judgement:
: Civil Appeal No. 33 of 1953.
Appeal by special leave from the Judgment and Order dated the 16th May, 1951, of the High Court of Judicature at Patna in Miscellaneous Judicial Case No. 126 of 1950, arising out of the Order dated the 17th May, 1949, of the Income tax Appellate Tribunal, Calcutta Bench, Calcutta, in I.T.A. No. 147 of 1948 49.
sukumar Mitra (section N. Mukherjee with him) for the appellant.
C.K. Daphtary,.
Solicitor General for India (Porus A. Mehta, with him) for the respondent 1954.
February 9.
The Judgment of the Court was delivered by DAS J.
This is an appeal by special leave from the judgment of the Patna High Court delivered on a reference made by the Income tax Appellate Tribunal under section 66(1) of the Indian Income tax Act.
The tribunal referred the following two questions for the opinion of the High Court: 769 1.
On the facts and in the circumstances of this case is the surplus of Rs. 13,05,144 arising out of the sale of the plant and machinery of the sugar factory chargeable under section 10 (2) (vii) ? 2. Was the profit of Rs. 15,882 on the sale of stores of the factory taxable under the Income tax Act in the circumstances of this case ? The reference came up for hearing before a Division Bench consisting of Shearer and Sarjoo Prasad JJ.
and after a prolonged hearing the learned Judges delivered separate judgments on the27th February.
1951, giving divergent answers to the questions, Shearer J. answering both the questions in the negative and Sarjoo Prasad J. giving an affirmative answer to both of them.
The matter thereupon was placed before a third Judge, Ramaswami J. who, after a fresh hearing delivered his judgment on the 16th May, 1951, agreeing with Sarjoo Prasad J. on the first question and with Shearer J. on the second question.
The result was that the High Court by a majority decision answered the first question in the affirmative, i.e., against the assessee, and the second question in the negative, i,e.
in favour of the assessee.
The assessee applied to the High Court for leave to appeal to this court against the High Court 's decision on the first question.
The High Court having declined to grant the necessary certificate the assessee applied for and obtained the special leave of this court to prefer the present appeal.
The department has not preferred any appeal against the High Court 's decision on the second question and nothing further need be said about that question.
The controversy arose in course of the proceedings for the assessment of Pursa Ltd. to income tax for the assessment year 1945 46, the relevant accounting year covering the period between the 1st October, 1943, to 30th September, 1944.
Pursa Ltd., was a company incorporated in 1905 under the Indian Companies Act but all its shareholders and directors were residents in the United Kingdom.
The business of the 770 company was that of growers of sugarcane, manufacturers of sugar and dealers in sugar.
It is common ground that the crushing season for the manufacture of sugar is from December to April of each year.
It appears that towards the end of 1942 an attempt was made to sell the entire business of the company but such attempt did not succeed.
It appears from the case filed by the respondent in tiffs appeal that in the middle of 1943 the directors of the company commenced negotiations for the sale of the factory and other assets of the company with the ultimate object of winding up the company.
From the correspondence, affidavit and other materials placed before the tribunal and referred to by Sarjoo Prasad J. in his judgment it appears that on the 9th August, 1943, an inventory was prepared and a firm offer was received from Dalmia lain & Company Ltd., for the purchase of the factory and stores as on that date.
This offer was on the 16th August, 1943, communicated by cable to the directors in England.
On the 20th August, 1943, the directors, asked the local managers in India to proceed with the matter in anticipation of the sanction of the shareholders which the directors expected to obtain at an extraordinary general meeting to be held very shortly.
That meeting, however, was held on the 8th October, 1943, i.e., 8 days after the accounting year had started.
, At that meeting the firm offer of Dalmia lain & Company Ltd. was accepted and a concluded agreement for sale came into existence.
Thereafter instructions were given to the solicitors to draw up the necessary documents.
On the 7th December, 1943, a written memorandum of agreement was executed whereby the company agreed to sell and demise to Dalmia Jain & Company Ltd., free from all mortgages and charges at and for the price of rupees twenty eight lacs all the lands, buildings, machinery and plant and all vats, reservoirs, cisterns, pumps, machinery, engines, boilers, plant, implements, utensils, tramways, furniture, stores, articles and things as on the ninth day of August, one thousand nine hundred and forty three (subject to subsequent use and consumption in the ordinary course 771 of business) used in connection with the said sugar factory, but excepting stocks of manufactured sugar and stocks of grain in godown on the ninth day of August, one thousand nine hundred and forty three and all stores and other articles bought or received by the company after the date.
Dalmia Jain & Company Ltd., paid the sum of rupees twenty eight lacs on the same day and on the 10th December, 1943, they got possession of the factory.
On the date of the aforesaid sale, the company possessed sugar stock valued at rupees six lacs which was excluded from the sale.
This stock of sugar the company continued to sell up to June, 1944.
It is said that the said stock of sugar was excluded because at the time it was not possible to know at what date such a sale would be concluded and the sugar produced in 1943 had to be sold by and through the exclusive selling agents of the company under a contract entered into with them.
It is, however, not disputed that between the 9th August, 1943, when the firm offer was obtained and the 10th December, 1943, when possession of the factory was made over to Dalmia Jain & Company Ltd., the company never used the machinery and plant for the purpose of manufacturing sugar or for any other purpose except that of keeping them in trim and running order.
Indeed, throughout the accounting period the machinery and plant were not used by the company.
The company went into voluntary liquidation on the 20th June, 1945.
The reason for the delay in putting the company into liquidation is said to have been caused by considerable legal difficulties with regard to the transfer of certain mokarari lands belonging to the company.
The liquidators appointed by the shareholders of the company represented the company in the matter of proceedings for assessment of the company for the assessment year 1945 46.
In the course of these assessment proceedings the Income tax Officer on the 21st February, 1947, wrote a letter to the liquidators asking for elucidation on certain points.
Amongst other things, the Income tax Officer wanted to know the liquidators ' objection why the company 's activities during the previous 772 year might not be treated as amounting to a realisation of assets on impending liquidation rather than to the carrying on of business within the meaning of the Income tax Act.
To this letter an answer was sent by the liquidators .
on the 19th March, 1947, pointing out that the company had gone into liquidation on the 20th June, 1945, and that in view of the date of liquidation the liquidators could not agree that the company was not carrying on business during the year ended 30th September, 1944, and they further pointed out that the various debits contained in the sugar factory accounts were those incurred in carrying on the company 's business.
By his letter dated the 17th May, 1947, the Income tax Officer claimed that large profits which had been made by the company on the sale of their machinery and plant were taxable under the second proviso to section 10 (2)(vii)of the Income tax Act and called upon the liquidators to retain sufficient funds and assets in their hands to meet the heavy tax liabilities that might eventually arise and also to warn the shareholders accordingly.
He also asked for certain information which, however, the liquidators did not furnish.
The liquidators, in their letter in reply dated the 22nd May, 1947, did not agree that the profits were taxable, for the profits to which reference had been made were not profits arising from a business carried on by the company but were profits arising from the company ceasing to carry on business.
The Income tax Officer, however, by his order dated the 21st June, 1947, held that the profits of the sale of machinery and plant were liable to assessment under section 10 (2)(vii)of the Act and added a sum of Rs. 13,05,144 to the profits.
The Appellate Assistant Commissioner of Income tax having dismissed the liquidators ' appeal on the 30th January, 1947, the liquidators went up on further appeal to the Income tax Appellate Tribunal.
By its order dated the 17th May, 1949, the tribunal dismissed that appeal.
Upon an application under section 66(1) of the Act the tribunal stated a case to the High Court referring the two.
questions herein before 773 set out.
The subsequent history of the matter has already been mentioned and needs no reiteration.
The relevant portion of section 10 of the Income tax Act as amended by Act VI of 1939was as follows : "10 (1) The tax shall be payable by anassessee 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 : (i) . . . . . . . (ii) . . . . . . . (iii) . . . . . . . (iv) in respect of insurance against risk of damage or destruction of buildings, machinery, plaint, furniture, stocks or stores, used for the purposes of the business, profession or vocation, the amount of any premium paid; (v) in respect of current repairs to 'such buildings, machinery, plant, or furniture, the amount paid on account thereof; (vi) in respect of depreciation of such buildings, machinery, plant, or furniture being the property of the assessee, a sum equivalent to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed: (vii) in respect of any machinery or plant which has been sold or discarded, the amount by which the written down value of the machinery or plant exceeds the. amount for which the machinery or plant 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 machinery or plant is sold exceeds the written down value, the excess shall be deemed to be profits of the previous year in which the sale took place; . . . . . . . . . . . . . . . ." 774 It is necessary to bear in mind the meaning and import of the provisions of section 10 (2)(vii)in so far as they apply to the present case.
Under section 10 tax is payable by an assessee "in respect of the profits or gains of any business, profession or vocation carried on by him." "Business" is 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.
" As pointed out by the Judicial Committee in Shaw Wallace & Co. 's case(1) the fundamental idea underlying each of these words is the continuous exercise of an activity and the same central idea is implicit in the words "carried on by him" occurring in section 10 (1)and those critical words are an essential constituent of that which is to produce the taxable income.
Therefore, it is clear that the tax is payable only in respect of the profits or gains of the business which is carried on by the assessee.
Sub section (2)permits allowances to be made before the taxable profits are ascertained.
Proviso (2)to clause (vii) of that sub section on which the income tax authorities have relied makes 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 refers to the machinery or plant in respect of which the allowance is to be given under that clause.
Although the word "such" was not used in the body of clause (vii), the scheme of sub section (2) which is apparent from the other clauses of allowances e.g., (iv), (v) and (vi), clearly indicates 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 vacation." Indeed, the position has been made clear and placed beyond any doubt by the subsequent amendment of 1946 which added the word "such" in clause (vii).
The words"used for the purposes of the business" obviously [1] L. R, 59 I.A. 206 at p. 213.
775 mean used for the purpose of enabling the owner to carry on the business and earn profits in the business.
In other words, the machinery or plant must be used for the purpose of that business which is actually carried on and the profits of which are assessable under section 10 (1).
The word "used" has been read in some of the pool cases in a wide sense so as to include a passive as well as active user.
It is not necessary, for the purposes of the present appeal, to express any opinion on that point on which the High Courts have expressed different views.
It is, however, clear that in order to attract the operation clauses (v), (vi) and (vii) the machinery and plant must be such as were used, in whatever sense that word is taken, at least for a part of the accounting year.
If the machinery and plant have not at all been used at any time during the accounting year no allowance can be claimed under clause (vii) in respect them and the second proviso also does not come into operation.
In its statement of the case, after referring to its decision that the profits on the sale of machinery and plant were assessable under section 10 (2)(vii), the tribunal proceeded to state: "This decision was based on two considerations.
First, that as admitted by the applicant company the company had been carrying on its business up to the date of the sale of the machinery, namely, 7th December, 1943. 'The tribunal was of the opinion that as the applicant company had not ceased to carry on its business till the date of the sale of the machinery, it must be held that the sale of the 'machinery was a part of the applicant company 's carrying on of the business.
The second reason for the decision of the tribunal was that the applicant company did not sell its sugar stocks amounting to over Rs.6,00,000, on 7th December, 1943.
The applicant company s plea that the sugar stocks could not be sold as the applicant company had sole agents for the sale of sugar, was not accepted by the tribunal.
The ' Income tax Appellate Tribunal found that sugar continued to be sold for more than 6 months 776 after the sale of the machinery and substantial expenses on establishment and general charges continued to be incurred.
From this the Income tax Appellate Tribunal concluded that the sugar stocks had not been sold on 7th December; 1943, purposely in order to sell these to the best advantage later on.
This, the Income tax Appellate Tribunal held, showed that the applicant company carried on business even subsequent to the sate of machinery on '7th December, 1943." Although the High Court will not disturb or go behind the finding of fact of the tribunal, it is now well settled that where it is competent for a tribunal to make findings in fact which are excluded from review, the appeal court has always jurisdiction to intervene if it appears either that the tribunal has misunderstood the statutory language because the proper construction of the statutory language is a matter of law or that the tribunal has made a finding for which there is no evidence or which is inconsistent with the evidence and contradictory of it.
[See Lord Normand in Commissioners of Inland Revenue vs Fraser(1)].
It appears to us that the tribunal misdirected itself in law as to the meaning and import of the relevant provisions of section 10 of the Act. ]t completely overlooked the fact which is plainly in evidence on the record that the machinery and plant which were sold had not at all been used for the purposes of the business carried on in the accounting year and consequently the second proviso to section 10 (2) (vii) could have no application to the sale proceeds of such machinery and plant.
In fact the entire decision of the tribunal was vitiated by its failure to keep in view the true meaning and scope of section 10 (2) (vii) and cannot, therefore, be supported.
It further appears to us that in the statement of the case the tribunal was not merely stating something in the nature of a primary fact but was also drawing a conclusion which is to a certain extent contrary to the primary finding.
As is stated clearly in the statement of the case, the decision of the tribunal was based on (1) at p. 501.
777 two considerations.
The first consideration was rounded on an admission by the liquidators that the company had been carrying on its business up to the date of the sale of the machinery on the 7th December, 1943.
This admission is quite consistent with the case that the company was only selling its stock of sugar and not doing any business of manufacture of sugar.
Indeed, the manufacturing process does not begin until December of each year and the memorandum of agreement was made on the 7th December, 1943, and possession was delivered to the purchaser on the 10th December, 1943.
It is nobody 's case and it has not been found that the company had manufactured any sugar during the whole of the accounting year.
Therefore, this finding that the company carried on its business up to the 7th December, 1943, certainly does not indicate that the company was also carrying on any business of 'growing sugarcane or manufacturing sugar by the use of the machinery or plant in question.
The second finding that the company carried on business even after the sale of the machinery and the plant clearly indicates that that business had nothing to do with the machinery or plant.
Both the findings, therefore, are inconclusive.
The matter, however, does not rest there.
It appears to us that the findings of fact, taken literally, cannot support the decision of the tribunal.
If, as held by the tribunal, "the sale of the machinery was a part of the applicant company 's carrying on of the business" then the sale must be regarded as an ordinary operation of such business and consequently the profits arising out of such ordinary business operation would be assessable under the provisions of section 10 (1) and it would not be necessary to have recourse to the statutory fiction created by the second proviso to clause (vii)under which the excess of the sale proceeds over the written down value is to be deemed to be profits of the business.
If the profits on the sale of the machinery and plant are to be made assessable under the second proviso, as has ' been done by the tribunal, then it must be conceded that these deemed profits were not in reality the profits of the business carried on by the (2) 24 Tax Cases 498 at p. 501.
13 95 section C.I./59 778 company and, therefore, the sale transaction which brought in these profits was not in fact part of the company 's business, which conclusion again will be inconsistent with the finding of fact if the business is not understood as limited only to the selling of sugar.
For reasons stated above, it appears to us that having misdirected itself in law as to the scope and effect of the relevant portions of section 10 of the Act the tribunal did not approach the facts from a proper angle and, further, that its findings cannot, in the circumstances of this case, be given such sanctity as would exclude the same from review by the High Court or this court.
Turning to the facts to be gathered from the records it is quite clear that the intention of the company was to discontinue its business and the sale of the machinery and plant was a step in the process of the winding up of its business.
The sale of the machinery and plant was not an operation in furtherance of the business carried on by the company but was a realisation of its assets in the process of gradual winding up of its business which eventually culminated in the voluntary liquidation of the company.
Even if the sale of the stock of sugar be regarded as carrying on of business by the company and not a realisation of its assets with a view to winding up, the machinery or plant not being used during the accounting year at all and in any event not having had any connection with the carrying on of that limited business during the accounting year, section 10 (2) (vii) can have no application to the sale of any such machinery or plant.
In this view of the matter, the answer to the first question should be in the negative and we answer accordingly.
The result is that this appeal is allowed and the respondent shall pay the costs of the appellants both in this court and in the High Court.
Appeal allowed.
Agent for the appellant:B. N. Ghose.

summary:
The fundamental idea underlying the words used in the definition of "business" in section 2(4) of the Income tax Act the continuous exercise of an activity and the same central idea is implicit in the words "carried on by him" occurring in 10(1) and those critical words are an essential constituent that which is to be produce the taxable income, and therefore the 768 tax is payable only in respect of the profits or gains of the business which is carried on by the assessee.
That under clause (vii) of section 10(2) the machinery and plant must be such as were used at least for a part of the accounting year.
As the machinery and plant of the sugar factory which were sold had not at all been used for the purpose of business during the accounting year, the second proviso to s.10.
(2) (vii) could have no application and the assessees were not liable.
Although the High Court will not disturb or go behind a finding of fact of the Tribunal, it is well settled that where it is competent for a Tribunal to make findings of fact which are excluded from review, the appeal court has always jurisdiction to intervene if it appears either that the Tribunal has misunderstood the statutory language because the proper construction of the statutory language is a matter of law or that the Tribunal has made a finding for which there is no evidence or which is inconsistent with the evidence and contradictory of it.
Commissioner of Income tax vs Shaw Wallace and Company (L.R. 59 I.A. 206), and Commissioners o/Inland Revenue vs Fraser (24 Tax Cases 498) referred to.


judgement:
Appeals Nos, 731 732 of 1964.
Appeals by special leave from the order dated January 29, 1963 of the Commissioner of Income tax, Bombay City 1, in No. 1/RP/BBY/40 and 41 of 1961.
N. A. Palkhivala, T. A. Ramachandran, section P. Mehta and O, C. Mathur, for the appellant.
Sarjoo Prasad, R. Ganapathy Iyer and R. N. Sachthey, for the respondent.
The Judgment Of SARKAR, C.J. and MUDHOLKAR, J. was delivered by SARKAR, C.J. BACHAWAT, I. delivered a dissenting opinion.
Sarkar.
The assessee was an advocate of the High Court of Bombay and was practicing his profession there till March 1, 1957 when he was elevated to the Bench of that Court.
He then ceased to carry on his profession and has not resumed it since.
As an advocate he had been assessed to income tax on his professional income, his accounting years for the assessments being the calendar years, When he was raised to the Bench, various fees for professional work done by him were outstanding.
In the years 1958 and 1959 during no part of which he had carried on any profession, he received certain moneys on account of these outstanding fees.
297 His accounts had always been kept on the cash basis.
The question is.
whether be is liable to pay income tax on those receipts.
We shall first make a few general observations.
Section 6 of the Income tax Act, 1922 specifies six sources or heads of income which are chargeable to tax.
In order to be chargeable, an income has to be brought under one of these six heads.
section 6 also provides that the chargeability to tax shall be in the manner provided in sections 7 to 12B of the Act.
Each of these sections lays down the rules for computing income for the purpose of chargeability to tax under one or other of the heads mentioned in section 6.
An income falling under any head can only be charged to tax if it is so chargeable under the corresponding computing section.
The fourth head of income in section 6 is "Profits and gains of business, profession or vocation" and the fifth head "income from other sources".
The fifth head is the residuary head embracing all sources of income other than those specifically mentioned in the section under the other heads.
Then we observe that the several heads of income mentioned in section 6 are mutually exclusive; a particular income can come only under one of them: The United Commercial Bank vs The Commissioner of Income Tax(2).
We now turn to the present case.
The receipts in the present case are the outstanding dues of professional work done.
They were clearly the fruits of the assessee 's professional activity.
They were the profits and gains of a profession.
They would fall under the fourth head, viz., "Profits and gains of business, profession or vocation".
They were not, however, chargeable to tax under that head because under the corresponding computing section, that is, section 10, 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 is not chargeable and the income in the present case was so received.
This is reasonably clear and not in dispute: see Commissioner of Income Tax vs Express Newspapers Ltd.(1).
Can the receipts then be income falling under the residuary head of income and charged to tax as such? The Commissioner of Income tax from whose decision the present appeal has been taken by the assessee, held that it was chargeable under that head.
He came to that conclusion on what he thought were the general principles and also on the authority of a certain observation of Chagla, J. in Re. B. M. Kamdar(3).
The observation of Chagla, J. does not seem to us to be of much assistance for the decision in that case was not based on it nor is it supported by reasons.
We find ourselves unable to agree with the learned Judge.
We may add that apart from the observation in Kamdar 's case(1), there does not appear to be any direct authority supporting the view of the Commissioner.
(1) ; (2) (3) I.T.R. 10.
298 As to the general principles, we first observe that as the heads of income are mutually exclusive, if the receipts can be brought under the fourth head, they cannot be brought under the residuary head.
It is said by the Revenue that as the receipts cannot be brought to tax under the fourth head they cannot fall under that head and must therefore fall under the residuary head.
This argument assumes, in our view, without justification, that an income falling under one head has to be put under another head if it is not chargeable under the computing section corresponding to the former head.
If the contention of the revenue is right, the position would appear to be that professional income of an assessee who keeps his account on the cash basis would fall under the fourth head if it was received in a year in which the profession was being carried on, but it would take a different character and fall under the residuary head if received in a year in which the profession was not being carried on.
We are unable to agree that this is a natural reading of the provisions regarding the heads of income in the Act.
Whether an income falls under one head or another has to be decided according to the common notions of practical men for the Act does not provide any guidance in the matter.
The question under which head an income comes cannot depend on when it was received.
If it was the fruit of professional activity, it has always to be brought under the fourth head irrespective of the time when it was received.
There is neither authority nor principle for the proposition that an income arising from a particular head ceases to arise from that head because it is received at a certain time.
The time of the receipt of the income has nothing to do with the question under which particular head of income it should be assessed.
It is then said that the receipts had to be included in the total income stated in section 4 and since they do not fall under the exceptions mentioned in that section, they must be liable to tax and, therefore, they must be considered as income under the residuary head as they could not otherwise be brought to tax.
This contention seems to us to be ill founded.
While it is true that under section 4 the receipts are liable to be included in the total income and they do not come under any of the exceptions, the contention is based on the assumption that whatever is included in total income under section 4 must be liable to tax.
We find no warranty for this assumption.
Section 4 does not say that whatever is included in total income must be brought to tax.
It does not refer at ill to chargeability to tax.
Section 3 states that "Tax. shall be charged . . in accordance with, and subject to the provisions, of this Act in respect of the total income".
This section does not, in our opinion, 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 has therefore to be brought under one of the heads In section 6 and can be charged to tax only if it is so chargeable under 299 the computing section corresponding to that head.
Income which comes under the fourth head, that is, professional income, can be brought to tax only if it can be so done under the rules of computation laid down in section 10.
If it cannot be so brought to tax, it will escape taxation even if it be included in total income under section 4.
Furthermore, the expression "total income" in section 3 has to be understood as it is defined in section 2(15).
Under that definition.
total income means "total amount of income, profits and gains referred to in sub section
(1) of section 4 computed in the manner laid down in this Act", that is, computed for the purpose of chargeability under one of the sections from section 7 to section 12 B.
The receipts in the present case, as we have shown, can only be computed for chargeability to tax, if at all, under section 10 as income under the fourth head.
If they cannot be brought to tax by computation under that section, they would not be included in "total income" as that word is understood in the Act for the purpose of chargeability.
That all income included in total income is not chargeable to tax may be illustrated by referring to income from the source mentioned in the third head in section 6, namely, "Income from property".
The corresponding computing section is section 9 which says that tax shall be payable on income under this head in respect of bona fide annual value of property.
It is conceivable that income actually received from the property in a year may exceed the notional figure.
The excess would certainly be liable to be included in total income under section 4.
It however, cannot be brought to tax as income under the head "other sources", see Saliently House Estate, Ltd. vs Fry(1).
It is an income which cannot be taxed at all though it is included in total income as defined in section 4.
In Probhat Chandra Barua vs King Emperor(1) it was no doubt said that section 12 which is the computing section in respect of the residuary head of income, was clear and emphatic and expressly framed so as to make the head of "Other sources" describe a true residuary group embracing within it all sources of income, profits and gains, provided the Act applies to them, that is, provided they are liable to be included in total income under section 4 which deals with income to which the Act applies.
We are in full agreement with that observation but we do not think that it affords any support to the contention that all income liable to be included within total, income under section 4 must be brought to tax.
The observation must be read keeping in mind the undisputed principle that a source of income cannot be brought under the residuary head if it comes under any of the specific heads, for the Judicial Committee could not have overlooked that principle.
If we do that, it will be clear that all that the Judicial Committee said was that all sources of income which do not come under any of the other heads of income can be brought under the residuary head.
The words used are "embracing. all sources of income" and not all income.
It did not say that an (1) ; (2) 57 I.A. 228.
300 income liable to be included in the total income is chargeable to tax as income under the residuary head if it is not chargeable tinder a specific head under which it normally falls.
In Probhat Chandra Barva 's case(1) the Judicial Committee was not concerned with that aspect of the matter; the only question before it was, whether zamindari and certain other income fell under the third head of income from property, as the word 'property ' was understood in the Act.
Another aspect of Probhat Chandra Barua 's case(1) requires a mention.
The question that there arose, as we have just now said, was, whether the Income tax Act did not impose a tax on the income of a zamindar derived from his zamindari and certain other properties.
It was said on behalf of the assessee that the zamindari and the other income being income from property fell under the third head and could be brought to tax only under the corresponding computing section, section 9.
It was pointed out that the income could not be charged to tax under that section because it dealt only with income from house property which the income concerned was not.
It was then said that the income could not be taxed under the residuary head because it was really income from property and could be taxed only as such.
The Judicial Committee did not accept this contention.
It took the view that the word 'property ' in the third head "Income from property" had to be interpreted as restricted only to that kind of property which is described in the computing section, section 9 and as that section deals only with house property the income from zamindari and other properties did not fall under the head "Income from property".
It, therefore, found no difficulty in holding that the zamindari income was income from the residuary source.
We find no support in this case for the view that an income which is admittedly under a specific head can be brought to tax under the residuary head if it cannot be so brought under the cornputing section corresponding to that head.
That case only held that zamindari income was not income which fell under the head "Income from property" and that it could never so fall.
It provides ,no warranty for the contention that an income from one source may, in certain circumstances, be treated as income from a different source, which is the contention of the Revenue in the present case.
We think it right also to observe that if the receipts in the present case could be treated as income from the residuary source, the position would be most anomalous.
We have earlier said that if that were so, the placing of an income under this head would depend on the act of the assessee, it would depend on the time when the assessee chose to receive it.
That we conceive is not it situation which the Act contemplates.
But there is another and stronger reason to show that the Act did not contemplate it.
Suppose the assessee had kept his accounts on the mercantile basis.
(1) 57 I.A. 228. 301 He would then have been charged to tax on these receipts in the year when the income accrued which must have been a year when he was carrying on his profession as an advocate.
It could not then have been said that the receipts should be taken under the head "other sources".
If we are to accept the contention of the Revenue, we have to hold that the method of book keeping followed by an assessee would decide under which head a particular income will go.
If the Revenue is right, the income of the assessee would go under the fourth head if the method of accounting was mercantile and it would go under the fifth head if the accounting was the cash basis.
We are wholly unable to take the view that such can be the position under the Act.
The heads of income must be decided from the nature of the income by applying practical notions and not by reference to an assessee 's treatment of income: see Commissioner of Income tax vs Cocanada Radhaswami Bank Ltd.(1).
It now remains to see whether section 12 justifies a view contrary to that which we have taken.
It lays down the rules for computation of income under the head "Other sources".
It says that tax under the head "Income from other sources" shall be payable in respect of income of every kind which may be included in the total income if not included under any of the preceding heads.
It seems to us clear that the words "if not included under any of the preceding heads" which refer to the heads considered in sections 7 to 10 refer to income and not to a head of income.
section 12, therefore, deals with income which is not included under any of the preceding heads.
If the income is so included, it falls outside section 12.
Whether an income is included under any of the preceding heads would depend on what kind of income it was.
It follows that if the income Is profits and gains of profession, it cannot come under section 12.
Section 12 does not say that an income which escapes taxation under a preceding head will be computed under it for chargeability to tax.
It only says and this is most important that 'an income shall be chargeable to tax under the head "other sources" if it does not come under any other head of income mentioned in the Act.
Section 12 therefore does not assist the contention of the Revenue that professional income which cannot be brought to tax under section 10 may be so brought under section 12.
For these reasons we have come to the conclusion that the receipts were not chargeable to tax either under the head of professional income or under the residuary head, It was not said that the receipts might be brought to tax under any other head.
In our opinion, therefore, the receipts were not chargeable to tax at all.
We accordingly allow these appeals with costs.
(1) 3 S.C.R. 619.
302 Bachwat, J.
These appeals raise the question whether the professional income of an assessee whose accounts are kept on a cash basis, received by him during his life time after the discontinuance of the profession and after the close of the accounting year in which the profession is discontinued, is assessable to income tax either under section 10 or under section 12 of the Indian Income tax Act, 1922.
The assessee was practising as an advocate in the High Court of Bombay till March 1, 1957 when he was appointed a Judge of the High Court at Bombay.
His method of accounting was cash, and his accounting year was the Calendar year.
The relevant orders of the Income tax Officer suggest that his accounting year was the financial year ending on March 3 1, but it is now the common case of both the assessee and the Revenue that the accounting year was the Calendar year.
In the assessment year, 1958 59, the assessee was assessed to income tax in respect of the entire professional income received by him, during the Calendar year including the income received after March 1, 1957.
It is not disputed that the assessee was liable to pay tax in respect of the income received by him between March 1, 1957 and December 31, 1957.
During the Calendar years, 1958 and 1959, the assessee re ceived the sums of Rs. 30,570 and Rs. 15,240 respectively on account of professional fees for work done by him before March 1, 1957.
In the returns for the assessment years, 1959 60 and 196061, the assessee included the aforesaid two sums as his income from profession.
By his orders dated May 30, 1960 and October 26, 1960, the Income tax Officer subjected the aforesaid two sums to tax treating them as receipts of fees for professional services rendered in the earlier years and as part of the total income of the assessee.
On April 4, 1961, the assessee filed two revision petitions before the Commissioner of Income tax, Bombay City 1, under section 33 A contending that the aforesaid two sums were no part of his total income of the relevant accounting years and were included in his returns through an error and asking for their exclusion from his assessable income for the relevant assessment years.
By a common order dated January 29, 1963, the Commissioner of Income tax held that the two sums were assessable on general principles and also on the authority of the decision in Re. B. M. Kamdar(1), and rejected the revision petitions.
From this order, the assessee now appeals to this Court by special leave.
The first question is whether the two sums were assessable to tax under section 10 of the Indian Income tax Act, 1922.
Section 10(1) provides: "The tax shall be payable by an assessee under the head Profits and gains of business, profession or vocation ' in respect of the profits and gains of any business, profession or vocation carried on by him." (1) 303 Section 10 applies to the profits and gains of any business, profession or vocation carried on by the assessee.
Considering that the subject matter of charge is income of the previous year, the expression "carried on by him" must mean "carried on by him at any time during the previous year." To attract section 10(1), it is not essential that the assessee should have carried on the profession throughout the entire previous year or at the time when be realised the outstanding professional fees; it is sufficient that he carried on the profession at any time during the accounting year in which he realised his fees, see in re. Kamdar(1).
On the other hand, the section does not apply to the profits and gains of any profession which was not carried on by the assessee at any time during the previous year.
Our attention was drawn to several decisions of this Court dealing with section 10(2)(viii) and the second proviso to section 10(2)(vii).
In Commissioner of Income tax vs Express Newspapers Ltd(1) and Commissioner of Income tax vs Ajax Products Ltd.(1), this Court held that one of the essential conditions of the applicability of the second proviso to section 10(2)(vii) is that during the entire previous year or a part of it the business shall have been carried on by the assessee.
In the Express Newspapers Ltd. case(1), at page 259, Subba Rao, J. said: "Under section 10(1), as we have already pointed out, the necessary condition for the application of the section is that the assessee should have carried on the business for some part of the accounting year.
" These observations support the conclusion that the profits and gains of a business or profession are not chargeable under section 10(1), if the assessee did not carry on the business or profession during any part of the previous year.
In the instant case, the assessee discontinued his profession as soon as he became a Judge of the Bombay High Court.
He could not carry on the profession after he became a Judge.
It is not possible to hold that he continued to carry on the profession merely because he continued to realise his outstanding fees.
It follows that the assessee did not carry on his profession as an advocate at any time during the Calendar years, 1958 and 1959.
The receipts of the outstanding professional fees during 1958 and 1959 were not profits and gains of a profession carried on by the assessee during those years, and were not assessable to tax under section 10(1).
Section 13 provides that except where the proviso to that section is applicable, the income for the purposes of section 10 must be computed in accordance with the method of accounting regularly employed.
by the assessee.
Section 13 is mandatory.
In the instant (1) (2) , (3) ; 304 case, as the assessee employed the cash method of accounting and as the proviso to section 133 did not apply, his professional income during 1957 and the previous accounting years had to be computed on the cash basis.
The Revenue had no option in the matter.
Had the assessee adopted the mercantile method of accounting.
the entire income of the assessee arising from his profession before March 1, 1957 would have been included in his assessable income for those years, and no portion of it would have escaped assessment under section 10.
But as the assessee adopted the cash method of accounting, the outstanding fees could not be included in the assessment for those years.
The question is whether this income now escapes taxation altogether.
There is no doubt that by the method of accounting employed by the assessee, he has chosen to treat the receipts in question as income of the accounting years, 1958 and 1959.
The Revenue claims that the income was assessable to tax under section 12.
On behalf of the assessee, Mr. Palkhiwala submitted that (1) the income from the defunct source of profession, though not assessable under section 10, continued to fall under the head covered by section 10 and the residuary head under section 12 was not attracted, (2) section 12 covers residual heads and not residual receipts, and (3) that if section 12 were applied to this income, the assessee would suffer injustice because the deductions properly allowable under section 10 in respect of the income could not be allowed.
On the other ban(], Mr. Sarjoo Prasad appearing on behalf of the Revenue submitted that the receipts in question were part of the total income of the assessee for the relevant accounting years chargeable under section 3 read with sections 2(15) and 4.
and as the income was not exempt from tax and as it did not fall under section 10 or any other head, it must be assessed to tax under section 12.
In support of his contention, Mr. Sarjoo Prasad relied upon the opinion of Chagla, J. in re. Kamdar(1) at p. 58.
By section 3 read with sections 2(15) and 4, income tax is charged for every year in accordance with and subject to the provisions of the Act in respect of the total income of any previous year of the assessee computed in the manner laid down in the Act, including all income, profits and gains from whatever source derived.
which accrue or arise or are received or are deemed to accrue, arise or to be received as provided by section 4(1) and which are not exempted under section 4(3).
The crucial words in section 4 are "from whatever source derived".
The nature of the source does not affect the chargeability of the income.
Section 6 sets out the heads of income chargeable to tax.
The several heads are dealt with specifically in sections 7, 8, 9, 10 and 12.
Income is classified under different heads for the purpose of computing the net income under each head after making suitable deductions.
Income, profits and gains from what ever source derived, included in the total income fall under one (1) 305 head or the other, If any part of the total income does not fall under the specific heads under sections 7, 8, 9 and 10, it must fall under the residuary head under section 12.
Section 12(1) provides: "The tax shall be payable by an assessee under the head Income from other sources ' in respect of income, profits and gains of every kind which may be included in his total income (if not included under any of the preceding heads).
" Income, profits and gains of every kind are covered by section 12, provided two conditions are satisfied, viz., (1) they are not included under any of the preceding heads and (2) they may be included in the total income of an assessee.
Any income chargeable under a specific head can be charged only under that head and no part of that income can be charged again under section 12.
But any part of the total income of the assessee not assessable under a specific head is assessable under the residuary head covered by section 12.
Referring to similar words in section 12(1), as it stood before its amendment in 1939, Lord Russell observed in Probhat Chandra Barua vs The King Emperor(1): "These words appear to their Lordships clear and emphatic, and expressly framed so as to make the sixth head mentioned in section 6 describe a true residuary group embracing within it all the sources of income, profits and gains provided the Act applies to them i.e., provided that they accrue or arise or are received in British India or are deemed to accrue or arise or to be received in British India, as provided by section 4, sub section
(1), and are not exempted by virtue of section 4, sub section
" Referring to the words "income, profits and gains" in section 12, Lord Russell said in Gopal Saran Narain Shigh vs Income tax Commissioner(1): "The word 'income ' is not limited by the words 'profits ' and 'gains '.
Anything which can properly be described as income is taxable under the Act unless specially exempted. " And Sarkar, J. said in Sultan Brothers vs Commissioner of Incometax(1): "Section 12 is the residuary section covering income, profits and gains of every kind not assessable under any of the heads specified earlier.
" Section 6 gives the short label of each head, but the actual contents of the several heads are to be found in sections 7, 8, 9, 10 and 12.
Take the head "(iii) Income from property" in section 6.
Section 9 shows that only income from buildings or lands appurtenant thereto, of which the assessee is the owner, falls under this head.
Income from other properties, e.g., land not appurtenant to (1) [1930] L.B. 57 I.A. 228,239.
(2) [1915] L.R. 62 I.A. 207,213.
(3) , 357: 306 building is outside the purview of this head and fall s under section 12.
Again.
take the head "(iv) Profits and gains of business, profession or vocation.
" Section 10 on its proper construction applies only to the profits and gains of a business, profession or vocation carried on by the assessee during any part of the previous year.
Profits and gains of business, profession or vocation of the assessee which was not carried on by him during any part of the previous year being outside the purview of section 10 must necessarily fall under section 1 2.
Mr. Palkhiwala conceded that the receipts in question were the income of the assessee.
He also admitted that the income was not exempt from tax under sub section
(3) of section 4.
The income was received by the assessee in the taxable territories during the relevant previous years.
The receipts are, therefore, liable to be included in the total income.
We have found that this income cannot be included under section 10.
It is common case that it cannot be included under any other head.
It follows that the income must fall under the residuary head specified in section 12.
Section 12 dealing with the residuary head is framed in general terms and in computing the income under this head, requires deduction of any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income.
As the income in the present case falls under section 12, the allowance for the necessary expenditure must necessarily be given under this head and not under section 10.
There is no question of the assessee suffering an injustice by not being given the allowances under section 10.
He cannot be given the allowances under section 10, as the income does not fall under that section.
Counsel rightly submitted that section 12 covers residual heads and not residual receipts.
In this connection, he relied upon Salisbury House Estates Ltd. vs Fry(1).
That case decided that the various Schedules of the English Income tax Act, 1918 are mutually exclusive, Sch.
A must be applied to the class of income falling under it and no pay of this income is chargeable under Sch.
This decision received the approval of this Court in United Commercial Bank Ltd. vs The Commissioner of Income tax(2).
On the principle of this decision, if a particular income is taxable as income from property under section 9, any residual receipt from the property in excess of the annual value assessed under section 9 cannot be assessed again as residual income under section 12.
This principle has no application to the case before us.
The relevant professional income of the assessee is not taxable under section 10 or under any other specific head, and it must, therefore, be taxed tinder section 12.
This is not a case where the revenue has taxed or can tax the incomeunder section 10 and again seeks to tax the income under section 12.
Mr. Palkhiwala next referred us to several English decisions in support of his contention that the receipts of the professional (1) ; (2) ; 307 income after the discontinuance of the profession are not assess a ble to income tax.
Rowlatt, J. in Bennett vs Ogston(1) said: "When a trader or a follower of a profession or vocation dies or goes out of business because Mr. Needham is quite right in saying the same observations apply here and there remain to be collected sums owing for goods supplied during the existence of the business or for services rendered by the professional man during the course of his life or his business, there is no question of assessing those receipts to Income Tax; they are the receipts of: the business while it lasted, they are arrears of that business, they represent money which was earned during the life of the business and are taken to be covered by the assessment made during the life of the business, whether that assessment was made on the basis of bookings or on the basis of receipts." These bservations received the approval of the House of Lords in Purchase vs Stainer 's Executors(1) and Carson vs Cheyney 's Executors(1).
In ' the last two cases, the Court held that the professional earnings of a deceased individual realised by his executor were not liable to income tax either under Case II or under Cases III and VI of Schedule D of the English Income tax Act, 1918.
in Cheyney 's case(1), the professional earner had died in one of the assessment years and part of his earnings had been realised by his executor during the same assessment year.
It is remarkable, however, that in Cheyney 's case(1) at p. 265 Lord Reid said: "In my opinion, the ground of judgment in this House in Stainer 's case was that payments which are the fruit of professional activity are only taxable under Case 11 and cannot be taxed under Case III, even when it is no longer possible when they fall due to tax them under Case II, and when looked at by themselves and without regard to their source they would fall within Case Ill.
I am not sure that I fully appreciate the reasons for the decision, but I have no doubt that is what was decided, and I am bound by that decision whether I agree with it or not.
" The rule in Stainer 's case(1), rests on shaky foundations and has been subjected to criticism even in England.
The rule is subject to exceptions in England, and as pointed out by Jenkins, L. J. in Stainer 's case(1) is subject to the application of Rule 18 of the General Rules.
The Indian Income tax Act, 1922 is not pair material, the scheme is in many respects different from the scheme of the English Act, and I think that the rule in Stainer 's case(1) is not applicable to the Indian Act.
In England, the tax is on the I current year 's income, the Revenue has the option to assess the (1) ,378.
(3) (2) 308 income on the accrual basis, and even if it chooses to make an assessment on the cash basis, the entire accrued income might be considered to be covered by the assessment.
But under the Indian law, the tax is on the previous year 's income, the Revenue has no option to assess the income from a business or profession on the accrual basis if the accounts of the as are regularly kept on the, cash basis, and the assessment on the cash basis cannot cover the receipts in the subsequent years.
Moreover, it is impossible to say under the Indian law that all receipts of outstanding professional fees after the retirement of the assessee from profession escape taxation.
Beyond doubt, the receipt of the professional fees in the accounting year during which the assessee carried on the profession is assessable under section 10, though at the time of the receipt he has retired from the profession.
The decision in The Commissioner of Income tax, Bombay City 1, Bombay vs Amarchand N. Shroff(1) is entirely distinguish able.
In that case, this Court held that the income of a deceased solicitor received by his heirs subsequent to the previous year in which he died was not liable to be assessed to income tax under a. 24B as his income in the hands of his heirs, and apart from section 24B, no assesment can be made in respect of a person after his death.
In the instant case, the assessee is alive,.
and no question of assessment under section 24B arises, Neither side relied on section 25(1), and, in my opinion, rightly.
That sub section gives an option to the Revenue to make an assessment in the year of the discontinuance of the business or profession on the basis of the income of the period between the end of the previous year and the date of the discontinuance in addition to the assessment, if any, made on the basis of the income of the, previous year, The sub section does not preclude the Revenue from making an assessment on the professional income under any other section of the Act.
Our attention was drawn to section 176(4) of the Income tax Act, 1961, which provides: "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.
" (2) [1963] Supp.
I S.C.R. 690.
309 The note on cl. 178 of the Income tax Bill, 1961 suggests that this sub section was passed with a view to give effect to the following recommendations of the Direct Taxes Administration Enquiry Committee in paragraph 7.81 (11) of its Report: "There is no provision in the law at present to assess the income, received after the cessation of practice or retirement or death of the assessees carrying on a profession, like, Solicitors.
Advocates, Doctors, Consulting Surveyors.
Engineers etc.
The law should be amended in such a way that even on the assessee 's cessation of his vocation or retirement from the profession or death income received after such cessation, retirement or death would be taxed.
" The Report does not purport to base, its opinion on any judicial decision.
The assumption in this Report that there is no provision in the Indian Income tax Act to assess the entire income received after the retirement or death of professional men cannot be wholly correct, because, beyond doubt, the income received after the retirement in an accounting year during any part of which the assessee practiced his profession is assessable under section 10 and the income received after his death by his legal representative during the previous year in which he practised his profession is assessable in the hands of the legal representative under section 24B.
Moreover, the Report is silent on the question of the assessment of the outstanding profits of business realised by a trader after the discontinuance of his business.
In this case, we are concerned with the interpretation of the Indian Income tax Act, 1922, and the question is whether we can take into account the provision of the later Act in interpreting the earlier Act.
In Craies on Statute Law, 6th Edn, p. 146, the law is stated thus: "Except as a parliamentary exposition, subsequent Acts are not to be relied on as an aid to the construction of prior unambiguous Acts.
A later statute may not be referred to interpret the clear terms of an earlier Act which the later act does not amend, even although both Acts are to be construed as one, unless the later Act expressly interprets the earlier Act; but if the earlier Act is ambiguous, the later Act may throw light on it, as where a particular construction of the earlier Act will render the later incorporated Act in.
effectual.
" This passage is fully supported by the decision of the House of Lords in Kirkness vs John Hudson & Co.(1).
In Hariprasad Shivshankar Shukla vs A. D. Divikar(2), this Court gave effect to the (1) [1955] 2 All.
R.R. 845.
(2) [1957] S.C.R. 121,140.
310 plain meaning of an unamended Act, though on the interpretation given by it a later amendment would become largely unnecessary, and quoted with approval the following passage in the opinion of Lord Atkinson in Ormond Investment Co. Limited vs Betts(1): "An Act of Parliament does not alter the law by merely betraying an erroneous opinion of it.
" I do not find any ambiguity in the clear terms of sections 2(15), 3,4,6,10, 12 and 13 of the Indian Income tax Act, 1922 and the later Act cannot be used as an aid to their construction.
On the construction of the Indian Income tax Act, 1922, 1 hold that the profession income of an assessee whose accounts were kept on a cash basis received by him during his lifetime after the discontinuance of the profession and after the close of the accounting year in which the profession was discontinued, is assessable to income tax under section 12 of the Act.
In the result, the appeals are dismissed.
There will be no order as to costs.
ORDER In accordance with the Judgment of the majority the appeals are allowed with costs.
(1) ,164.

dataset_name: IN-Abs

summary:
The appellant an advocate who maintained his accounts on the cash system gave up practice when he was elevated to the Bench in 1957.
Certain outstanding professional dues were however received by him in the accounting years 1958 and 1959.
These receipts were shown by him as income in his return for the assessment years 1959 60 and 1960 61 and were assessed by the Income tax Officer.
The appellant then went in revision to the Commissioner of Income tax contending that the said receipts were not income and had been wrongly taxed.
The Commissioner having decided against him the appellant came to this Court under article 136 of the Constitution.
HELD: (i) The receipts in the present case were clearly the fruits of the assessee 's professional activity and fell under the fourth head of section 6 of the Indian Income tax Act 1922.
They were however not chargeable to tax under that head because under the corresponding computing section that is.
section 10.
an income received by the assessee who kept his accounts on the cash basis in an accounting year in which the profession had not been carried on at all is not chargeable.
[297 D F] Commissioner of Income Tax vs Express Newspapers Ltd., , relied on.
(ii) The income could not be taxed under section 12 either.
Section 12 deals with income which is not included under any other preceding heads covered by sections 7 to 10.
If the income is so included, it falls outside section 12.
It follows that if, as in the present case, the income is profits and gains of profession it cannot come under section 12.
[301 E] The heads of income in section 6 are mutually exclusive and it would be incorrect to say that as the receipts could not be brought to tax under the fourth head they could not fall under that head and must therefore fall under the residuary head 'other sources '.
There is no justification for the assumption that an income falling under one head has to be put under another head if it escapes taxation under the computing section corresponding to the former head.
[298 A; 300 E F] The character of the income cannot change merely because the assessee received it at a certain time or adopted a certain sYstem of accounting.
[301 B] Section 4 does not say that whatever is included in total income must be brought to tax.
The income has to be brought under one of the heads mentioned is section 6 and can be charged to tax only if it is so chargeable under the computing section corresponding to L/S5SCI 296 that head.
Income which falls under the fourth head can be brought to tax only if it can be so done under the rules of computation laid down in section 10.
[298 G 299 B] In re: B, M. Kamdar, , not approved.
The United Commercial Bank vs The Commissioner of Income Tax, ; , Salisbury House Estate Ltd., vs Fry.
15 Tax Cases 266 and Commissioner of In tax vs Cocanada Padhaswami Bank Ltd., , relied on.
Probh At Chandra Barua vs King Emperor, 57 I.A. 228, distinguished, Per Bachawat J. (dissenting) The receipts in question were chargeable under section 12.
Any income Chargeable under a specific head can be charged only under that head, and no part of that income can be charged again under section 12.
But any part of a total income of the assessee not me*sable under a specific head is assessable under the residuary head covered by section 12, [305 C] The income in question was not exempt under section 4(3).
The receipts were liable to be included in total income under section 4.
This income could not be included under section 10 owing to the method of accounting adopted by the assessee.
Nor did it fall under any other head.
It followed that the income must fall under the residuary head specified in section 12, This was not a case where the Revenue had taxed or could tax the income under s, 10 and again sought to tax the income under a. 12.
[306 C. G H]


judgement:
Appeal No. 303 of 1963.
Appeal from the judgment and order dated September 5, 1960 of the Orissa High Court in Appeal under Orissa High Court Order No. 4 of 1956.
N. C. Chatterjee, Ranadey Chaudhuri, G. section Chatterjee and section C. Majumdar, for the appellant.
C. K. Daphtary, Attorney General, N. D. Karkhanis and R. N. Sachthey, for respondent No. 1.
The Judgment of the Court was delivered by Bachawat, J.
On November 29, 1947, the Indian Chemical Products, Ltd., a limited company, was incorporated having its registered offices in Baripada, Mayurbhanj and in the town of Calcutta.
Its authorised capital is Rs. 25 lakhs divided into 25,000 shares of Rs. 100 each.
The company has seven share holders.
The Maharaja of Mayurbhanj subscribed and paid for 7,500 shares.
The remaining six shareholders hold 150 shares only.
All the shareholders are signatories to the memorandum of association of the company.
The State of Orissa claims that by reason of the constitutional changes since the declaration of independence, all the shares held by the Maharaja of Mayurbhanj have now vested in it by operation of law.
The State also based its claim to the shares on a formal instrument of transfer executed by the Maharaja.
On March 16, 1950, the Government of Orissa lodged the share scrip and the transfer deed with the company, and requested it to make the necessary changes in the share register.
The Government as also the Maharaja, through his agent, the Imperial Bank of India, repeatedly requested the company to register the Secretary to the Government of Orissa,, Finance Department as the holder of the shares in place of the Maharaja.
There was protracted correspondence in the matter for over three L/S5SCI 26(a) 382 years and eventually on May 16, 1953, the board of directors of the company refused to register the transfer.
On December, 1, 1953, Sri section K. Mandal, attorney for the State of Orissa, requested the company to record the name of the State as the owner of the shares in the share register, but the company declined to do so.
On February 9, 1955, the State of Orissa filed ' an application under section 38 of the Indian Companies Act, 1913 in the High Court of Orissa asking for rectification of the share register by inserting its name as the holder of the shares in place of the Maharaja.
The company and the Maharaja were impleaded as respondents.
The application was contested by the company only.
On November 22, .1956, Ray, J. allowed the application.
On September 13, 1957, he passed a supplemental order directing the filing of the notice of rectification with the Registrar within a fortnight.
On September 5, 1960, a Division Bench of the High Court dismissed the appeal preferred by the company.
The company now appeals to this Court on a certificate granted by the High Court.
Both courts concurrently held that (1) the title to the shares vested in the State of Orissa by operation of law; (2) the, refusal of the board of directors to register the transfer was mala fide; (3) the State of Orissa was entitled to rectification of the share register and a proper case for the exercise of the Court 's jurisdiction under section 38 of the Indian Companies Act, 1913 had been made out; (4) the petition was not liable to be dismissed on the ground that the State had asked the company to register the name of the Secretary to the Government of Orissa, as the shareholder in place of the Maharaja.
The appellate Court also held that under the articles of association of the company the board of directors had no power to refuse registration of a transfer where the transfer was by operation of law.
The appellant challenges the correctness of these findings.
The courts below concurrently found that the 7,500 shares were held by the Maharaja in his capacity as ruler of the State of Mayurbhanj.
This finding is amply supported by the documentary evidence on the record and is no longer challenged.
The State of Mayurbhanj was one of the feudatory States of Orissa under the suzerainty of the British Crown.
As from August 15, 1947, with the declaration of independence the paramountly of the British Crown lapsed.
Thereafter, steps were taken for the integration of the State with the Dominion of India.
On October 17, 1948, the Maharaja of Mayurbhanj signed an agreement for the merger of the State with the Dominion.
By article 1 of this agreement, the Maharaja completely ceded to the Dominion his sovereignty over the State of Mayurbhanj as from November 9, 1948.
Article 4 of the agreement allowed the Maharaja to retain the ownership of his private properties only as distinct from the State properties.
On and from November 9, 1948, as a necessary 383 consequence of the cesser of sovereignty all the public properties of the State including the 7,500 shares in the company vested in the Dominion.
By operation of law in consequence of the change of sovereignty, all the public properties of the State which were vested in the Maharaja as the sovereign ruler devolved on the Dominion as the succeeding sovereign.
As from January 1, 1949, the Government of India in exercise of its powers under section 3(2) of the Extra Provincial Jurisdiction Act (47 of 1947) delegated to the Government of Orissa the power to administer the territories of the merged State.
On August 1, 1949, the States Merger (Governors ' Provinces) Order, 1949 came into force, and in consequence of section 5(1) of the Order, all property vested in the Dominion Government for purposes of governance of the merged State became from that date vested in the Government of Orissa, unless the purposes for which the property was held were central purposes.
By a certificate dated November 10, 1953, the Government of India declared that the 7,500 shares were not held for central purposes.
Under the Constitution which came into force on January 26, 1950, the territories of the merged State were included in the State of Orissa.
By reason of these successive constitutional changes, the shares became vested in the State of Orissa.
The State is now the legal owner of the shares and the directors of the company are bound to enter its name in the register of members, unless there is one restrictive provision in the articles authorising them to refuse the registration.
The company contends that under its articles, the directors have the power to refuse the registration.
It relies on article 11, which reads: "The Board of Directors shall have full right to refuse to register the transfer of any share or shares to any person without showing any cause or sending any notice to the transferee or transferor, The Board may refuse to register any transfer of shares on which the Company has lien.
" Article 1 A attracts the regulations in Table A of the First Schedule to the Indian Companies Act, 1913 so far as they are applicable to private companies and are not inconsistent with the articles.
The regulations in Table A make a distinction between transfer and transmission of shares.
In respect of a transfer, they require that the instrument of.
transfer shall be executed both by the transferor and the transferee.
A transmission by operation of law in not such I transfer.
In In re. Bentham Mills Spinning Company(1), James, L.J. said "In Table A the word 'transmission ' 384 is put in contradistinction to the word 'transfer '.
One means a transfer by the act of the parties, the other means transmission by devolution of law.
" Article 11 refers to transfers.
A devolution of title by operation of law is not within its purview.
Being a restrictive provision, the article must be strictly construed.
In the instant case, the title to the shares vested in the State of Orissa by operation of law, and the State did not require an instrument of transfer from the Maharaja to complete its title.
, Article 11 does not confer upon the board of directors a power to refuse recognition of such a devolution of title.
We may add that we express no opinion on the question whether such an article applies to an involuntary transfer of shares by a Court sale having regard to the provisions of O.21, r. 80 of the Code 'of Civil Procedure with regard to the execution of necessary documents of transfer.
Clause 22 of the regulations in Table A read with article 1 A confers power upon the board of directors to decline registration of transmission of title in consequence of the death or insolvency of a member.
In the instant case, there is no transmission of title in consequence of death or insolvency, and clause 22 has no application.
Under the articles, the directors had therefore no power to refuse registration of the devolution of title on the State of Orissa by operation of law in consequence of the constitutional changes.
Though the State of Orissa had acquired title to the shares by operation of law, by way of abundant caution it obtained a deed of transfer and lodged it with the company together with the share scrip.
The transfer deed was duly stamped and complied with all the formalities required by law.
The claim of the State of Orissa based upon the transfer deed was within the purview of article 11.
Even with regard to this claim, the Courts below concurrently held that the board of directors acted mala fide in refusing to register the transfer.
This finding is amply supported by the materials on the record.
In spite of the fact that the State had filed with the company a certificate of the Collector of Stamp Revenue.
West Bengal, that no stamp duty was payable on the transfer, the company raised the objection that the transfer deed must be stamped.
To avoid this objection, the Government stamped the deed and again lodged it with the company.
For over three years, the directors delayed registration of the transfer on frivolous pretexts.
On May 16, 1953, the directors without assigning any reason declined to register the transfer.
Before the High Court, the company asserted that the registration was refused because the Maharaja of Mayurbhanj was under an obligation to execute an agreement conferring valuable rights on the company and the State of Orissa had failed to honour this obligation.
Reliance was, placed on cl. 6 of the company 's memorandum of association, which stated that the company and the Maharaja proposed to 385 enter into an agreement and a copy of the proposed agreement was annexed.
Clause 6 shows that there was a proposal between the parties to enter into an agreement, but there was no concluded agreement between them, nor was there any binding obligation on the Maharaja to execute an agreement.
The directors could not use their power of declining to register the transfer under article 11 for the purpose of forcing the State of Orissa to enter into the proposed agreement.
Actually, the reason given at the trial was an afterthought.
The Imperial Bank of India representing the Maharaja was pressing for registration of the transfer.
By its letter dated March 17, 1953, the company assured the Bank that the registration would be effected shortly.
Nevertheless, on May 16, 1953 the directors capriciously refused to register the transfer.
The power under article 11 to refuse registration of the trans fer is a discretionary power.
The directors must exercise this power reasonably and in good faith.
The Court can control their discretion if they act capriciously or in bad faith.
The directors cannot refuse to register the transfer because the transferee will not enter into an agreement which the directors conceive it to be for the interests of the company.
We cannot accept the contention that the petition was liable to be dismissed because the State of Orissa had asked for registration in the name of the Secretary, Finance Department.
No such objection was taken by the company, although it had taken numerous other objections.
Moreover, by letter dated December 1, 1953, Shri section K. Mandal, the attorney for the State of Orissa, had definitely called upon the company to record the name of the State as the owner of the shares in the share register.
In spite of this letter, the company refused to make the necessary registration.
The Maharaja of Mayurbhanj has ceased to be the owner of the shares.
The State of Orissa, is now their owner, and has the legal right to be a member of the company and is entitled to say that the company should recognise its membership and make an entry on the register of the fact of its becoming a member and its predecessor in title having ceased to be a member.
The name of the State of Orissa has, without sufficient reason, been omitted from the register and there is default in not entering on the register the fact of the Maharaja having ceased to be a member.
The Court 's jurisdiction under section 38 is, therefore, attracted.
The High Court rightly ordered the rectification in the exercise of its summary powers under section 38.
The jurisdiction created by section 38 is very beneficial and should be liberally exercised.
We see no reason why the Court should deny the applicant relief under section 38.
The directors of the appellant company on the most frivolous of objections have prevented the State of Orissa from becoming a 386 member for the last 16 years.
It is a matter of regret that justice has been obstructed so long.
There is no merit in this appeal.
The appeal is dismissed with costs.
The appellant company do forthwith carry out the order of rectification passed by the Courts below in case the order has not been carried out yet.
Appeal dismissed.

summary:
As a result of constitutional changes following the Indian Independence Act, 1947, the ownership of the public properties of the Maharaja of the Mayurbhanj including certain shares in the appellant company passed to the State of Orissa.
Although the State had acquired title to these shares by operation of law, it also obtained from the Maharaja by way of abundant caution, a deed transferring these shares to it.
In 1950, the State Government lodged the share scrip and transfer deed with the company and requested it to make the necessary changes in the share register.
Despite repeated requests.
however, the directors of the company refused to do so.
In 1955 the State filed an application under section 38 of the Indian Companies Act, 1913 in the High Court of Orissa, asking for rectification of the share register by inserting its name as the holder of the share in place of the Maharaja.
The High Court allowed the application and passed a supplemental order directing the filing of the notice of rectification with the Registrar within a fortnight.
The company 's appeal before the Division Bench failed, whereupon it appealed to this Court by special leave.
It was urged on behalf of the appellant company, inter alia, that under article 11 of its Articles of Association as well as under cl. 22 of Table A read with article 1 A the directors has power to refuse registration of the transfer.
HELD: (i) In Table A which was attracted by article 1 A of the company 's Articles of Association, the word transmission is put in contradistinction to the word 'transfer '.
One means a transfer by the act of the parties, the other a transmission by devolution of law.
article If refers to transfers.
A devolution of title by operation of law is not within its purview.
Being a restrictive provision the article must be strictly construed.
In the instant case, the title to the shares vested in the State of Orissa by operation of law and the State did not require an instrument of transfer from the Maharaja to complete its title.
Article 11 does not confer upon the Board of directors a power to refuse recognition of such a devolution of title.
r383G 384C].
In re Bentham Mills Spinning Company, , referred to.
(ii)Clause 22 of the regulations in Table A read with article 1 A confers power on the Board of directors to decline registration of transmission of title in consequence of the death or insolvency of a 381 member.
In the instant case, there was no transmission of title in consequence of death or insolvency and clause 22 had, therefore no application, [384 D] (iii)In so far as the claim of the State was based on the transfer deed it fell within the purview of article 11.
But the refusal of the board of directors to register the transfer under that article was mala fide.
The power under that article was a discretionary power.
The directors must exercise that power reasonably and in good faith.
The Court can control this discretion if they act capriciously or in bad faith.
[384 E F; 385 C D] (iv)The name of the State of Orissa had without sufficient reason, been omitted from the register, and there was default in not entering on the register the fact of the Maharaja having ceased to be a member.
The Court 's jurisdiction under section 38 was, there fore, attracted.
The High Court rightly ordered the rectification in the exercise of its summary powers under section 38.
The jurisdiction created by section 38 is very beneficial and should be liberally exercised.
[385G]