • Indian I.T Act, 1922,
See more information ...
Smart Summary

Structured Summary of the Opinion (Kania, J.)

Factual and Procedural Background

This is a reference under section 256(1) of the Income-tax Act, 1961. The reference arises from an appeal to the Income-tax Appellate Tribunal (the Tribunal) against assessment orders relating to the assessment year 1963-64. The assessee was a resident of Daman (a territory formerly Portuguese) and dealt in foreign goods. In the original assessment the ITO attributed sales to Daman, Bombay and other unspecified places and applied the proviso to section 145 to estimate gross profits, leading to additions to the assessee's disclosed income. The AAC revised the gross profit estimate on appeal, and the assessee appealed to the Tribunal. Before the Tribunal the assessee abandoned several earlier contentions but relied on paragraph 5(1) of the Dadra and Nagar Haveli and Goa, Daman and Diu (Taxation Concessions) Order, 1964 (the Taxation Concessions Order, 1964) to contend that income which accrued to him in Daman was not taxable under the Income-tax Act, 1961. The Tribunal accepted that contention and also held that an appeal against the assessment order as a whole could include a challenge to the imposition of penal interest under sections 139(1) and 217. The Tribunal's decision gave rise to the two questions referred under s. 256(1).

Background statutory facts relevant to interpretation included: Daman was liberated in December 1961 and the Income-tax Act, 1961 was extended to Daman by the Taxation Laws (Extension to Union Territories) Regulation, 1963 effective 1 April 1963; the Taxation Concessions Order, 1964 came into force on 20 February 1964 to alleviate hardships and double taxation resulting from extension of Indian tax law to the territory; paras. 5 and 6 of that Order contained concessions for persons resident or carrying on business in Daman before the appointed day.

Legal Issues Presented

  1. Whether the Tribunal was right in law in holding that income which accrued to the assessee in Daman (the Union Territory) cannot be included in the total income of the assessee for the purposes of determining the rate of tax under the Income-tax Act, 1961 read with the Taxation Concessions Order, 1964, for the year under reference?
  2. Whether the Tribunal was right in law in holding that the assessee can challenge the levy of penal interest under sections 139(1) and 217 of the Income-tax Act, 1961 in the appeal if the appeal is filed against the order of assessment as a whole and that, in the instant case the assessee, having challenged the assessment order as a whole, was entitled in law to challenge the levy of interest on the ground of the same being bad in law?

Arguments of the Parties

Department (Mr. Joshi)

  • After extension of the Income-tax Act to Daman, the assessee became a resident of India and under section 5 was chargeable to tax on all income, including income earned in Daman.
  • The concession in paragraph 5(1) of the Taxation Concessions Order, 1964 merely exempts the assessee from paying actual tax on income earned in Daman, but that income must still be included in total income for the purpose of determining the rate of tax (i.e., included for rate computation though tax relief may follow by other mechanism).
  • Clause (ii) of sub-paragraph (1) of paragraph 3 of the Order (referring to "included in his total income") indicates the income was to be treated as included in total income for rate purposes, and therefore section 110 (determination of tax where total income includes income on which no tax is paid) should apply.

Assessee (Mr. Mehta)

  • A plain reading of sub-paragraph (1) of paragraph 5 shows that income of the previous year ending 31 December 1962 which was chargeable to tax under the local law and had been assessed under the local law was to be completely excluded from assessment under the Income-tax Act, 1961.
  • Thus such income should not be taken into account at all in computing total income for the purposes of rate determination under the Income-tax Act.
  • On the procedural point, since the appeal was filed against the whole assessment order, the levy of penal interest under sections 139(1) and 217 could properly be challenged in that appeal.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner Of Income-Tax Central, Bombay v. N.M. Raiji, [1949] 17 ITR 180 The principle that sums exempted from payment of tax and not included in total income (under earlier I.T. statute provisions) should be excluded in computing total income for ascertaining the rate of tax. The court applied this principle by analogy to the Income-tax Act, 1961 and concluded that income chargeable and assessed under the local law (and exempted from assessment under para. 5(1) of the Taxation Concessions Order, 1964) must be excluded when computing total income for rate determination.
CIT v. Daimler Benz A.G., [1977] 108 ITR 961 (Full Bench) Authority on the appealability of interest/penal interest where an appeal is filed against the assessment order as a whole. The court relied on this Full Bench decision to answer the second question in favour of the assessee, holding that the levy of interest under ss. 139(1) and 217 could be challenged in an appeal filed against the entire assessment order.

Court's Reasoning and Analysis

The court's analysis proceeded in several steps, grounded in statutory text, context and existing authority:

  1. Statutory and contextual foundation: The court reviewed the Extension Regulation, 1963 (which extended the Income-tax Act, 1961 to Daman effective 1 April 1963), the definitions and operative provisions of the Taxation Concessions Order, 1964 (appointed day, local law, local rate of tax, Indian rate of tax, and inclusion of Daman in "Union territories"), and the specific operation of paras. 3, 5 and 6 of the Order.
  2. Construction of para. 5(1): The court read paragraph 5(1) of the Taxation Concessions Order, 1964 literally: it provides that income of the previous year ending 31 December 1962 which is chargeable to tax under the local law for 1962 "shall be assessed under the Income-tax Act, 1961, if and only if such income has not already been assessed under the local law." On its face the provision excludes from assessment under the Income-tax Act income already assessed under the local law.
  3. Characterisation of the concession: The court concluded that the concession is in the nature of an exemption. As a result, income which was chargeable and assessed under the local law is to be treated as separate and not to be taken into account in the assessment of income earned in India (other than Union Territories) under the Income-tax Act.
  4. Response to the Department's argument: The court considered Mr. Joshi's argument that clause (ii) of sub-para. (1) of para. 3 (which uses the expression "included in his total income") indicated the income must nevertheless be included in total income for rate purposes and that section 110 should govern. The court rejected this reliance, holding that the phrase "included in his total income" in that clause should be read as meaning "which would have been included in his total income under the Act but for the provisions of paras. 5 and 6"; thus clause (ii) does not compel the inclusion of Daman-assessed income for rate computation where para. 5(1) provides an exemption.
  5. Reliance on precedent: The court cited the Division Bench decision in Commissioner of Income-Tax v. N.M. Raiji to support the principle that sums exempted and not included in total income should be excluded in computing total income for ascertaining the rate of tax. The court treated the Raiji principle as applicable to the Income-tax Act, 1961 and controlling here.
  6. Alternative reading confirming result: The court observed that even if approached from another angle the plain reading of para. 5(1) supports the conclusion that the income assessed under the local law is exempted from assessment under the Income-tax Act and thus excluded for rate computation.
  7. Procedural point on interest: On question two, the court accepted the Tribunal's view that an appeal against the whole assessment order permits challenge to the levy of penal interest under sections 139(1) and 217, relying on the Full Bench decision in CIT v. Daimler Benz A.G.

Holding and Implications

Holding: Both questions referred under section 256(1) were answered in the affirmative and in favour of the assessee.

Specifically:

  • On Question 1: The court held that income which accrued to the assessee in Daman and was chargeable and assessed under the local (Portuguese) law for the previous year ending 31 December 1962 is not to be included in the assessee's total income for the purpose of determining the rate of tax under the Income-tax Act, 1961 read with the Taxation Concessions Order, 1964. The court treated paragraph 5(1) as granting an exemption that excludes such income from rate computation.
  • On Question 2: The court held that the assessee could challenge the levy of penal interest under sections 139(1) and 217 in an appeal filed against the assessment order as a whole; therefore, in the case before it the assessee was entitled to challenge the levy of interest.

Direct consequences on the parties: The Commissioner is ordered to pay the costs of the reference.

Broader implications: The opinion does not elaborate broader policy consequences or purport to create a new precedent beyond applying existing decisions (the Raiji and Daimler Benz authorities) to the statutory text. The direct effect is the exclusion of Daman-assessed income from rate computation for the facts and year under consideration and the confirmation of appealability of penal interest where the appeal is against the whole assessment order.

Show full summary ...

    Addl. Commissioner Of Income-Tax, Gujarat v. Mustakhusein Gulamhusein Ghia.

    Kania, J.:— This is a reference under s. 256(1) of the I.T Act, 1961 (referred to hereinafter as “the said Act”). The questions referred to us for our determination are as follows:

    “(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the income which accrued to the assessee in Daman (the Union Territory) cannot be included in the total income of the assessee for the purposes of determining the rate of tax under the provisions of the Act read wich the provisions of the Taxation Concessions Order, 1964, for the year under reference?

    “(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee can challenge the levy of penal interest under sections 139(1) and 217 of the Act in the appeal if it is filed against the order of assessment as a whole and that in the instant case the assessee having challenged the assessment order as a whole, was entitled in law to challenge the levy of interest on the ground of the same being bad in law?”

    2. The facts relevant for an appreciation of the controversy raised in the reference and the relevant background are as follows:

    The assessment year with which we are concerned is the assessment year 1963-64. The assessee was a resident of Daman, which was earlier a Portugese territory, and was dealing in foreign goods. In the assessment proceedings, the ITO held that in the books of account of the assessee, the sales to Daman merchants amounted to Rs. 5,12,042 and the sales to Bombay merchants amounted to Rs. 3,39,020. There were other sales amounting to Rs. 6,90,533, for which no details were given and it was held by the ITO that they were also effected in Bombay. The ITO applied the proviso to s. 145 of the said Act and proceeded to work out the gross profit. It is not necessary to set out how that gross profit was worked out. It is sufficient to point out that in respect of the sales of Rs. 3,32,798, the gross profit disclosed by the assessee, ranging between 41% to 61% was accepted and on the balance of the sales the ITO estimated the gross profit at 40%. As a result of this, an amount of Rs. 3,44,163 was added to the disclosed income. On an appeal before the AAC, the AAC estimated the gross profit at Rs. 7,02,694 which was roughly 40% of the estimated sales of Rs. 17,80,480. The assessee appealed against the order of the AAC to the Income-tax Appellate Tribunal. Several contentions which were taken up by the assessee earlier were given up before the Tribunal by the learned counsel for the assessee. Before the Tribunal, however, the assessee raised a contention that he was not liable to pay any tax on the income arising to him in Daman in view of para. 5(1) of the Dadra and Nagar Haveli and Goa, Daman and Diu (Taxation Concessions) Order, 1964 (referred to hereinafter as the “Taxation Concessions Order, 1964”). This contention was accepted by the Tribunal. The Tribunal held that the word “assessment” has been used in para. 5(2) as well as in para. 5(1) of the said Taxation Concessions Order, 1964, as meaning assessment of income both for rate and tax and that, in any event, the said interpretation was an alternative interpretation which was beneficial to the taxpayer and should be accepted. It may be mentioned that the appeal filed by the assessee against the assessment order, included an appeal against the imposition of interest under ss. 139(1) and 217 of the said Act. The AAC held that the action of charging interest under the aforesaid sections was not appealable. The Tribunal held that the appeal was maintainable as it had been filed against the entire order of assessment. It is from this decision of the Tribunal that the aforesaid reference arises.

    3. Apart from the facts set out above, it is also necessary to take into account certain other facts and the background of the case in order to appreciate the controversy raised before us. Daman was formerly Portuguese territory and was liberated in the month of December, 1961, and became a part of India. The said Act, viz., the I.T Act, 1961, was extended to the territory of Daman by the Taxation Laws (Extension to Union Territories) Regulation, 1963, with effect from April 1, 1963, and the corresponding laws enforced in the said territories were repealed. The said regulation is referred to hereinafter as “the Extension Regulation, 1963”. Clause (25A) was inserted in s. 2 of the said Act with effect from 1st April, 1963, whereby, inter alia, “India” was deemed to include the Union territory of Daman in respect of any period for the purpose of s. 6 of the said Act and in respect of any period included in the previous year for the purposes of making any assessment for the assessment year commencing on 1st April, 1963, or for any subsequent year. A combined reading of s. 2(25A) and ss. 5 and 6 of the said Act would show that from the assessment year 1963-64, all persons ordinarily resident in Daman became liable to tax as residents under the said Act for the said assessment year and subsequent years in respect of the income earned in India, including the Union territory of Daman, in the previous year relevant to the assessment year 1963-64 and subsequent years as any other resident in India. As, before the liberation, the local taxes levied and collected by the Portuguese Govt. were at lower rates, and as a result of the extension of the said Act to Daman a higher liability to pay tax under the said Act arose on the income of the previous year, certain hardships and double taxation resulted. In order to remove these hardships or alleviate the same, the said Taxation Concessions Order, 1964, was issued by a notification. This came into force on 20th February, 1964. Certain concessions were given under paras. 5 and 6 of the said Taxation Concessions Order, 1964, to which we shall presently come. These concessions were granted, inter alia, to every person who resided or maintained a dwelling place in Daman for a period of 182 days or more during the calendar year 1961 or carried on any business or profession there before the appointed day, being 20th December, 1961, and was assessable as a person resident in India only by virtue of the extension of the said Act to Daman. Moreover, the concession was available only to income which accrued or arose to such person in the Union territory of Daman and not to income which accrued or arose or which was deemed to be received in India other than the said Union territory. We may at this stage also take note of the relevant statutory provisions which need to be considered in some detail. Clause (b) of para. 2 of the Taxation Laws Extension Regulation, 1963, runs as follows:

    “‘Union territory’ means any of the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu, and Pondicherry.”

    4. Clause (1) of para. 3 provides that the Acts specified in Pt. I of the Schedule to the said Regulation shall extend to, and come into force in, each of the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu, and Pondicherry on the 1st day of April, 1963, subject to the modifications, if any, specified in that Part. Clause (2) of the said paragraph provides that the Acts specified in Pt. II of the said Schedule shall extend to, and come into force in, the Union territories of Goa, Daman and Diu, and Pondicherry on the 1st day of April, 1963 and shall, in their application to those territories and the Union territory of Dadra and Nagar Haveli, be subject to the modifications, if any, specified in that Part. The I.T Act is one of the Acts specified in Pt. II of the Schedule to the said Regulation. The said Taxation Concessions Order of 1964, inter alia, defines the “appointed day” as meaning “the 20th day of December, 1961” in relation to Goa, Daman and Diu. Clause (d)(ii) of sub-para. (1) of para. 2 of the said Order runs thus:

    “‘Local law’ means—…

    (ii) in relation to Goa, Daman and Diu, any law relating to income-tax or super-tax in force in Goa, Daman and Diu immediately before the 1st day of April, 1963.”

    5. Clause (e) of the said sub-paragraph runs thus:

    “‘Local rate of tax’ means the rate determined by dividing the amount of income-tax and super-tax payable on the total income (including agricultural income) under the local law according to the rates of tax in force in Dadra and Nagar Haveli or Goa, Daman and Diu, as the case may be, immediately before the 1st day of April, 1963, by the amount of such total income.”

    6. Clause (f) runs thus:

    “‘Indian rate of tax’ means the rate determined by dividing the amount of income-tax and super-tax payable in India on the total income in respect of the relevant previous year under the provisions of the Income-tax Act, 1961, by the amount of such total income.”

    7. Under cl. (g) of the said sub-paragraph, Daman is included in the definition of “Union Territories”. Sub-clause (ii) of sub-para. (1) of para. 3 of the said Taxation Concessions Order, 1964, read with the opening portion of sub-para. (1) read thus:

    “Subject to the provisions of sub-paragraph (2)—…

    (ii) the provisions of paragraphs 5 and 6 of this Order shall apply-in the case of every assessee who resided or maintained a dwelling place in Goa, Daman and Diu for a period or periods amounting in all to one hundred and eighty-two days or more during the calendar year 1961 or carried on any business or profession in Goa, Daman and Diu before the appointed day and is assessable as a person resident in India in the previous year but would not have been so assessable if the Income-tax Act, 1961, had not been extended to Goa, Daman and Diu, to so much of his income included in his total income as accrues or arises in the Union Territories or outside India and is not deemed to accrue or arise or is not received or is not deemed to be received in any part of India other than the Union Territories.”

    8. Sub-paragraph (1) of para. 5 of the said Taxation Concessions Order, 1964, with which we are directly concerned reads thus:

    “The income of the previous year ending on the 31st day of December, 1962, which is chargeable to tax under the local law for the year 1962, shall be assessed under the Income-tax Act, 1961, if and only if, such income has not already been assessed under the local law.”

    9. The relevant portion of sub-para. (2) of the said paragraph runs thus:

    “Where the income referred to in sub-paragraph (1) has not been assessed under the local law, it shall be assessed under the Income-tax Act, 1961, for the assessment year commencing on the 1st day of April, 1963, and the tax payable thereon shall be determined as hereunder:…”

    10. Paragraph 6 deals with tax on income assessable for the assessment year 1963-64, which does not fall under para. 5. Paragraph 8 provides for credit for tax paid under the local law. Paragraph 9 grants certain concessions on the tax on income chargeable to tax for the assessment years 1964-65 up to 1969-70.

    11. As the first question referred to us indicates, what we have to consider is whether the income which arose to the assessee in the previous year ending on 31st December, 1962, is liable to be included in the total income of the assessee for the purposes of determining the rate of tax. It is common ground that in respect of the said income the assessee was assessed to tax under the local law, viz., the Portugese law, and had paid that tax.

    12. The submission of Mr. Joshi, learned counsel for the Department, is that after the extension of the said Act to the territory of Daman by the Extension Regulation of 1963, the assessee became a resident of India and under s. 5 of the said Act he was liable to the charge of income-tax on all his income from whatever sources derived, including the income which accrued or arose to him outside India during such period. It was submitted by him that the concession granted under sub-para. (1) of para. 5 of the Taxation Concessions Order, 1964, only shows that the assessee was not liable to pay any actual tax on the income, which accrued to him or which was earned by him in Daman in the previous year ending on 31st December, 1962, but the said income was liable to be included in the total income of the assessee for the purpose of determination of rate of tax payable by him. It was submitted by him that the said income earned by the assessee in Daman should be included in the total income of the assessee and thereafter tax should be calculated as provided in s. 110 of the said Act which deals with the determination of tax where total income includes income on which no tax is paid. In support of this contention, he strongly relied on the provisions of cl. (ii) of sub-para. (1) of para. 3 of the Taxation Concessions Order, 1964. We have set out earlier the said clause which stated that the concession granted therein is applicable only in respect of income included in the total income of the assessee as accrues or arises in the Union Territories or outside India and is not deemed to accrue or arise or is not received or is not deemed to be received in any part of India other than the Union Territories. It was submitted by him that these provisions show that the entire concession was only on the footing that the income was liable to be included in the total income of the assessee for rate purposes. It was, on the other hand, urged by Mr. Mehta, learned counsel for the assessee, that a plain reading of the said sub-para.(1) of para. 5 of the said Taxation Concessions Order, 1964, shows that the income earned by the assessee in the previous year ending on 31st December, 1962, which was chargeable to tax under the local law as defined under the said Order and which had been assessed under the local law was to be completely excluded in the assessment of the assessee under the said Act. It appears to us that there is substance in the contention of Mr. Mehta. A plain reading of sub-para. (1) of para. 5 shows that the income earned by the assessee in the previous year ending on 31st December, 1962, which was charged to tax under the local law was not to be assessed under the said Act at all and looking to the context in which the term “assessed” has been used there, it appears to us that the said income was not to be taken into account at all in the assessment of the income earned by the assessee in India other than the Union Territories. Clause (ii) of sub-para. (1) of para. 3 on which so much reliance has been placed by Mr. Joshi is, in our view, of not much assistance to him. The expression “included in his total income” used in the said clause, in our view, only means, which would have been included in his total income, i.e, in the total income of the assessee under the said Act, but for the provisions of paras. 5 and 6 of the said Taxation Concessions Order, 1964. It appears that under the said Taxation Concessions Order, 1964, the income which accrued to the assessee in the Union Territory of Daman and which has been chargeable to tax under the local law and assessed under the same was treated as completely separate from the rest of the income which arose in India in the relevant period. In view of this, we are unable to accept the submission of Mr. Joshi.

    13. The question set out earlier can be looked at even from a different angle and yet the result would be the same. On a plain reading of sub-para. (1) of para. 5 of the said Taxation Concessions Order, 1964, it is clear that what has been granted thereunder is in the nature of an exemption and it exempts the income of the assessee of the previous year ending on 31st December, 1962, which was chargeable to tax under the local law and assessed under the local law from being assessed under the said Act, viz., the I.T Act, 1961. As held by a Division Bench of this court in Commissioner Of Income-Tax Central, Bombay v. N.M Raiji…Assessee., [1949] 17 ITR 180, the sums which are exempted from the payment of tax under the various provisions of the Indian I.T Act of 1922, and are not included in the total income of an assessee by s. 16 of that act should be excluded in computing the total income of the assessee for ascertaining the Rate of tax. It is beyond dispute that this principle, which was laid down in connection with the Indian I.T Act, 1922, would also apply to the said Act. This decision also supports the contention of Mr. Mehta, which we have set out above. In view of the aforesaid, question No. 1 referred to us is answered in the affirmative and in favour of the assessee. As far as question No. 2 is concerned, it is common ground that the said question has also to be answered in favour of the assessee in view of the decision of the Full Bench of this court in CIT v. Daimler Benz A.G, [1977] 108 ITR 961. Hence, the said question is also answered in the affirmative and in favour of the assessee.

    14. The Commissioner to pay the costs of the reference.

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    Comments

    Addl. Commissioner Of Income-Tax, Gujarat v. Mustakhusein Gulamhusein Ghia.
    (Jun 16, 1982)