Baroda Traders Ltd. v. Commissioner Of Income-Tax, Gujarat.

J.M Shelat, C.J:— The question arising in this reference is one of construction of sub-section (2A) of section 10 of the Income-tax Act, 1922, and arises as a result of bringing to tax a sum of Rs. 18,401 in the assessment for the assessment year 1959-60. The normal accounting year of the assessee-company, while it was carrying on its business in respect of which the assessment was made, was the calendar year, but whether the calendar year can be taken to be the accounting year after the assessee-company closed that business is a matter of some controversy.

2. The assessee-company carried on business in disposal of cloth in a joint venture with Messrs. Chinubhai Jesingbhai of Baroda. The accounts of this joint venture were maintained by Messrs. Chinubhai Jesingbhai. The assessee-company suffered losses in this venture during the years 1948, 1949 and 1950. Its share of loss was from time to time debited to the account of the assessee-company in the books of Messrs. Chinubhai Jesingbhai and corresponding credit entries were made in the books of account of the assessee-company in favour of Messrs. Chinubhai Jesingbhai. The business of disposal of cloth ceased in 1950 and at the end of 1951, the amount payable by the assessee-company to Messrs. Chinubhai Jesingbhai came to Rs. 58,624. Thereafter, interest amounts were credited to this account from time to time and some payments also were made. In 1956, the assessee-company gave a cheque for Rs. 5,000 in full settlement of the claim of Messrs. Chinubhai Jesingbhai. That cheque, however, was not cashed and ultimately in February, 1958, the assessee-company paid Rs. 5,000 in full settlement of the debt due by it and thereafter the balance of Rs. 54,172 was transferred to its profit and loss account. On these facts, the Income-tax Officer, relying on sub-section (2A) of section 10, brought to tax a sum of Rs. 18,401 as deemed profits of business, having accrued or arisen to the assessee-company in the year 1958. The amount of Rs. 18,401 was arrived at as being the difference between the aggregate of the amounts allowed in the past assessments as expenditure or deduction, and the aggregate of amounts which were disallowed. The Income-tax Officer, after citing the provisions of sub-section (2A), held that there was no condition attached to that sub-section that the business in respect of which the said profits are deemed to accrue or arise should be carried on in the previous year. The total liability of the company came to Rs. 91,782. But, as aforesaid, the Income-tax Officer had in the assessment years 1949-50 to 1953-54, allowed Rs. 56,014 but had disallowed Rs. 35,771. The difference came to Rs. 18,401 and it was that difference which was brought to assessment. There is no dispute that the assessee-company had ceased to carry on business and the only income derived by the assessee-company during the relevant period was the income from investments and that income in the year in question came only to Rs. 78. The Appellate Assistant Commissioner in an appeal filed by the assessee-company set aside the order of the Income-tax Officer, holding that the primary requirement for the applicability of sub-section (2A) was that the business must have been carried on by the assessee-company as required by section 10(1) of the Act, and no such business having been carried on during the relevant year, he held that the benefit amounting to Rs. 18,401 could not be assessed to income-tax under sub-section (2A) of section 10 of the Act. On an appeal by the Commissioner, the Tribunal thought that there was no validity in the ground upon which the Appellate Assistant Commissioner had set aside the order of the Income-tax Officer. The Tribunal observed:

“Section 10(2A) creates business profit by a fiction and that fiction presupposes that there is business carried on. Since the section deems certain transactions to be profits and gains of business, profession or vocation, it must be presumed that business, profession or vocation is carried on during the year of account or else the fiction created by the section would be a superstructure without foundation. Moreover, in the later part of the section itself it is provided that not only the amounts in question would be deemed to be profits and gains of business but they would be deemed to have accrued or arisen during the previous year. Now, no profit from business can accrue or arise during a period unless the business is carried on during that period. The deeming of accrual, therefore, necessarily presupposes the deeming of the business being carried on during the year.”

3. The question whether the amount of Rs. 18,401 brought to tax was rightly assessed or not turns on the construction of sub-section (2A) of section 10. Section 10 provides as follows:

“10. (1) The tax shall be payable by art assessee under the head ‘Profits and gains of business, profession or vocation’ in respect of the profits or gains of any business, profession or vocation carried on by him.

(2) Such profits or gains shall be computed after making the following allowances, namely:…

(2A) Where for the purpose of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and, subsequently during any previous year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the amount received by him or the value of the benefit accruing to him shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year.”

4. Section 10 taxes the profits and gains of business, profession or vocation carried on by the assessee and it is clear from the words “carried on by him” used in sub-section (1) that profits or gains liable to be assessed thereunder are profits or gains of business, profession or vocation carried on by the assessee during the account year relevant to the assessment year. Therefore, if a business is discontinued before the commencement of the accounting year but profits of that business are received in the accounting year after the discontinuance of that business, those profits clearly cannot be brought to tax in that year for the simple reason that the source of those profits does not exist in that accounting year and the profits would not be profits from a business carried on by the assessee. The expression “such profits or gains” in sub-section (2), which provides for certain allowances allowable thereunder in the computation of profits or gains also presupposes that the business in respect of which profits are to be computed and in respect of which these allowances are claimable, was carried on in the relevant accounting year by the assessee. Sub-section (2A) provides that where an allowance or deduction has been granted in any year in respect of any loss, expenditure or liability and, subsequently during any previous year the assessee receives, whether in cash or in any other manner, any amount in respect of that loss or expenditure or the assessee is benefited by remission or cessation, then the amount received or the amount of liability which is extinguished by way of remission or cessation, is chargeable as business profits of that previous year. Ordinarily, even if a trading liability has been allowed during a previous year as business expenses, on the remission of such liability in any subsequent year, the amount so remitted cannot be taxed as income of the year when such remission is given, nor can the account and the year in which allowance was given be allowed either to be readjusted or reopened. This position was made clear by the House of Lords in British Mexican Petroleum Company Ltd. v. Jackson 1932 16 Tax Cas. 570., where Lord Macmillan observed that he could not conceive how the extent to which a debt was forgiven could become a credit item in the trading account for the period within which the concession was made. Sub-section (2A), however, does away with this principle and provides that the amount of remission or cessation should be taxed as profits of the year when such remission or cessation is made. But the sub-section applies only if, (1) an allowance or deduction has been made in the computation of profits and gains in the assessment of any year, and (2) subsequently, during any previous year, the assessee has obtained some benefit in respect of trading liability by way of remission or cessation. By the use of the words “the amount received by him or the value of the benefit accruing to him shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year”, the sub-section enacts a fiction whereunder the amount received by an assessee or the value of the benefit from remission or cessation is to be regarded as profits or gains of business, profession or vocation which otherwise would not be income, and they are to be regarded as profits or gains as having accrued or arisen during such previous year, that is to say,-during the year when such remission or cessation has been given. The subsection does not, of course, apply where the liability is time-barred and the debtor does not have to pay the debt, as such a case would not be one of remission or cessation. The deeming provision in sub-section (2A) has thus two effects, namely: (1) that though ordinarily the amount of remission or cessation would not be profits or gains, it has to be regarded as such profits or gains, and (2) such an amount so forgiven by way of remission or cessation has to be regarded as profits or gains accruing or arising in that previous year. It is clear that the object of enacting sub-section (2A) was to supersede the principle that once a loss is allowed as a deduction or as a trading liability, recoupment of the loss or remission of the trading liability would be a capital advantage and not a business receipt. To get over this difficulty this sub-section was enacted whereunder such an advantage is to be treated as profits or gains includible in the total income of the assessee for the previous year in which such remission or cessation is granted. If sub-section (2A) were to be independent of sub-section (1), there would be no difficulty, for, under sub-section (2A), the amount that is remitted or which is the subject-matter of cessation would be deemed to be profits or gains of business, whether that business had ceased or not in the previous year. But the difficulty would arise if it were not to be independent and had to be read along with sub-section (1), in which event, the paramount requirement for the application of sub-section (2A) would be the existence of the business in the previous year. In that case, the question would be whether the deeming clause, besides enacting the fiction and treating the amount forgiven as profits or gains having accrued or arisen during that year from business, also regards that business to be existent or continuing during that year when in fact such business had ceased during that year.

5. The contention of Mr. Kaji was that the entire section has to be read as one and integral and sub-section (2A) has to be read subject to the requirement of sub-section (1), that the deemed profits must be profits arising from business which was carried on by the assessee during that previous year or at least part of that year. He also contended that the only fiction that was enacted by sub-section (2A) is that the remitted amount is to be deemed as profits or gains and that such remitted amount is to be deemed as arising or accruing from such business during the year of remission or cessation. But, according to him, the fiction does no more than that and does not create a further fiction that the business was in existence or is to be deemed to have continued during that year. In support of his contention, Mr. Kaji urged that as the legislature had not extended this fiction, it had to provide while enacting section 41(1) of the 1961 Act that the remitted amount is to be treated as profits, whether the business in respect of which the allowance or deduction has been made is in existence in that year or not. According to Mr. Kaji, this clearly shows that the deeming provision in sub-section (2A) did not extend to a further fiction that the business must be deemed to be in existence and that the language of sub-section (2A) does not permit such extension. As a second branch of his argument, Mr. Kaji pointed out the second proviso to clause (vii) of sub-section (2), which uses similar language and which has been held in several decisions to apply to cases where the business was carried on during the previous year or at least part of such year. Clause (vii) of sub-section (2) relied on by Mr. Kaji reads as follows:

“In respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value:

Provided that such amount is actually written off in the books of the assessee:

Provided further that where the amount for which any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place.”

6. The argument was that considering the similarity in the language used in proviso two of clause (vii), which, though a proviso in form, is in effect a substantive provision, with the language in sub-section (2A), sub-section (2A) must be construed in the same manner as clause (vii) and, so construed, it must be held that under both the provisions, it is essential that the business was carried on by the assessee during the relevant previous year. He argued that in both the cases the deemed profits are taxed only if the business had been carried on and no departure from such a construction should be made unless there are express words permitting such a course. By way of a contrast, Mr. Kaji pointed out sub-section (5A) where compensation or other payment due to or received by a managing agent at or in connection with the termination or modification of his managing agency agreement with a company, a manager of a company at or in connection with the determination of his office or modification of the terms and conditions relating thereto, any person, by whatever name called, managing the whole or substantially the whole affairs of any other company in the taxable territories, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto, or any person holding an agency in the taxable territories for any part of the activities relating to the business of any other person, at or in connection with the termination of his agency or the modification of the terms and conditions relating thereto is to be deemed to be profits and gains of a business carried on by the managing agent, manager or other person, as the case may be, and shall be liable to tax accordingly. He argued that, unlike sub-section (2A), the legislature has extended here the fiction by making compensation as deemed profits and also by that fiction laid down that such profits or gains shall be regarded as profits and gains of a business carried on by such person during the previous year when such compensation is paid.

7. The learned Advocate-General, on the other hand, countered these arguments by arguing that what sub-section (2A) provides is that where an allowance or deduction has been made in the assessment of any year in respect of any expenditure or trading liability for computing profits or gains under this section and subsequently during any previous year the assessee has received any amount in respect of such loss or expenditure or has obtained some benefit in respect of some trading liability by way of remission or cessation thereof, the amount received by him or the value of the benefit accruing to him shall be deemed to be profits and gains of business and to have accrued or arisen during that previous year. He argued that sub-section (2A) was independent of sub-section (1) and, therefore, the requirement of sub-section (1) of the assessee having carried on the business in the previous year would not apply. According to him, the business in respect of which the amount received by the assessee or the benefit in respect of a trading liability is obtained by him and which is deemed profits is a fictional business and not a business carried on by him as envisaged by sub-section (1) and that that indicates that sub-section (2A) is independent of sub-section (1). In particular, he emphasized the omission of the article “the” before the word “business” in the latter part of sub-section (2A), and said that the deemed profits and gains are profits of business which is notional and independent of the factual business carried on by the assessee when the allowance or deduction was made and, therefore, sub-section (2A) does not require a factual business being carried on in the previous year in question. In regard to the contention of Mr. Kaji about clause (vii) of sub-section (2), the learned Advocate-General took us to all the clauses of sub-section (2) and relying on the expressions there used, such as “the premises”, “such business”, “the business”, “purposes of the business” and “such building, machinery or plant”, he argued that these expressions show that the various clauses in sub-section (2) were intended to apply where the business is carried on by the assessee in the accounting year or at least part of it. He urged that it was in the light of these expressions contained in subsection (2), clauses (v), (vi) and (vii) that the Supreme Court held in Liquidators of Pursa Ltd. v. Commissioner of Income-tax that in order to attract the operation of these clauses, the machinery and plant must be such as were used, in whatever sense that word was taken, at least for a part of the accounting year, and if the machinery and plant have not at all been used at any time during the accounting year no allowance could be claimed under clause (vii) in respect of them and the second proviso to that clause also did not come into operation. He referred to us the passage in that judgment at pages 272 to 273 where the Supreme Court has observed that under section 10 tax was payable by an assessee “in respect of the profits or gains of any business, profession or vocation carried on by him”. “Business” was defined by section 2, sub-section (4), as “including any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture”, and that the fundamental idea underlying each of those words was the continuous exercise of an activity and the same central idea was implicit in the words “carried on by him” occurring in section 10(1) and those critical words were an essential constituent of that which was to produce the taxable income. Therefore, tax was payable only in respect of profits or gains of the business which was carried on by the assessee. As regards proviso (2) to clause (vii) of sub-section (2), the Supreme Court observed that that proviso made the excess of sale proceeds over the written down value of “any such machinery or plant” to be deemed to be profits of the previous year in which the sale took place. Any such machinery or plant in the proviso clearly referred to the machinery or plant in respect of which the allowance was to be given under that clause. The Supreme Court further observed that although the word “such” was not used in the body of clause (vii), the scheme of sub-section (2), which was apparent from the other clauses of allowance, such as clauses (iv), (v) and (vi), clearly indicated that the machinery or plant referred to in clause (vii) must be the same as those mentioned in the earlier clauses, i.e, such machinery or plant as were “used for the purposes of the business, profession or vocation “. Therefore, the machinery or plant must be used for the purposes of that business which is actually carried out and the profits of which are assessable under section 10(1). The Supreme Court then laid down that in order to attract the operation of clauses (v), (vi) and (vii), the machinery or plant must be such as were used in whatever sense that word was taken, at least for a part of that accounting year. From these observations, the learned Advocate-General urged that the decision in this case turned on the expressions used in clauses (v), (vi) and (vii) of sub-section (2) and, therefore, would not assist us in construing sub-section (2A) which is different in content and form from sub-section (2). He then referred to Commissioner of Income-tax v. National Syndicate, where the facts were as follows:

The assessee-firm, which acquired a tailoring business on January 11, 1945, found it difficult to continue the business and closed it in August, 1945. The firm sold its sewing machines at a loss of Rs. 41,998 and a motor lorry at a loss of Rs. 3,700 during the period from August 16, 1945, to February 14, 1946. The firm closed its books of account on February 28, 1946, showing the two losses and the two losses having been written off. The accounting period was from January 11, 1945, to February 28, 1946. In its assessment to income-tax for the assessment year 1946-1947, the assessee claimed deduction of Rs. 45,698 under clause (vii) of section 10(2). The Tribunal found that the assessee continued its business only till August 28, 1945, and held that the assessee was not entitled to the allowance as the sales of the machines and the motor lorry were made in the course of winding up of the assessee's business after the business had been stopped. On these facts, the Supreme Court held that on the assumption that the assessee's business closed down on August 28, 1945, all the conditions necessary for the allowance under clause (vii) were fulfilled and the assessee was entitled to the allowance claimed, the business was carried on by the assessee in accordance with sub-section (1), the machinery or the plant had been used for the purposes of the business as provided for in clause (iv) of sub-section (2), the sale took place during the year of account and the loss was brought into the books of the assessee and written off as provided by the first proviso to clause (vii) of sub-section (2). There was no other condition to be found in the section or in the Act which remained to be complied with. The Supreme Court held that there was nothing to show that the business of the assessee should have been carried on for the whole year or that the machinery or plant should have been used for the whole of the accounting year or that if the assessee worked only for a part of the year and then sold out, the loss that he incurred was not a business loss or that he must pay tax on the small profit that he might have made and bear the loss in addition. Dealing with clause (vii) of subsection (2), the Supreme Court stated that that clause dealt with loss, while the second proviso to that clause with profits. That proviso enacted a fiction which the main clause did not enact. The reason for the introduction of the fiction in the proviso was that the law took note of the loss and, provided it had been computed and brought into the books of the business and written off, it could be claimed as a deduction. But if an allowance had been claimed as depreciation and had been allowed, and if the sale of the building, machinery or plant on which depreciation allowance was claimed in the past, showed that there was in fact no depreciation but an accretion in value, the law deemed that a profit had been made. The fiction enacted in the proviso thus converts that which may not be strictly profit of the business in a narrow sense into a profit for the purposes of assessment. That was a case under clause (vii) and not under the second proviso to that clause. The learned Advocate-General argued that the observations of the Supreme Court, that the requirement of sub-section (1) of section 10 that business must have been carried on by the assessee was essential for the application of clause (vii) of sub-section (2) in this case, were made because of the express language used under that clause and the other clauses of that sub-section referred to above. Therefore, these two decisions, turning as they do on the language of sub-section (2), cannot help in the construction of sub-section (2A). Turning to sub-section (5A), the learned Advocate-General pointed out that out of the four categories of assessees there in clauses (a) to (d), persons falling in categories (b) and (c) in any event would be salaried employees and would not be persons who could be said to be persons who were carrying on business. The deeming clause in sub-section (5A) had, therefore, to be larger in content than in sub-section (2A) and, therefore, the legislature had to provide that the compensation or other payment due to or received by any of them shall be deemed to be profits or gains of a business, which business shall be deemed to have been carried on by them, and further that such compensation in the form of notional profits shall be taxed accordingly, i.e as profits of a business. He stressed in particular the expression “a business” in the deeming clause, and contended that the words “a business” were significant because there could be no business carried on by persons in clauses (b) and (c) at any rate and, therefore, the sub-section had to have a notional business in respect of which compensation is deemed to be profits. The notional business thus has no relation with any factual business as there can be no factual business by persons falling in categories (b) and (c) and, therefore, the requirement of sub-section (1) which envisages an actual business can have no application.

8. In our view, the entire question really turns on the extent of the fiction enacted in sub-section (2A). Since there is no direct authority on sub-section (2A), we have to turn to the language of the sub-section and ascertain what the sub-section deems. Section 10 provides for computation of tax under the head “Profits and gains of business, profession or vocation” in respect of the profits or gains of any business, profession or vocation carried on by an assessee. It is clear from this language that in order that the section may apply, the requirement is that the business, profession or vocation should have been carried on during the accounting year. The words “carried on” occurring in sub-section (1) must mean that if the business had been discontinued before the commencement of the accounting year, the profits of the business, though received in the accounting year, cannot be taxed because the source of the income does not exist in the accounting year. The allowances provided for in sub-section (2) also are to be made in respect of “such profits or gains”, i.e, profits or gains in respect of the business, profession or vocation carried on during the accounting year. Sub-section (2A), being part of the main section, would, prima facie, seem to be governed by the requirement laid down in sub-section (1), unless there is something in the language of sub-section (2A) to read it as an independent provision. The object of enacting the sub-section clearly is to bring to tax as income that which had been earlier allowed as a deduction or an allowance. The opening words of the sub-section, namely, “Where for the purpose of computing profits or gains under this section” would themselves indicate that the sub-section is not an independent provision but a part of the scheme of section 10, a scheme for computing profits or gains. As part of the scheme for such computation, the sub-section provides that where an allowance or deduction has been made in the assessment of any year in respect of any loss, expenditure or trading liability, and subsequently, during any previous year the assessee has received any amount of such loss or expenditure or has obtained some benefit in respect of such trading liability by remission or cessation thereof, the amount received by him or the value of the benefit shall be deemed to be profits or gains, and such profits and gains shall also be deemed to have accrued during that previous year. The deeming provision thus creates two fictions, (1) that though the amount so received or the benefit in respect of trading liability would not be income, it is to be deemed to be profits or gains, and (2) that such profits or gains have to be deemed as having accrued during that previous year, i.e, the year of remission or cessation. The first fiction was necessary, for, otherwise the amount would not be profits or gains, and the second was necessary because unless it was deemed that it accrued during the year of remission or cessation, it cannot be taxed for that particular year. But it would seem that beyond these two fictions, the sub-section does not go further and provide that in a case where the business is discontinued before the commencement of that previous year, i.e, the year of remission or cessation, it shall be deemed to have continued during that year notwithstanding its discontinuance.

9. In ascertaining the scope and the meaning of the deeming provision in sub-section (2A), some guidance can no doubt be had from the other clauses of the section. As already stated, clause (vii) of sub-section (2) provides for allowance where, in the case of a building, machinery or plant which has been sold, the amount by which its written down value exceeds the amount for which it is sold. The second proviso of that clause, however, lays down a deeming provision whereby it is provided that where the amount at which such building is sold, whether during the continuance or after the cessation of the business, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place. This proviso has been explained in Commissioner of Income-tax v. Express Newspapers Ltd., where the Supreme Court, while dealing with clause (vii) and the second proviso, has observed that the substantive clause grants a balancing allowance in respect of building, machinery or plant which has been sold or discarded or demolished or destroyed, and that that allowance represents the excess of the written down value over the sale price. Regarding the proviso, it had observed that if the sale price exceeds the written down value but does not exceed the original cost price, the difference between the original cost and the written down value is to be deemed to be profits of the year previous to that in which the sale took place. As the sale price is higher than the written down value, the difference represents the excess depreciation mistakenly granted to the assessee. The second proviso, therefore, in substance brings to charge escaped profits or gains of business carried on by the assessee. At page 254 of the report, the Supreme Court observes:

“The scope of this proviso cannot be ascertained in vacuum. The conditions for its applicability can be ascertained only in its relation to the other related provisions. Under section 3 of the Act, income-tax shall be charged for any year in accordance with and subject to the provisions of the Act in respect of the total income of the previous year of every assessee; under section 6, one of the heads of taxable income is ‘profits and gains of business, profession or vocation’; under section 10(1), the tax under that head is payable in respect of profits or gains of any business carried on by the assessee during the accounting year. The main condition which attracts all the other sub-sections and clauses of the section is that the tax shall be payable by an assessee in respect of the profits or gains of business… carried on by him. The crucial words are ‘business carried on by him’. If the profits or gains were not earned when the business was being carried on by the assessee during the accounting year, they would fall outside the provisions of section 10(1).”

10. Dealing with clause (vii), the Supreme Court has then observed that if the machinery was sold after the business was closed or when the business was under liquidation, it would not be appropriate to hold that the profits or gains earned by the sale were in respect of the business that was being carried on by the assessee. The second condition that attracts the second proviso is implicit in the adjective “such” preceding “the building, machinery or plant sold”. That adjective “such” refers back to clauses (iv), (v), (vi) and (vii) of section 10(2). Under clause (iv), an allowance is allowed in regard to any premium paid in respect of insurance against risk of damage or destruction of buildings, machinery, plant, etc., used for the purposes of the business. Similarly, clauses (v), (vi) and (vii) refer to such buildings, machinery, plant, etc., that is to say, such buildings, machinery and plant used for the purposes of the business. The result, therefore, is that the second proviso would only apply to sale of such machinery which was used for the purposes of the business during the accounting year. At page 257 of the report, the Supreme Court referred to its earlier decision in Commissioner of Income-tax v. West Coast Chemicals and Industries Ltd. and stated that though that case did not turn upon the provisions of the second proviso to clause (vii) of section 10(2), the principle accepted therein was the basis for the application of section 10 of the Act and that would apply to all the provisions of section 10 unless an exception is made in a particular provision. The learned Advocate-General argued that sub-sections (2A) and (5A) were exceptions to the condition laid down in sub-section (1) of section 10 and, therefore, the requirement in sub-section (1) would not apply to a case falling under sub-section (2A). There is, however, nothing in the language of sub-section (2A) nor in the extent of the deeming provision therein contained which would suggest that the sub-section is an exception to the paramount requirement contained in sub-section (1) of section 10 and, as observed by the Supreme Court, in this decision, the condition of carrying on business during the previous year by the assessee laid down in sub-section (1) would govern all the sub-sections of section 10. Another decision which deals with clause (vii) of sub-section (2) is to be found in Ajax Products Ltd. v. Commissioner of Income-tax, where dealing with the second proviso to that clause, the High Court of Madras explained that the fictions enacted by that proviso with reference to a business were what was not a trading profit was deemed to be a trading profit assessable to tax, and, secondly, that a trading profit was deemed to accrue to the assessee in the year of sale. The court held that despite the express reference to the cessation of the business in the amended proviso, it did not enact a further fiction that the assessee shall be deemed to carry on the business in the year of sale and that the condition that the assessee should have carried on the business in the year of sale was a factual requirement of the proviso and further that no fiction came into play. The High Court also held that the proviso not having enacted such a fiction where the business ceased in a year of account anterior to the year of sale, the assessee cannot be deemed to have a business in the previous year for the purposes of taxation.

11. The decision in Commissioner of Income-tax v. Express Newspapers Ltd. [1964] 53 I.T.R 250 S.C., in our view, is a clear authority for the proposition that sub-section (2A) cannot be construed as an independent clause, but has to be read subject to the paramount requirement of sub-section (1), namely, the necessity of an assessee having carried on business during the previous year, in the present case the year of remission or cessation of the trading liability. That decision as also the decision of the Madras High Court explain the scope of the fiction and though they are decisions under clause (vii) of sub-section (2), the language of the fiction in the second proviso to that clause being similar, they would assist in construing the deeming provision in sub-section (2A). In our view, the deeming prevision merely lays down that the value of the benefit derived as a result of the remission or cessation is deemed to be profits and such profits are deemed to have accrued in that previous year. But there is no further deeming provision therein which lays down that though the business is discontinued, it shall be deemed to have been carried on during such previous year.

12. As regards the submission made by the learned Advocate-General on sub-section (5A), it is possible to agree with him to the extent that clauses (a) to (d) therein seek to assess four different units and two at least of them in clauses (b) and (c) would be persons who would be employees and not persons who can be said to have carried on business. The sub-section intends to bring to tax compensation received by such persons on the happening of the conditions therein set out as profits or gains and, therefore, a deeming provision was necessary. The question is, what is the extent of the fiction enacted there? The deeming provision, in the first instance, notionally treats such compensation as profits or gains and, secondly, regards such notional profits or gains as profits or gains of a business carried on by the managing agent, manager or other person, as the case may be, and makes such notional profits taxable and such persons liable to tax accordingly. We agree with the learned Advocate-General that in the case of persons falling in categories (b) and (c), there could be no factual business carried on by either of them, and, therefore, in order to rope in compensation received by them as profits or gains, it had to be deemed that they were profits or gains of a business. The article “a” before the word “business” had also to be used there as it would be not a factual business in which case article “the” would have been used or some qualifying word like “such”, but a notional business. But it is significant that in order to rope in such compensation, the legislature had to enact a deeming provision whereunder such compensation is not only deemed profits or gains but also profits or gains from a notional business, notionally carried on by the managing agent, manager or other person, as the case may be. It is clear that the legislature has used the expression “profits and gains of a business carried on by the managing agent” as such income was to be caught under head IV. in section 6, namely, profits and gains of business, profession or vocation. That being the clear intention, the legislature had to extend the fiction by providing that compensation shall be deemed to be profits and gains and further that they shall be deemed to be profits or gains of a business notionally carried on by the assessee. The expression “carried on” in sub-section (5A) shows that these words were deliberately used in order to have the notional business related to sub-section (1) of section 10. Since sub-section (1) requires business to have been carried on by an assessee, the legislature, while dealing with the deemed profits in sub-section (5A), had to use the words “a business carried on by (he managing agent, etc.” Subsection (5A), therefore, treats such notional business as business carried on as required by sub-section (1) and, therefore, that sub-section, instead of being treated as an independent provision or as an exception, must be regarded as falling under sub-section (1) and governed by the paramount requirement therein provided, namely, of a business having been carried on during the accounting year. In the view that we are inclined to take, sub-section (2A) has to be read as governed by the condition laid down in sub-section (1). We find some support for this conclusion from sub-section (1) of section 41 of the 1961 Act, which provides that the amount obtained by an assessee or the value of the benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. Section 41(1) includes two changes from the old sub-section (2A), (1) it introduces chargeability, and (2) it provides that such deemed profits and gains would be chargeable, whether the business carried on by the assessee, in respect of which the allowance or deduction was made, is in existence in the accounting year or not. These two changes clearly indicate that the legislature intended to rope in the amount of benefit mentioned in the sub-section, though it is received in the year when the business has not been carried on at all in that year. These changes were made as it was not possible to bring to tax such deemed profits under sub-section (2A), if the business was not carried on during the account year or part of that year. The fact that the legislature has brought about these changes supports the construction of sub-section (2A) which we are inclined to place on that sub-section. While construing a statute, the court is at liberty to look at the provisions of a subsequent Act, whenever the construction is obscure or ambiguous. In Ormond Investment Company Limited v. Betts, Lord Atkinson referred to this well-recognised principle in dealing with construction of statutes, and said:

“… where the interpretation of a statute is obscure or ambiguous, or readily capable of more than one interpretation, light may be thrown on the true view to be taken of it by the aim and provisions of a subsequent statute.”

13. For the reasons stated above, we must uphold the construction suggested by Mr. Kaji and in that view, the amount of Rs. 18,401 could not be brought to tax as that benefit was received or obtained by the assessee-company in the accounting year when the business had ceased and was not carried on at all. The construction adopted by us is not only consistent with the scheme of section 10 as a whole, but it is to a certain extent supported by the observations made in Commissioner of Income-tax v. Express Newspapers Ltd.

14. The second contention urged by Mr. Kaji was that as the remission was given in February, 1958, and as the business of the assessee-company had then ceased to exist, the proper accounting year would be the financial year 1957-58 and, therefore, the assessment year would be 1958-59. He urged, therefore, that the Tribunal was in error in coming to the conclusion that the proper assessment year was 1959-60. In our view, there is no substance in this contention. Under section 2(11), the previous year means in respect of any separate source of income, profits and gains, 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 date to which his accounts have been so made up. We find from the returns filed by the assessee-company that the company had in fact exercised its option and had fixed the previous year ending on December 31, 1958, in other words, it had already exercised the option, while filling in the returns, for its previous year, namely, the calendar year 1958. That being the position, the proper assessment year would be 1959-60. But the original returns as also the revised returns were not made part of the statement of the case, but Mr. Kaji agreed that they can be brought on record, and by consent of the parties have been made part of the statement of the case. We find from the original returns filed by the assessee-company on October 5, 1959, that the company had in those returns shown the amount of Rs. 54,096 as part of its total income and in those returns had specifically stated that the calendar year 1958 was its accounting year. It is true that subsequently the assessee-company filed revised returns on February 11, 1960, and though in Part A of the returns it only showed Rs. 79 as its total income, that amount being the interest amount, in Part B of the returns it did show the amount of Rs. 54,172 but as a sum which was not taxable. But in the revised returns, the assessee-company did not change its previous year which in the original returns it had specifically stated to be the calendar year 1958. That being so, the assessee-company must be said to have exercised its option within the meaning of section 2(11) and, therefore, its previous year was the calendar year 1958. Mr. Kaji referred to two cases in Bisheshwar Singh v. Commissioner of Income-tax and Binodi Ram Balchand v. Commissioner of Income-tax, but in view of the fact that the assessee-company has exercised its option, neither of these two decisions can come to his assistance. That being so, we do not see any merit in the second contention urged by Mr. Kaji.

15. But as we are with Mr. Kaji on the question of interpretation of sub section (2A), our answer to the first question will have to be in the negative. In view of our answer to the first question, the second question would not actually arise. But in the event of our being not correct in our answer to the first question, we would answer the second question in the affirmative. The Commissioner will pay to the applicant the costs of this reference.