1. Professional fees received after cessation of practice by an assessee using cash-basis accounting — Chargeability under the Income-tax Act, 1922. (Para 1 , 13 , 14 , 15 , 16 )
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1966 Supreme(SC) 146
SUPREME COURT OF INDIA
A.K. SARKAR, C.J.I., J.R. MUDHOLKAR AND R.S. BACHAWAT, JJ.
Nalinikant Ambalal Mody, Appellant
Versus
S. A. L. Narayan Row, Commissioner of Income-tax, Bombay City 1, Bombay, Respondent.
Civil Appeals Nos. 731 and 732 of 1964. D /- 4-5-1966.
Advocates appeared
Mr. N. A. Palkhivala, Senior Advocate, (M/s. T. A. Ramachandran and S. P. Mehta, Advocates, and Mr. O. C. Mathur, Advocate, of M/s. J. B. Dadachanji and Co. with him), for Appellant; Mr. Sarjoo Prasad, Senior Advocate, (M/s. R. Ganapathy Iyer and R. N. Sachthey, Advocates, with him), for Respondent.
Advocates:
J.B.DADACHAN, N.A.PALKHIWALA, O.C.MATHUR, R.Ganapathy Iyer, R.N.SACH, S.P.MEHTA, SARJU PRASAD, T.A.Ramachandran
J.B.DADACHAN, N.A.PALKHIWALA, O.C.MATHUR, R.Ganapathy Iyer, R.N.SACH, S.P.MEHTA, SARJU PRASAD, T.A.Ramachandran
Professional income received after the cessation of a profession by an assessee using the cash basis of accounting is not taxable if the profession was not carried on during the year of receipt, and such income cannot be taxed under the residuary head "Income from other sources".
Headnote:(A) Income-tax Act, 1922 - Sections 2(15), 3, 4, 6, 10, 12 and 13 - Professional income received after cessation of profession - Cash basis of accounting - Chargeability to tax - Heads of income mentioned in Section 6 are mutually exclusive; a particular income can come under only one of them (Para 2) - If an income is the fruit of professional activity, it must be brought under the head "Profits and gains of business, profession or vocation" irrespective of the time when it was received (Para 5).
(B) Residuary head of income - An income falling under a specific head cannot be brought under the residuary head "Income from other sources" merely because it is not chargeable under the computing section corresponding to the specific head (Para 5) - Inclusion of receipts in "total income" under Section 4 does not automatically mean they are chargeable to tax; chargeability must be established under the relevant computing sections (Para 6).
Facts of the case:
An advocate who was elevated to the bench ceased his professional practice. He had maintained his accounts on a cash basis. In subsequent years, during which he did not carry on any profession, he received outstanding fees for professional work performed prior to his elevation. The revenue sought to tax these receipts, arguing that since they were not taxable under the professional income head, they should be taxed under the residuary head.
Findings of Court:
The receipts were the fruits of professional activity and thus fell under the head "Profits and gains of business, profession or vocation". However, since the profession was not carried on during the years of receipt and accounts were kept on a cash basis, the income was not chargeable under the corresponding computing section. It was further found that such income cannot be shifted to the residuary head just because it escapes taxation under the specific head.
Issues: Whether professional fees received after the cessation of a profession, where accounts are kept on a cash basis, are taxable under the head "Profits and gains of business, profession or vocation" or under the residuary head "Income from other sources".
Ratio Decidendi: The court ruled that the nature of the income determines the head under which it is assessed, not the time of receipt or the method of accounting. Since the income was professional in nature, it belonged exclusively to the head "Profits and gains of business, profession or vocation". Because it was not chargeable under the computing section for that head (due to the cessation of profession and cash accounting), it escaped taxation entirely and could not be reassigned to the residuary head.
Result: Appeals allowed.
Legal Category Hierarchy
Table of Contents
2. Whether professional receipts not taxable under the specific head of profession can be assessed under the residuary head of income from other sources. (Para 4 , 5 , 6 , 21 , 22 )
3. Heads of income are mutually exclusive; professional income cannot be shifted to the residuary head if it is not chargeable under the professional computing section. (Para 2 , 3 , 5 , 6 , 10 )
4. Income falling under a specific head cannot be taxed under the residuary head if it is not chargeable under the computing section of the specific head. (Para 5 , 10 )
5. Appeals allowed; receipts held not chargeable to tax under either the professional head or the residuary head. (Para 11 , 12 , 33 )
6. Are the different heads of income under the Income-tax Act, 1922, mutually exclusive?
Yes, a particular income can come under only one head. If an income is identified as falling under a specific head, it cannot be brought under the residuary head of income from other sources. (Para 2 , 5 )
7. Does inclusion in total income under Section 4 automatically make an amount chargeable to tax?
No. Inclusion in total income under Section 4 does not guarantee chargeability. Income must be brought under a head in Section 6 and be chargeable under the corresponding computing section. (Para 6 )
8. Is professional income received after the profession has ceased taxable for an assessee using the cash basis of accounting?
Under Section 10, such income is not chargeable if the profession was not carried on at any time during the accounting year in which the fees were received. (Para 3 , 17 , 19 )
9. Can income that escapes taxation under a specific head be taxed under the residuary head of other sources?
No. If income is the fruit of a professional activity, it always falls under the professional head regardless of when it is received; it cannot shift to the residuary head. (Para 5 , 10 )
Judgment
SARKAR, CJI. : The assessee was an advocate of the High Court of Bombay and was pactising 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. His accounts had always been kept on the cash basis. The question is, whether he is liable to pay Income-tax on these receipts.
2. 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. S. 6 also provides that the chargeability to tax shall be in the manner provided in Ss. 7 to 12-B 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 S. 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 S. 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 S. 6 are mutually exclusive; a particular income can come only under one of them: United Commercial Bank Ltd. Calcutta v. Commissioner of In-come Tax, West Bengal. 1958 SCR 79: (AIR 1957 SC 918).
3. 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, S. 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 Madras v. Express Newspapers Ltd. Madras , 1964-53 ITR 250:
4. 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 , 1946-14 ITR 10: 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, 1946-14 ITR 10: there does not appear to be any direct authority supporting the view of the Commissioner.
5. 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,
