Esthuri Aswathiah vs Commissioner Of Income-Tax, Mysore
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: Supreme Court of India
Case Number: Civil Appeal No. 402 of 1965
Decision Date: 04/06/1962
Coram: M. Hidayatullah, R. S. Bachawat, Subbarao, K. Hidayatullah
The case titled Esthuri Aswathiah versus Commissioner of Income‑Tax, Mysore, was reported as decided on 4 June 1962 by the Supreme Court of India. The judgment was authored by Justice M. Hidayatullah, who also sat on the bench together with Justices Bachawat, R. S., Subbarao and K. Hidayatullah. The parties before the Court were the petitioner, Esthuri Aswathiah, and the respondent, the Commissioner of Income‑Tax for Mysore. The date of the judgment was 04 /06 /1962 and the decision is cited in the law reports as 1966 AIR 1285 and 1966 SCR (3) 359, with a citator reference of R 1976 SC 43 (6). The statutory provision under consideration was Section 2(11) of the Income‑Tax Act, 1922, which deals with the length of the previous year for tax purposes, specifically the question of whether the previous year must be exactly twelve calendar months or whether a period of twenty‑one months could be permissible, and the consequent rate of tax that would apply.
According to the headnote, the petitioner had, up to the assessment year 1951‑52, used the financial year ending on 30 June as his previous year for tax assessment. For the assessment year 1952‑53, however, the assessee filed a return covering a period of twenty‑one months, beginning on 1 July 1950 and ending on 31 March 1952, and sought the sanction of the Income‑Tax Officer to change his previous year from the year ending 30 June to a year ending 31 March. The Officer granted the requested change on the condition that the total income earned during the twenty‑one‑month period would be taxed at the rate applicable to that entire period. The order was affirmed by the Appellate Assistant Commissioner, the Appellate Tribunal, and later by the High Court on reference. When the matter reached the Supreme Court, the petitioner contended on four points: first, that the scheme of the Act, particularly Sections 2(11) and 3, prohibited a previous year longer than twelve months; second, that the Income‑Tax Officer lacked authority under the proviso to Clause 1(a) of Section 2(11) to specify a twenty‑one‑month previous year; third, that the Officer should have sanctioned the change only if the assessee were given two separate previous years—one of nine months from 1 July 1950 to 31 March 1951 and another of twelve months from 1 April 1951 to 31 March 1952; and fourth, that any sanction should have required the income for the twenty‑one months to be assessed at the tax rate applicable to the last twelve‑month segment. The Supreme Court held that a combined reading of the clauses of Section 2(11) demonstrates that the length of a previous year is not confined to twelve calendar months. Under Sub‑section 2(11)(i)(b), the previous year may be any period determined by the Central Board of Revenue or an authority authorized by the Board, and such a period may be more or less than twelve months. The Court further observed that while the Income‑Tax Officer may refuse consent to a change in the previous year, once consent is given the officer possesses sufficient power to impose a condition that the full period from the end of the earlier previous year to the end of the new accounting year shall be treated as the previous year for the current assessment year, thereby safeguarding the revenue’s interest.
The Court explained that when the end of the “previous year” for the assessment of the earlier year is extended to coincide with the end of the new accounting year, that extended period must be treated as the previous year for the present assessment year. The Court held that this condition suitably protects the Revenue because, had the Income‑tax Officer sanctioned the change on the basis that the previous year would consist only of the twelve‑month period from 1 April 1951 to 31 March 1952, the income earned during the earlier nine‑month interval from 1 July 1950 to 31 March 1951 would have escaped taxation. The Court cited the relevant observations recorded at pages 363 D‑F. It further observed that the concept of having two separate previous years applicable to the same assessment year is untenable and conflicts with section 3 of the Act. Section 25(1) does not envision assessments within a single assessment year that are based on two different previous years; rather, it envisages the ordinary assessment of income belonging to the one previous year and, where necessary, a special and separate assessment of income arising from the broken period that lies between the end of the previous year and the date when the business was discontinued. This view was supported by the passages noted at pages 363 H‑364 C.
The Court further clarified that the Income‑tax Officer does not possess the authority to alter the rate at which the income of the previous year is to be assessed. Accordingly, the condition imposed by the Officer—namely that the income of the twenty‑one‑month previous year should be taxed at the rate applicable to that same twenty‑one‑month period—was deemed redundant. Once it is established that the length of the previous year is twenty‑one months, the entire income earned during that twenty‑one‑month span must be treated as the income of the previous year for the assessment year in question, and it must be taxed at the rate prescribed by the Finance Act that is applicable to the assessment year 1952‑53. No other rate may be applied to that income. These conclusions were reflected in the Court’s remarks at pages 364 D‑G.
In the judgment of the Civil Appellate Court, the appeal was listed as Civil Appeal No. 402 of 1965, arising from the order dated 4 June 1962 of the Mysore High Court in Income‑tax Referred Case No. 7 of 1961. The Court noted that counsel for the appellant and counsel for the respondent appeared before it, and that the judgment was delivered by Justice Bachawat. The appeal presented a question of interpretation of the proviso to clause (i)(a) of section 2(11) of the Indian Income‑tax Act, 1922. Up to the assessment year 1951‑52, the appellant had used a fiscal year ending on 30 June as his “previous year,” and consequently the assessment for 1951‑52 was made with reference to the previous year that ended on 30 June 1950. For the subsequent assessment year 1952‑53, the assessee filed a return covering a twenty‑one‑month period from 1 July 1950 to 31 March 1952, and sought the Income‑tax Officer’s sanction to change the previous year from one ending on 30 June to one ending on 31 March. The Income‑tax Officer duly granted this sanction, thereby setting the factual backdrop for the Court’s subsequent analysis.
The Income‑tax Officer, in his order concerning the assessment year 1952‑53, recorded that the return of income filed for that year covered the period from 1‑7‑1950 to 31‑3‑1952. He further stated that permission to change the ‘previous year’ was granted on the condition that the total income earned during the twenty‑one‑month period ending on 31‑3‑1952 would be taxed at the rate applicable to the total income for that same twenty‑one‑month period. The appellant did not object to this order and made no protest to the Income‑tax Officer. Consequently, the assessment for the year 1952‑53 was made on the basis of the income of the preceding year, which the officer had defined as the twenty‑one‑month span commencing on 1‑7‑1950 and concluding on 31‑3‑1952. When the matter was taken up before the Appellate Assistant Commissioner and subsequently before the Income‑tax Appellate Tribunal, the appellant argued that the income for the twenty‑one‑month period should be taxed at the rate that would apply to the proportionate income for a normal twelve‑month year. Both the Appellate Assistant Commissioner and the Tribunal rejected this contention. On the appellant’s application, the Tribunal referred two questions of law to the High Court of Mysore: (1) whether, within the meaning of Section 2(11)(a) of the Income‑tax Act, the Income‑tax Officer could define the ‘previous year’ as a period of twenty‑one months when the assessee himself had applied for such a change; and (2) if the previous year were allowed to be twenty‑one months, whether the officer was bound to tax the income for that period at the rate applicable to the proportionate income for a twelve‑month year. At the hearing of the reference, the second question was not pressed, while the first question was actively argued. The argument presented was that the scheme of the Indian Income‑tax Act did not permit a ‘previous year’ to exceed twelve months, and that the Income‑tax Officer therefore lacked the competence to deem a twenty‑one‑month period as a ‘previous year’ under the proviso to clause (i)(a) of Section 2(11). The High Court rejected this view and answered both questions in favour of the Revenue, holding against the appellant.
The appellant subsequently appealed to this Court on a certificate granted by the High Court under Section 66A(2) of the Indian Income‑tax Act, 1922. Counsel for the appellant reiterated the submissions made before the High Court, contending that the structure of the Act, particularly Sections 2(11) and 3, demonstrated that a ‘previous year’ could not exceed twelve months, and that the Income‑tax Officer had no authority to direct, under the proviso to clause (i)(a) of Section 2(11), that the previous year consist of twenty‑one months. This Court was unable to accept that contention. It was observed that Section 3 is the charging provision, and it provides that for any assessment year, income‑tax is levied on the income of the preceding year. However, Section 3 does not contain any definition of the length of the ‘previous year’. The definition of ‘previous year’ is found in Section 2(11). Consequently, the argument that the Act’s scheme precludes a ‘previous year’ of more than twelve months, and that the officer acted beyond his jurisdiction, could not be sustained.
The Court explained that the term “previous year” is defined in section 2(11) of the Act. The principal provision, clause (i)(a), states that “previous year” means, with regard to any separate source of income, profits or gains, either the twelve‑month period ending on 31 March immediately preceding the assessment year, or, if the taxpayer’s accounts have been prepared up to a date falling within that twelve‑month span for a year ending on a date other than 31 March, the taxpayer may, at his option, select the year ending on the date to which his accounts have been prepared. The Court noted that this main clause provides the primary meaning of the expression “previous year”. To illuminate this meaning, the Court cited the judgment of Mahajan, J. in Commissioner of Income‑Tax, Madras v K Srinivasan and K Gopalan, wherein it was observed that the expression “previous year” substantially denotes an accounting period consisting of a full twelve months, usually corresponding to a financial year that precedes the financial year of assessment. The judgment further recognized that the term may also refer to a twelve‑month accounting year adopted by the assessee for maintaining his books, even if it differs from the financial year, provided it also precedes the financial year of assessment. Accordingly, under clause (i)(a), the “previous year” is either the standard twelve‑month period ending on 31 March before the assessment year, or, at the assessee’s option, a twelve‑month period ending on another date within that same twelve‑month interval, provided the assessee’s accounts have been closed as of that date. The Court then turned to the proviso attached to clause (i)(a), which stipulates that where an assessee has already been assessed with respect to a particular source of income, profit or gain, or where a newly‑set‑up business, profession or vocation has exercised the option under sub‑clause (e), the assessee may not again vary the meaning of “previous year” for that source or business, profession or vocation except with the consent of the Income‑Tax Officer and subject to such conditions as the Officer may deem appropriate. The Court further observed that sub‑clause (i)(b) empowers the Central Board of Revenue or its nominee to determine the period of the previous year for any person, business or company, or class thereof. Sub‑clause (i)(c) defines the previous year for a newly‑set‑up business, profession or vocation, while sub‑clause (ii) deals with the previous year applicable to the assessee’s share of income in a firm. A combined reading of these provisions demonstrates that the length of a “previous year” is not restricted to precisely twelve calendar months; indeed, under section 2(11)(i)(b) the period may be more or less than twelve months, depending on the determination made by the Board.
It was held that the period defined as a “previous year” could be determined by the Central Board of Revenue or by any authority that the Board might authorize for that purpose, and that the period so fixed could be either longer or shorter than twelve months. The provision in section 2(11)(i)(c) further allowed that, for a newly‑started business, profession or vocation, the previous year could be less than twelve months. Against this statutory backdrop, the Court examined the meaning of section 2(11)(i)(a). The provision gave the assessee the option to select any date that fell within the preceding financial year as the closing date of his accounting year, and that selected date would constitute his previous year. Once the assessee exercised this option, the expression “previous year” acquired a fixed meaning for him, and he could not again vary that meaning except with the consent of the Income‑tax Officer and subject to such conditions as that Officer might deem appropriate. Consequently, if the assessee desired to alter the meaning of the previously fixed previous year, he was required to obtain the Income‑tax Officer’s consent; the Officer, at his discretion, could either refuse consent or grant it subject to conditions. When consent was granted, the Officer possessed the authority to impose the condition that the entire interval from the end of the previous year used for the assessment of the earlier year up to the end of the newly chosen accounting year would be treated as the previous year for the current assessment year. For example, where the assessee’s previous year at a certain stage ended on 30 June and he wished to change it so that it would end on 31 March of the following year, the Income‑tax Officer could sanction the change on the condition that the previous year for the current assessment would comprise the full twenty‑one‑month span beginning on 30 June of the year in which his accounts were last closed and ending on 31 March of the year in which his accounts would be newly closed. This condition was deemed to protect the revenue’s interest. The Court observed that, had the Officer allowed the change on the basis that the previous year for the current assessment would simply be the twelve‑month period from 1 April to 31 March, the income earned during the nine‑month interval from 1 July to 31 March would have escaped taxation entirely. Counsel for the petitioner, Mr Srinivasan, argued that the Income‑tax Officer could impose the sanction on the condition that the assessee would have two previous years – one covering nine months from 1 July to 31 March and another covering twelve months from 1 April to the next succeeding 31 March. The Court rejected this argument as untenable, stating that it was impossible to have two previous years for the same assessment year, since the liability under section 3 for any assessment year relates to the income of a single previous year.
The Court observed that the notion of having two previous years for the same assessment year conflicts with the provision of section 3 of the Income‑Tax Act. In the decision of Dhandhania Kedia & Co. v. Commissioner of Income‑tax, the Court had previously described it as a contradiction in terms to speak of six previous years in relation to any specified assessment year. Accordingly, the submission that section 25(1) allows for two previous years was rejected. Section 25(1) permits the Income‑tax Officer, in an assessment year where a business, profession or vocation is discontinued, to make an accelerated assessment for the income earned from the end of the preceding year up to the date of discontinuance, in addition to the normal assessment of the income of the preceding year. Thus, the statute envisages a regular assessment of the income of one previous year and a separate special assessment of the income earned in the broken period; it does not authorize, as counsel suggested, assessments of two distinct previous years within the same assessment year.
The Court further held that the alternative argument that the Income‑tax Officer might sanction a change by assessing the income for a twenty‑one‑month period at the rate applicable to the last twelve‑month period was untenable. The Officer does not possess the authority to alter the tax rate applicable to the income of the previous year, as the rate is fixed annually by the Finance Act. Under section 3, tax is levied at that fixed rate for the assessment year on the income of the previous year, and once the length of the previous year and the corresponding income are determined, that income must be taxed at the rate specified in the Finance Act and at no other rate. The order under consideration allowed the previous year for the assessment year 1952‑53 to be defined as the twenty‑one‑month period from 1 July 1950 to 31 March 1952, a condition within the Officer’s power to impose. The additional condition that this twenty‑one‑month income be assessed at the rate applicable to the same twenty‑one‑month period was redundant, because once the previous year is established as a twenty‑one‑month span, the entire income for that span must be taxed at the rate fixed by the relevant Finance Act. Accordingly, the appeal was dismissed with costs.
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