Facts

The assessee was an advocate of a High Court and was practicing his profession   till 1-3-1957, when he ceased to  carry on  his  profession as  he  was  elevated as  a Judge of the High Court at Bombay.  His  method of  accounting was  cash and his accounting year was calendar year. During the accounting years relevant to assessment years 1959-60 and 1960-61, he received certain moneys on account of the outstanding fees, though no profession was carried on by him. The assessee included the aforesaid receipts as income from profession. The ITO treated these receipts as fees for professional services rendered in earlier years and as part of total income of the assessee. On an revision application under section 33A of 1922 Act the Commissioner held that it was chargeable under the residuary head and rejected the revision petition. It is from this order that the assessee filed appeal to the Supreme Court by specialleave.

Issue

Whether an income from business or profession can be taxed under the head “Income from business or profession” after the assessee has ceased to carry on     his business or profession? If such income is not taxable under the head “Income from business orprofession”, then can it be taxed under the residuary head “Income from other sources?

Views

Taxability  under the head “Profit and gains of business or profession” arise only   in respect of profits and gains of any business or profession  which  was carried on by the assessee at any time during the previous year.  If no business is carried on  by the assessee at any time during the previous year, then the charging provision does not get attracted and therefore, one does not enter such head ofincome.

Further, in order to compute an income, the Act has bifurcated the incomes under Chapter IV of the Act ‘Computation of the Total Income’ in four specific

heads viz. ‘Income from Salaries’, ‘Income from house properties’, ‘Profits and gains of business and profession’ and lastly “Capital gains’ and a residuary head i.e. ‘Income from other sources’. The scheme to arrive at the net income chargeable to tax under the various heads broadly differs from each other. Thus,  the computation mechanism under the head ‘Income from house property’ and ‘Profits and gains of business and profession’ differ. The idea of having separate heads of income was to have separate computation mechanism for different types  of income depending upon the nature of income. An income to be taxed has to      be brought under any one of the heads of income. All the heads of income are mutually exclusive and therefore, a particular item of income can be taxed only under one particular head of income. If the same is not taxable under the said   head of income then the same cannot be charged to tax under the other head of income.

Held

The Court held that receipts in the present case were the outstanding dues of professional work done and therefore would fall under the head “Profits and gains of business, profession or vocation”. Further, the Court held that the said receipts were not taxable under the said head as the said receipts were taxed on cash basis and in the year of receipt, no profession at all had been carried on by   the assessee. In this regard, reliance was placed by the Court on the judgment in case of CIT v. Express Newspapers Ltd. [1964] 53 ITR 250 (SC).

The Court also held that heads of income are mutually exclusive, and if the receipts can be brought under the fourth head, they cannot be brought under the residuary head. Section 12 deals with income which is not included under any      of the preceding heads. If the income is so included, it falls outside section 12        of 1922 Act. 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 of 1922 Act. Section 12 of 1922 Act 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 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. Accordingly  the Court held that the receipts were not chargeable to tax either under the head    of professional income or under the residuary head.

However, Justice Bachawat had taken the dissenting view and held that the professional 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. (AY.  1958-59, 1959-60)   (CA Nos. 731 & 732 of 1964 dt. 4-5-1966)

Editorial: What was contained in section 12 of the 1922 Act in now incorporated in sections 56 to 59 of the Income-tax Act, 1961. The ratio of the judgement is applicable to The Income-tax Act, 1961. Refer CIT v. T. P. Sidhwa (1982) 133 ITR 840 (Bom) (HC). Further,  this ratio has been followed by the Bombay High Court   in case of Cadell Wvg. Mill Co. (P.) Ltd. v. CIT [2001] 116 Taxman 77 (Bombay)/ [2001] 249 ITR 265 (Bombay)/[2001] 166 CTR 7 (Bombay) which is also been affirmed by Apex Court in [2005] 142 Taxman  713 (SC) and by the Apex Court    in case of CIT v. D. P. Sandu Bros. Chembur (P.) Ltd. [2005] 142 Taxman 713 (SC)/[2005] 273 ITR 1 (SC)/[2005] 193 CTR 578 (SC).

In the Income Tax Act, 1961 Section 176(4) was introduced where the professional fees received by assessee from discontinued business was taxable. However, the Hon’ble Calcutta High Court in case of Justice R.M. Datta (1989) 180 ITR 86 has held that in spite of the introduction of section 176(4), 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 could    not be taxed under section 28 nor could such income be taxed under section 56     of the Act as income from other sources. The said income, therefore, could not      be taxed under section 28, 56 or 176(4).

The same view has also been taken by Hon’ble  Gujarat High Court in case of Anil    R Dave [2015] 56 taxmann.com 139 (Guj)(HC) and Hon’ble Delhi Tribunal in case   of Justice Rajiv Shakedar [2013] 36 taxmann.com 585 (Delhi) (Trib.)

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