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Section 176(4) in The Income- Tax Act, 1995
The Income- Tax Act, 1995
Section 41(2) in The Income- Tax Act, 1995
Section 28 in The Income- Tax Act, 1995
Section 41(1) in The Income- Tax Act, 1995

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Calcutta High Court
Commissioner Of Income-Tax vs Justice R.M. Datta on 4 July, 1989
Equivalent citations: 1989 180 ITR 86 Cal
Author: A K Sengupta
Bench: A K Sengupta, B P Banerjee

JUDGMENT

Ajit K. Sengupta, J.

1. This reference has been made at the instance of the Commissioner of Income-tax. The question referred to this court is :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee's professional receipts were not assessable under Section 176(4) of the Income-tax Act, 1961, for the assessment years 1968-69 and 1969-70 ?"

2. The assessee, in the present reference, is Justice Ramendra Mohan Datta who has since retired as a judge of this court. The assessee received sums of Rs. 14,000 and Rs. 10,000 in the accounting years relevant to the assessment years 1968-69 and 1969-70, respectively, as arrears of professional fees from solicitors and clients for services rendered by him as a lawyer before he was elevated to the Bench in the year 1967.

3. The Income-tax Officer found that the assessee had maintained his accounts on receipt basis, i.e., on cash basis, and not on accrual basis. He, however, held that the sums received by the assessee as arrears of professional fees were not received before his discontinuance of the profession, although it could have been included in the total income of the assessee had it been received before such discontinuance. Hence, he was of the view that the said amount would be chargeable to income-tax in view of Section 176(4) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). Accordingly, he charged the same to tax in both the years.

4. On an appeal having been preferred by the assessee, the Appellate Assistant Commissioner, by his order dated June 7, 1973, held in favour of the assessee. The Appellate Assistant Commissioner, following the decision of the Appellate Tribunal in Income-tax Appeals Nos. 2319, 2320 and 2321 (Cal) of 1969-70, held that the said amount received by the assessee is not taxable as Section 176(4) of the Act is not applicable to the case of the assessee.

5. On an appeal preferred before the Appellate Tribunal, the Tribunal followed its earlier decision in the case of Hon'ble Mr. Justice C.N. Laik delivered on January 22, 1972, in Income-tax Appeals Nos. 2319, 2320 and 2321 (Cal) of 1969-70, held in favour of the assessee. According to the Tribunal, Section 176(4) of the Act creates a fiction by which the sum received after the discontinuance of the profession is deemed to be of income nature. Unless the Legislature introduces a further fiction that such income is deemed to be income from profession, it is not open to the Department to bring such receipts to charge under the head "Profits and gains of business or profession". According to the Tribunal, the said income also cannot be brought under the head "Income from other sources",

in view of the decision of the Supreme Court in the case of Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT [1966] 61 ITR 428.

6. The Tribunal, on an application being made by the Commissioner of Income-tax, has made this reference on the question referred to hereinbefore.

7. Learned counsel for the Department contended that in view of the introduction of Section 176(4) in the Act, the said receipts are liable to be taxed as the income of the assessee. The contention of the Revenue is that if one considers the scheme of the Act and the setting in which Section 176(4) of the Act has been placed, it will be evident that when receipts from a discontinued profession are deemed to be income by law, the natural corollary is that they should be deemed also to be income from business or profession. Accordingly, it was contended that the receipts in question are deemed to be the income of the assessee in view of Section 176(4) of the Act and are chargeable to tax in the relevant year.

8. On behalf of the assessee, Dr. Debi Pal, learned counsel, relied upon the decision of the Supreme Court in Nalinikant Ambalal Mody [1966] 61 ITR 428 and submitted that the receipts of the assessee were the outstanding dues of professional work done and were clearly the fruits of the assessee's professional activity. They were the profits and gains of a profession and they fell under Section 14D of Chapter IV of the Act, viz., "Profits and gains of business or profession". As the assessee maintains his accounts on receipt basis, at the time when the assessee has received his outstanding dues of professional work, he had discontinued his profession as, in the year 1967, he had been appointed as a judge of this court. Hence, in the relevant year, he did not carry on his profession. As the source of his professional income had dried up because of the discontinuance of the profession in this relevant year, the said receipts cannot be charged under Section 28 of the Act which is applicable in the case of profits or gains of any business or profession which has been carried on by the assessee at any time during the relevant previous year. The receipts also cannot be brought to tax under Section 56 of the Act under the head "Income from other, sources". Dr. Pal further submitted that even by the introduction of Section 176(4) in the Act, such receipts cannot be brought to tax as income falling under the head "Profits and gains of business or profession". According to Dr. Pal, Section 176(4) of the Act, by a deeming provision, has introduced two fictions, viz. (a) deeming the professional receipts after the discontinuance of the profession as the income of the recipient ; and (b) deeming such income to be the income in the year of receipt. Section 176(4) of the Act has not created a third or further fiction of deeming such receipts to be the business or professional income of the assessee. According to him, in the absence of a specific provision deeming such

receipts to be of the nature of professional receipts taxable under Section 28 of the Act, such receipts cannot be brought to tax under the head "Profits and gains of business, profession or vocation". If such income cannot be brought under the head "Profits and gains of business, profession or vocation" in view of the decision of the Supreme Court in the case of Nalinikant Ambalal Mody [1966] 61 ITR 428, the said income cannot be brought under the residuary head "Income from other sources". Reference has also been placed upon the decision of the Supreme Court in the case of CIT v. Ajax Products Ltd. [1965] 55 ITR 741 and also the decision of the Gujarat High Court in the case of Baroda Traders Ltd. v. CIT [ 1965] 57 ITR 490. Dr. Pal further submitted that if it was the intention of Parliament to treat such receipts as income falling under the head "Profits and gains of business, profession or vocation" and would be chargeable to tax under the said provision, Parliament would have introduced a further fiction that the said receipts 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 from which such receipts have been obtained is in existence in that year or not. Such fiction has been introduced in Section 10(5A) of the Indian Income-tax Act, 1922, and also in Section 41(1) and Section 41(2) of the Act. In the absence of any such fiction introduced by Parliament, Section 176(4) of the Act cannot have any application in respect of receipts from a profession which had been discontinued from an earlier year.

9. On a careful consideration of the rival contentions of the parties, we are of the view that the contention of Dr. Pal has substantial force and should be accepted. It is an admitted position that the assessee had been maintaining his accounts on receipt basis. It is also an admitted position that the sums in question had been received by the assessee by way of receipts of professional fees for the professional services rendered by the assessee before he was appointed as a judge of this court in 1967. The assessee, undoubtedly, has not practised his profession during the relevant year as he is not permitted to practise the profession of law since he had been appointed as a judge of this court

10. In view of the aforesaid facts, the decision of the Supreme Court in Nalinikant Ambalal Mody [1966] 61 ITR 428 is clearly applicable. In that case, the assessee who was an advocate, had adopted the calendar year as the accounting year and had kept his accounts on cash basis or receipt basis. He ceased to carry on his profession from March 1, 1957, when he was elevated to the Bench of a High Court. In the years 1958 and 1959, during no part of which he carried on any profession, he received certain moneys on account of fees outstanding for professional work done by him before March 1, 1957. The Supreme Court, on the above facts, held that the receipts were not charge-able to tax at all. The receipts were the outstanding dues of professional work done and were clearly the fruits of the assessee's professional activity. They were the profits and gains of a profession and they fell under the fourth head, namely, "Profits and gains of business, profession or vocation". They were not, however, chargeable to tax under that head because, under the corresponding computation section, i.e., Section 10 of the Indian Income-tax Act, 1922, an income received by an assessee, who kept his accounts on the cash basis, in an accounting year in which the profession had not been carried on at all was not chargeable to tax. Nor could the receipts be brought to tax under Section 12 of the Indian Income-tax Act, 1922, as "Income from other sources". As the heads of income were mutually exclusive and the receipts could be brought under the fourth head, they could not be brought under the residuary head "Income from other sources".

11. No doubt, the decision was rendered by the Supreme Court on an interpretation of the provisions of the Indian Income-tax Act, 1922. The question, therefore, arises whether the law laid down by the Supreme Court in the above decision is also applicable under the Income-tax Act, 1961, particularly, in view of the fact that a new provision, viz., Section 176(4) of the Act, has been introduced in the Income-tax Act, 1961, which does not find place in the earlier Act of 1922.

12. Section 176(4) of the Act lays down that where any profession is discontinued in any year on account of the cessation of the profession by, or the retirement or death of, the person carrying on the profession, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the aforesaid person had it been received before such discontinuance. The said provision, therefore, creates two fictions. The first fiction is that any sum received after the discontinuance of the profession shall be deemed to be the income of the recipient. The second fiction is that the said income shall be charged to tax in the year of receipt, if such sum would have been included in the total income of the person had it been received before such discontinuance. By the aforesaid fiction introduced by Section 176(4) of the Act, the sum received after the discontinuance of the profession is to be treated as the income of the assessee chargeable to tax in the year in which such amount is received. But, as observed by the Supreme Court in Nalinikant Ambalal Mody [1966] 61 ITR 428, income-tax, however, has to be charged, according to Section 4, which is the charging provision, in accordance with and subject to the provisions of the Income-tax Act in respect of the total income of a person. The said Section does not provide that the entire total income shall be chargeable to tax. It says that the chargeability of an

income to tax has to be in accordance with and subject to the provisions of the Act. The income, therefore, has to be brought under one of the heads falling under Section 14 of the Act and can be charged to tax only if it is so chargeable under the computation section corresponding to that head. Income which comes under the head "Profits and gains of business, profession or vocation", that is, professional income, can be brought to tax only if it can be so done under the rules of the computation provisions laid down in Sections 28 to 43A of the Act. If it cannot be so brought to tax, it will escape taxation even if it is included in the total income under Section 5 of the Act. It is also to be noticed that "total income" as defined in Section 2(45) of the Act means the total amount of income referred to in Section 5, computed in the manner laid down in the Act. It will, therefore, appear that the receipts in question in the present case can only be computed for chargeability to tax, if at all, under Sections 28 to 43A of the Act as income under the head "Profits and gains of business, profession or vocation". If they cannot be brought to tax by computation under those sections, they would not be included in the "total income" as defined in Section 2(45) of the Act for the purpose of chargeability.

13. The aforesaid proposition is supported by the decision of the Supreme Court in the case of Nalinikant Ambalal Mody [1966] 61 ITR 428. In the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294, the Supreme Court pointed out that (at p. 299) "the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section, there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion."

14. In order, therefore, to bring to charge professional receipts after the discontinuance of the profession, a further fiction is to be inserted, viz., that such professional receipts are deemed not only to be the income of the assessee but such income is also deemed to be the income of the profession carried on by the assessee during the relevant year. The question, therefore, arises whether such a fiction can be presumed or inferred where Parliament has not introduced such a fiction. Reference may, in this connection, be made to the case cited by Dr. Pal in CIT v. Ajax Products Ltd. . The said case arose under the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922, corresponding to Section 41(2) of the Income-tax Act, 1961. The scope of the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922, fell to be construed by the Supreme Court in the aforesaid decision. The Supreme

Court held that in order that the amount realised in excess of the written down value, on the sale of the building, machinery or plant used in the business, might be deemed to be the profits under the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922, the following three conditions are to be satisfied :

(i) during the entire previous year or a part thereof, the business should have been carried on by the assessee ;

(ii) the building, machinery or plant should have been used in the business ; and

(iii) the building, machinery or plant should have been sold when the business was being carried on and not for the purposes of letting out and not for the purposes of closing down or winding it up.

15. The insertion of the words "whether during the continuance of the business or after the cessation thereof" in the proviso introduced by the amendment of 1949 only removed one of the conditions for the exigibility of the excess to tax, viz., the third condition. After the amendment, the excess realised is deemed to be profits notwithstanding that the sale took place after the business ceased ; but the amendment did not introduce a further fiction that the business must also be deemed to have been conducted by the assessee during the previous year in which the sale took place. Therefore, even after the amendment of 1949, it was necessary that during the whole or a part of the previous year, the business should have been carried on by the assessee in order that the excess realised on the sale of the building, machinery or plant could be treated as profits of the business under the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922.

16. The Supreme Court, in that case, further pointed out that the fiction created by the amendment introduced in 1949 is a limited one for a specific purpose and the fiction cannot be enlarged for the purpose of introducing a further fiction that the business must also be deemed to have been conducted by the assessee during the year in which the sale took place.

17. In view of the principle laid down by the Supreme Court in the aforesaid decision, in our view, the fiction created by Section 176(4) of the Act is a limited one and cannot be enlarged by importing a further fiction by deeming the sums so received as the income of the business or profession carried on by the assessee during the relevant year arid accordingly chargeable to income-tax under the head "Profits and gains of business, profession or vocation".

18. The Supreme Court, in the case of CIT v. Amarchand N. Shroff , administered a caution that a fiction should not be

stretched beyond the purpose for which it was enacted. The said caution was also noticed by the Supreme Court in the case of CIT v. Ajax Products Ltd. [19651 55 ITR 741. The legal fiction introduced by Section 176(4) of the Act should only be limited to the purpose for which it has been so created and there can be no justification for expanding it so as to introduce a further fiction by which the sum so received is to be treated as if it was income from business or profession carried on by the assessee during the relevant year.

19. The view that we are taking is also supported by the legislative intention which can be ascertained from the various other provisions of the Act Wherever Parliament had the intention to treat a certain amount to be the profits and gains of business or profession and chargeable to tax as the income of the relevant previous year, Parliament has specifically created a fiction for such a specific purpose. Parliament, while introducing Section 10(5A) of the Indian Income-tax Act, 1922, specifically provided that any compensation or other payment due to or received by a managing agent or a manager or any person specified therein shall be deemed to be profits and gains of the business carried on by the managing agent, manager or other person, as the case may be, and shall be liable to tax accordingly. Reference may also be made to Section 41(1) and Section 41(2) of the Act. Under Section 41(1) of the Act, where an allowance is granted in any year in respect of any loss, expenditure or trading liablity and, subsequently, during any previous year, the assessee receives, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or the assessee is benefited by the remission or cessation of a trading liability, the amount received or the amount of the liability which is extinguished is deemed by a fiction to be the profits and gains of the business or profession and, accordingly, chargeable to income-tax as the income of the previous year. Similarly, under Section 41(2) of the Act, where a building, machinery, plant or furniture owned by the assessee is sold, discarded, demolished or destroyed, so much of the balancing profits as does not exceed the difference between the actual cost and the written down value is chargeable to income-tax as income of the business or profession of the previous year in which the money payable for the building, machinery, plant and furniture becomes due. The fiction introduced by Section 41(2) of the Act also treats the balancing profits as the income of the business or profession. Section 176(4) of the Act, unlike the above provision, by a fiction, merely treats the receipt in question as the income of the recipient. The said section, however, has not introduced any further fiction by which the character of the receipt is to be determined viz., whether it should be deemed to be the profits of the business or profession falling under Section 28 of the Act. The fiction introduced by Section 176(4) of the Act cannot be pressed into service as indicative of the head of charge, namely, whether

it should be treated as the income of the business or profession chargeable under Section 28 of the Act. In the absence of any such fiction, it cannot be presumed that the legislative intention was to introduce a further fiction for the purposes of treating the said receipt as the income of the business or profession. The difference in the phraseology employed in Section 41(1) and Section 41(2) of the Act and the terms of Section 176(4) of the Act support the contention of Dr. Pal that the Legislature did not intend that Section 176(4) of the Act will come into play even in a case where the profession in respect of which the amount has been received is not in existence in any part of the year. The word "accordingly" in Section 176(4) of the Act, in our view, cannot be considered as indicative of the head of charge, viz., that the income should be deemed to be the income falling under the head "Profits and gains of business, profession or vocation", even in a case where the profession is not carried on during any part of the relevant previous year.

20. We agree with the contention of Dr. Pal that Section 176(4) of the Act is in the nature of a charging provision and should have found its place appropriately under Part D of Chapter IV of the Act which deals with income from business or profession. Dr. Pal, in this connection, has also drawn my attention to the recommendations of the Chokshi Committee which has also taken the view that Section 176(4) of the Act forms a part of the charging provision and should not have found a place in the Chapter largely dealing with procedural requirement to prevent loss of revenue. Section 176(4) of the Act being in the nature of a charging provision, the rule of construction adopted by Rowlatt J. in Cape Brandy Syndicate v. IRC [1921] 1 KB 64 at page 71, would be appropriately applied. It has been held in the said case that "In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used". The Supreme Court applied the aforesaid rule of construction in the case of CIT v. Ajax Products Ltd. [1965] 55 ITR 741 and observed that (at page 747) the subject is not to be taxed unless the charging provision clearly imposes the obligation. Equally, it is also the rule of construction that if the words of a statute are precise and unambiguous, they must be accepted as declaring the express intention of the Legislature.

21. In the light of the aforesaid rule of construction, the legislative intention indicated by the express language of Section 176(4) of the Act does not warrant any assumption of a further fiction treating the receipts as the income chargeable under the head "Profits and gains of business, profession or vocation". Wherever Parliament has intended to introduce such a fiction, it has expressly said so as in Section 10(5A) of the Indian Income-tax Act, 1922, and in Section 41(1) and Section 41(2) of the Act.

22.

In this connection, reliance has been placed by the Revenue upon the decision of the Andhra Pradesh High Court in the case of V. Parthasarathy v. Addl. CIT [1976] 103 ITR 508. In that case, the petitioner, who had been practising as an advocate on the rolls of the High Court ceased to practise on April 4, 1968, consequent on his elevation as a judge, of the High Court. He retired from the office of judgeship on March 6, 1972, and in June, 1972, he resumed practice and notified the Bar Council accordingly. After the elevation to the office of judge and during the assessment years 1969-70 and 1970-71, the petitioner received some amounts by way of fees for the professional services rendered during the period prior to his appointment as judge and the same was assessed to income-tax. No appeal was filed before the Appellate Assistant Commissioner. A revision petition filed under Section 264 of the Act before the Commissioner of Income-tax was unsuccessful. Aggrieved by that, the petitioner filed a writ petition under Article 226 of the Constitution of India contending, inter alia, that he had not discontinued his profession, but merely suspended it on account of constitutional disabilities during the period in which he held the office as judge, and even otherwise, to come within the mischief of Section 176(4) of the Act, this discontinuance must be either by retirement or death and not otherwise and, therefore, Section 176(4) of the Act had no application to him. It was also contended that, in any event, Section 176(4) of the Act would cover only cases of voluntary cessation and not involuntary cessation by virtue of constitutional limitations. The aforesaid contentions, however, were negatived by the Andhra Pradesh High Court. In our view, the said decision is only an authority for the proposition that even involuntary suspension of the profession of law consequent upon the assessee's elevation to the office of judge amounts to discontinuance of the profession within the meaning of Section 176(4) of the Act. The various contentions urged by Dr. Pal, on behalf of the assessee, in the present reference were neither raised before the Andhra Pradesh High Court nor were adjudicated upon by the Andhra Pradesh High Court. In view of the said position, in our view, the decision reported in V. Parthasarathy cannot be said to have decided the questions raised in the present reference.

23. For the foregoing reasons, we are of the view that the receipts of the assessee from his professional services, while he was at the Bar and before his elevation to the Bench of this court, cannot be treated as income falling under the head "Profits and gains of business, profession or vocation" even in spite of the introduction of Section 176(4) of the Act. In that view of the matter, as the receipts were the outstanding dues of the professional work done by the assessee, they were clearly the fruits of the assessee's professional activity. They were the profits and gains of a profession and they fall under the head "Profits and gains of business, profession or vocation". If,

in the absence of any legislative provision, such receipts cannot be treated as income falling under the head "Profits and gains of business, profession or vocation" carried on by the assessee during the relevant year, such receipts cannot be brought to tax under Section 50 of the Act as income from other sources in view of the decision of the Supreme Court in Nalinikant Ambalal Mody [1966] 61 ITR 428. In our view, in spite of the introduction of Section 176(4) of the Act, in the absence of any deeming provision treating such receipts as income falling under the head "Profits and gains of business, profession or vocation", as the assessee had not carried on any profession in any part of the relevant, previous year, the said income cannot be taxed under Section 28 of the Act nor can such income be taxed under Section 56 of the Act as income from other sources. The ratio of the decision of the Supreme Court in the case of Nalinikant Ambalal Mody [1966] 61 ITR 428 will be applicable in spite of the introduction of Section 176(4) of the Act.

24. For the reasons aforesaid, the question referred in this reference is answered in the affirmative and in favour of the assessee.

25. There will be no order as to costs.

Bhagabati Prasad Banerjee, J.

26. I agree.