Case Note & Summary
The dispute arose under the Indian Income Tax Act, 1922 concerning the determination of the 'previous year' for the assessment year 1950-51. The assessee, a Hindu Undivided Family with its head office in Indore, carried on various businesses including cotton and oil seeds, speculation, and managing agency. Prior to 1950-51, the assessee was assessed as a non-resident, and its income from the former Indian State of Madhya Bharat was not subjected to tax under the Act but was taken into account for computing world income to determine the applicable rate. After the Constitution came into force, the Finance Act, 1950 expanded the definition of 'taxable territories' to include Madhya Bharat, rendering the assessee liable to tax on income from those areas for the first time. Historically, the assessee maintained its accounts on a Diwali year basis. For the assessment year 1950-51, however, it chose the financial year ending March 31, 1950 as the previous year for its Madhya Bharat businesses. The Income Tax Officer and the Appellate Assistant Commissioner rejected this choice, holding that the previous year should continue to be the Diwali year as previously followed for other income. The Income Tax Appellate Tribunal reversed these orders and allowed the assessee's stand. On a reference under Section 66(1), the High Court of Madhya Pradesh agreed with the Tribunal, leading to the Revenue's appeal to the Supreme Court. The core legal issue was whether the assessee could select a different previous year for the newly taxable income, given that its overall income had previously been computed using the Diwali year but the specific income source had not been taxed. The Supreme Court examined Section 2(11)(i)(a) which defines 'previous year' for any separate source of income, profits or gains. It held that the provision refers to each separate source individually, not the assessee's income generally, thus permitting different previous years for different sources. The business in Madhya Bharat constituted a separate source. The Court then interpreted the proviso which restricts the option to vary the previous year if the assessee has 'once been assessed' for that source. After analyzing precedents, the Court concluded that 'assessed' in this context means subjected to levy or imposition of tax, not merely computed for rate determination. Since the Madhya Bharat income had never been taxed before, the proviso did not apply. Consequently, the assessee was entitled to choose the financial year ending March 31, 1950 as the previous year for that source. The Supreme Court upheld the High Court's decision and dismissed the appeal with costs.
Headnote
A) Income Tax Act, 1922 - Section 2(11)(i)(a) - Previous Year - Separate Sources of Income - The definition of 'previous year' applies to each separate source of income, profits and gains, so an assessee may have different previous years for different sources. The assessee's business in Madhya Bharat constituted a separate source, and since that source had not been previously assessed to tax, the first part of section 2(11)(i)(a) applied, making the twelve months ending 31st March the default previous year unless the assessee opted for a different year ending on the date to which accounts were made up (Paras 1-5). B) Interpretation of Statutes - Proviso to Section 2(11)(i)(a) - Meaning of 'Assessed' and 'Assessee' - The proviso bars varying the previous year only if in respect of a particular source the assessee has once been assessed, meaning subjected to levy or imposition of tax. Mere inclusion of income from such source for computing world income for rate determination does not amount to assessment; thus the assessee was entitled to choose the financial year ending March 31, 1950 as the previous year for the Madhya Bharat businesses (Paras 1-5).
Issue of Consideration
Whether under the circumstances of the case, having regard to section 2(11)(i)(a) of the Income Tax Act, 1922, the assessee is entitled to take the year ended on 31-3-1950 as the 'previous year' relevant to the assessment year 1950-51 in respect of his sources of income arising outside the 'taxable territories'
Final Decision
The Supreme Court held that the income from Madhya Bharat businesses constituted separate sources of income that had never been assessed to tax. Therefore, the assessee was entitled to choose the financial year ending March 31, 1950 as the previous year. The appeal was dismissed with costs.
Law Points
- Legal points not extracted
- interpretation of section 2(11)(i)(a) of Indian Income Tax Act
- 1922
- separate source of income
- previous year
- meaning of 'assessed' and 'assessee' in proviso
- income from outside taxable territories not previously taxed not considered assessed
- assessee can have different previous year for each separate source
