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1920 Supreme(Mad) 311
IN THE HIGH COURT OF MARAS
J Wallis, W Ayling, S Aiyar, Napier, Krishnan
The Secretary To The Board Of
Versus
Al. Ar. Rm. Arunachalam Chettiar
Decided On : 6 October, 1920
The term "income" as used in the Income Tax Act, VII of 1918, implied the idea of receipt, actual or constructive, and the term "profits" as used in Section 9 of the Act, which dealt with income derived from business, did not properly apply to unrealized amounts.
Headnote:
The question referred to the court was whether interest which became due to a money-lending firm in the year of account but was not recovered or realized by the firm in that year either in cash or by adjustment in the accounts was to be treated as part of the assessable income for that year of account, although it was not received or realized by the firm in that year either in cash or by adjustment in the accounts. The court held that the interest in question was not liable to be included in the amount for which the assessee was taxable under the Income Tax Act, VII of 1918.
Fact of the Case:
The assessee, a money-lending firm, had lent out a sum of money at 12% interest. At the end of the year, Rs. 12,000 accrued to the assessee as interest, but none of the debtors paid anything. The next year, the assessee lost the entire capital and interest due to the debtors' inability to pay.
Finding of the Court:
The court held that the interest in question was not liable to be included in the amount for which the assessee was taxable under the Income Tax Act, VII of 1918.
Issues: Whether interest which became due to a money-lending firm in the year of account but was not recovered or realized by the firm in that year either in cash or by adjustment in the accounts was to be treated as part of the assessable income for that year of account, although it was not received or realized by the firm in that year either in cash or by adjustment in the accounts.
Ratio Decidendi: The court interpreted the relevant provisions of the Income Tax Act, VII of 1918, and concluded that the term "income" as used in the Act implied the idea of receipt, actual or constructive. The court held that the term "profits" as used in Section 9 of the Act, which dealt with income derived from business, did not properly apply to unrealized amounts. The court further held that there was no provision in the Act to indicate that the term "profit" included earned but unrealized profits. The court also considered the meaning of "receipt" or "realization" of income and concluded that actual payment of cash by the payer to the payee was not necessary to constitute a receipt or realization. However, the court held that a sum of money unrealized in any manner by the assessee was not liable to be included in the amount for which the assessee was taxable under the Income Tax Act, VII of 1918.
Final Decision: The court answered the question referred to it in the negative, holding that the interest in question was not liable to be included in the amount for which the assessee was taxable under the Income Tax Act, VII of 1918.
John Wallis, C.J.
1. The only question argued before us was, whether money which became due to a money-lending firm in the course of its business by way of interest in the year of account, or year on the income of which the tax is to be assessed for the current year, is to be treated as part of the assessable income for that year of account, although it was not recovered or realised by the firm in that year either in cash or by adjustment in the accounts. Income is defined in the "Concise Oxford Dictionary of Current English," adapted from the great Oxford Dictionary, and published at the Clarendon Press, as "Periodical (usually annual) receipts from ones business, lands, work, investments etc; income tax (levied on this)." This is also the legal acceptation of the term, as appears from Strouds Judicial Dictionary, and numerous definitions, some of which are there cited; while others have been referred to by Mr. K.V. Krishnaswamy in his argument for the petitioners. Lord Salbornes, "income signifies what comes in" is the interest, and, at the same time, sufficiently indicates that the taxation of interest which has not come in is not within the scope of an Income Tax Act. The use of the word income in Section 3 of the present Act, on which some reliance is placed in the reference, also seems to me to be entirely in accordance with this view. That section, which appears under the head of "Taxable income" provides in effect that the income which is to be taxed under the Act is income from whatever source derived if it accrues or arises or if it is received in British India; that is to say, income which accrues or arises in British India is taxable even if it is received elsewhere, as, in England; while income which is received in India is taxable even if it accrued or arose out of British India. With this may be compared the more stringent provisions of Schedule D of the English Income Tax Act, 1918, which make residents in the United Kingdom liable in respect of annual profits or gains accruing or arising from any trade or business whether the same be carried on in the United Kingdom or elsewhere. What we are concerned with in the present case is, not the liability of the petitioners to pay income tax which is admitted, but the way in which the income they derive from their business is to be arrived at. That, of course, is to be ascertained by reference to the provisions of the Act regarding the particular class of income, which in this case is "Income derived from business," but, in construing these provisions, and the uniform interpretation which has been put upon the corresponding provisions of the English Acts, it must always be borne in mind that, in its natural and legal meaning, income means periodical receipts, that an income-tax is, therefore, presumably a tax on annual receipts, and that, while it is open to the Legislature, for good and sufficient reason, to enact that debts which have not been paid but are still outstanding, shall be treated as income for the purposes of the Act, the Court would not be justified in attributing such an intention to the Legislature, in the absence of the clearest and most express language. As observed by Warrington, L.J. in Inlani Revenue Commissioners v. Blott (1920) 2 K.B. 257 at p. 267 : 89 L.J.K.B. 677 with reference both to the Super Tax Act and the Income Tax Acts: "It is income and income only which is brought into charge."
2. The tax on income derived from business, which is the class of income with which we are dealing, has never been charged on the actual receipts of the year, which would involve postponing the levy of the tax to the following year, but has been charged in England on the average income for the three previous years. The language of Rule 1 of Schedule D of the English Income Tax Act, 1918, which has superseded all the earlier enactments dealing with this class of income, requires the tax in respect of trade not otherwise provided for to be "computed on t
