Commissioner Of Income-Tax Bombay vs Chugandas And Co., Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 685 and 686 of 1963

Decision Date: 29 July 1964

Coram: J.C. Shah, S.M. Sikri, Subbarao

In the matter titled Commissioner of Income‑Tax, Bombay versus Chugandas and Co., Bombay, the Supreme Court delivered its judgment on 29 July 1964. The case was authored by Justice J.C. Shah, who was joined on the bench by Justices S.M. Sikri and K. Subbarao. The official citation of the decision appears as 1965 AIR 568 and 1964 SCR (8) 332, and it is also referenced in several subsequent reports, including R 1966 SC 47, RF 1966 SC 1514, F 1967 SC 1061 and D 1968 SC 9. The statutory provision at issue was section 25(3) of the Indian Income‑Tax Act of 1922, which deals with the conditions under which an exemption from tax may be claimed.

The respondent, Chugandas and Co., was a firm engaged in dealing with securities. Under the provisions of the Income‑Tax Act of 1918, the firm was subject to income‑tax. In the accounting year 1946 the firm received Rs 4,13,992 as interest on securities, and in the following year 1947 it received an additional Rs 1,01,229 from the same source. The firm ceased its business operations on 30 June 1947. For the assessment year 1948‑49, the firm invoked section 25(3) of the 1922 Act and claimed an exemption from tax on the income earned in the preceding year, contending that the business had been discontinued.

At the first level, the Income‑Tax Officer, together with the Appellate Assistant Commissioner, held that the interest received by the firm fell under the heading “interest on securities” as defined in section 8 of the Act, and not under “profits and gains of business, profession or vocation” as defined in section 10. Consequently, they concluded that the exemption under section 25(3) did not apply to the firm. The Appellate Tribunal reversed this finding, and the Bombay High Court, by a majority judgment, affirmed the Tribunal’s order. The Commissioner of Income‑Tax then appealed the decision to the Supreme Court.

The Supreme Court examined the language of section 25(3), which states that where tax has ever been charged on any business, profession or vocation, such tax is deemed to have been charged on the owner of that business. The Court observed that if this condition is satisfied with respect to the income of the business under the 1918 Act, the owner is entitled to the exemption when the business is discontinued. The provision, the Court affirmed, refers to tax charged on any business and therefore on any person for all income derived from carrying on that business. The Court found no rationale for limiting the exemption only to income taxed under section 10, i.e., “profits and gains of business, profession or vocation.” Accordingly, the Court referred to earlier decisions, including United Commercial Bank Ltd., Calcutta v. Commissioner of Income‑Tax, West Bengal (1958 SCR 79) and Commissioner of Income‑Tax, Madras v. Express Newspapers Limited, Madras (1964 8 SCR 189), to support its interpretation. The Court ultimately held that the appeal should be dismissed, confirming that the firm was not entitled to the exemption claimed under section 25(3).

The judgment formed part of Civil Appeals Nos. 685 and 686 of 1963, arising from the Bombay High Court’s order dated 17 December 1958 and 18 December 1958 in Income‑Tax Reference No. 27/X of 1954. The appellants were represented by counsel, while the respondents were also represented by counsel, whose names are recorded in the original report.

C. Mathur and Ravinder Narain appeared as counsel for the respondent. The judgment was delivered on 29 July 1964 by Justice Shah. The case concerned M/s Chugandas and Co., a partnership that was engaged in the business of dealing in securities. In the financial year 1946 the firm received interest income amounting to Rs 4,13,992 from the securities that it held as stock‑in‑trade. In the following year, 1947, the same source yielded an additional interest sum of Rs 1,01,229. The partnership ceased its trading activities on 30 June 1947, thereby discontinuing its business. During the assessment proceedings covering the years 1947‑48 and 1948‑49 the firm invoked section 25(3) of the Indian Income‑tax Act, 1922, seeking exemption from tax on the income that it had earned in the relevant preceding year. The firm’s contention was that it had been carrying on the securities business before the enactment of the 1922 Act and that, for that earlier period, tax had been imposed under the provisions of the Indian Income‑tax Act, 1918 (VII of 1918). Accordingly, the firm argued that the exemption provided by section 25(3) should apply. In addition, the firm requested that the income earned in the year 1947 be treated as if it were income of the previous year.

The Income‑tax Officer examined the claim and held that the interest earned on the securities was “liable to be assessed to tax” under section 8 of the 1922 Act and not under section 10. Consequently, the Officer concluded that the firm was not entitled to the exemption sought. The officer’s order was upheld on appeal by the Appellate Assistant Commissioner. However, the Income‑tax Appellate Tribunal reversed that decision, holding that the firm was eligible for the exemption for the entire income of the business, including the interest on securities, for the year in which the business was discontinued. The Commissioner then invoked section 66(1) of the Act to refer a specific question to the Tribunal. The High Court of Bombay, when restating the question, asked: “Whether the assessee is entitled to the benefit of section 25(3) in respect of the interest on securities?” Both parties agreed that the assessee’s principal trade was that of a securities dealer, and that the securities held constituted its stock‑in‑trade. The interest accrued on those securities was received intermittently and, for the purpose of computing taxable income, was required to be accounted for under section 8 of the Indian Income‑tax Act, 1922.

Section 25(3) itself reads as follows: “Where any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income‑tax Act, 1918 (VII of 1918), is discontinued, then, unless there has been a succession by virtue of which the provisions of sub‑section (4) have been rendered applicable, no tax shall be payable in respect of the income, profits and gains of the period between the end of the previous year and the date of such discontinuance, and the assessee may further claim that the income, profits and gains of the previous year shall be deemed…” The proper construction of this provision, and the application of its terms to the facts of the present case, were the matters that required adjudication between the rival positions of the assessee and the Commissioner.

The provision provided that the income, profits and gains of the period in question shall be deemed to have been earned during that period. Whenever a person makes such a claim, the assessment must be conducted on the basis of the income, profits and gains attributed to that period. If, after such assessment, it is found that tax has already been paid on the income, profits and gains of the previous year in an amount greater than the tax that is now payable, the excess amount must be refunded to the claimant. An exemption from the liability to pay tax on the income, profits and gains under section 25(3) may be claimed by any assessee whose business, profession or vocation was at some time subject to tax under the Indian Income‑tax Act of 1918 and which has subsequently been discontinued, provided there has been no succession that would bring sub‑section 4 of section 25 into operation. Section 25(3) also applies even where the person assessed under the 1918 Act is not the same individual who now claims relief, as long as the earlier person was the predecessor‑in‑interest of the claimant with respect to the business. The legislature introduced section 25(3) because, under the 1918 Act, tax was levied according to section 14(2) on the income of the year of assessment, so that the financial year 1921‑22 was taxed on the income of that same year. When the Indian Income‑tax Act of 1922 came into force, it changed the basis of taxation by imposing tax on the income of the previous year under section 3 of that Act. Consequently, on 1 April 1922, the same income for the year 1921‑22 was subject to two separate assessments: one under the 1918 Act and another under section 3 of the 1922 Act together with the relevant Finance Act. This resulted in double taxation of the income for that year. To avoid such duplication and to ensure that the number of assessments corresponded to the number of years during which the business was carried on, the legislature enacted the exemption prescribed in section 25(3). However, the benefit was limited strictly to the income, profits and gains of a business, profession or vocation on which tax had been levied under the provisions of the 1918 Act. By enacting section 25(3), Parliament intended to relieve from tax the income, profits and gains that arise from a business, profession or vocation when that activity is discontinued, provided that tax had previously been charged on it under the 1918 Act. That principle is clear, but it does not resolve the remaining issue, namely what precisely constitutes “income, profits and gains of business, profession or vocation” within the meaning of section 25(3) for which the exemption may be claimed upon discontinuance.

The Court noted that the matter presented a question on which the High Court had been split. In the decision that was under appeal, Justice Tendolkar expressed the view that the expression in section 25(3) referred only to income, profits and gains of business that were chargeable to tax under the head “profits and gains of business, profession or vocation” as defined by section 10 read with section 6(iv); consequently, only such income would be exempt from liability under section 25(3). In contrast, Justice S. T. Desai held that section 25(3) exempted from tax liability all income, profits and gains earned by carrying on a business, profession or vocation, irrespective of whether those receipts were chargeable to tax under the head “profits and gains of business, profession or vocation.” The case was then referred for opinion to Justice K. T. Desai, who agreed with Justice Desai’s broader interpretation. To understand the dispute, the Court explained the structure of the statute for computing taxable income. Under the Act, income‑tax is levied as a single tax on the aggregate of income derived from the various heads enumerated in section 6. Section 6 itself is not a charging provision, and income calculated under each separate head is not taxed independently. Nevertheless, income that falls within a particular head cannot be subjected to tax under another head, either in place of or in addition to the first head. The Court referred to its earlier decision in The United Commercial Bank Ltd., Calcutta v. The Commissioner of Income‑tax, West Bengal, noting that the scheme of the Indian Income‑tax Act, 1922 makes the heads of income, profits and gains listed in section 6 mutually exclusive, each head being intended to cover items arising from a specific source. Accordingly, interest on securities, which is expressly chargeable under section 8 as a distinct head, belongs to that head and cannot be transferred to section 10, whether the securities are held as trading assets or as capital assets. In the United Commercial Bank case, the Income Tax Officer, during assessment, separated the income of a banking company into two heads—“interest on securities” and “business income”—and allowed a set‑off of the business loss against the securities income for the year of assessment, but refused to permit the business loss of a preceding year to be set off against that income under section 24(2). This approach was endorsed by the High Court of Calcutta, which affirmed that the various heads under section 6 are mutually exclusive and that an item fitting within an exclusive head cannot be taxed under a different head. The Supreme Court concurred, reiterating that interest on securities, being charged under section 8, cannot be brought under section 10 regardless of the nature of the securities. Consequently, the Court concluded that even when an item of income is earned in the course of carrying on a business, it does not automatically fall within the head “profits and gains of business” as defined by section 10 read with section 6(iv).

In this case, the Court observed that even when an amount is earned while carrying on a business, it does not automatically belong to the head “profits and gains of business” as defined by section 10 read with section 6(iv) of the Income‑Tax Act. The Court explained that if securities form part of the assessee’s stock‑in‑trade, the interest received on those securities must be reported under the head “interest on securities” in accordance with section 8 read with section 6(ii). Likewise, dividends received from shares are to be shown under section 12(1A) and not under section 10. When an assessee is engaged in the business of buying and selling buildings, the profits arising from those transactions are liable to be disclosed under section 10, whereas any income received from the ownership of such buildings, while they remain in the assessee’s possession, is to be charged under section 9 read with section 6(iii). The Court emphasized that the income of a business must be dissected in each circumstance, and that only the portion of income that is genuinely earned from the business activity will be taxed under the head “profits and gains of business”, while amounts falling under other specific heads will be taxed according to those heads. The judgment under appeal, authored by Tendolkar J., had held that only the income computed under section 10 could be admitted to the exemption, but the majority of the Court had decided that the entire income earned by carrying on a business qualified for the exemption. The Court then turned to clause (3) of section 25, which states that income of a business, profession or vocation that was ever taxed under the Act of 1918 becomes exempt from liability to tax under the Act of 1922 upon the cessation of that business, profession or vocation, for the period from the end of the preceding year up to the date of discontinuance. The Court noted that the Income‑Tax Acts impose tax on defined units such as individuals, Hindu Undivided Families, companies, local authorities, firms, and associations of persons, and that a business, profession or vocation is not itself a unit of assessment. Consequently, when section 25(3) speaks of tax having been charged on any business, it is intended that the tax was levied on the owner of that business. If that condition is satisfied for the business income under the 1918 Act, the owner or his successor in interest with respect to the business is entitled to the exemption upon discontinuance. The provision therefore refers to tax charged on any person in relation to income earned by carrying on the business, not to all income of the individual. The Court clarified that non‑business income will not enjoy the exemption, but there is no reason to limit the exemption only to income that was taxable under the specific head “profits and gains of business, profession or vocation”. The legislature has not expressed such a restriction, and no interpretive basis exists for imposing one. The Court further observed that subsection (3) does not condition the exemption on chargeability of income under a particular head, and that other provisions support this broader view. For example, where the legislature intended to refer to a specific head of taxation as a condition for an obligation or right, it has done so expressly, such as in section 18(2) which obliges any person responsible for paying income chargeable under the head “salaries” to deduct tax, and in section 18(3) which imposes a similar duty on persons paying interest on securities. Section 24, which permits set‑off of losses, also illustrates the legislative pattern of specifying heads when required, reinforcing that the exemption under section 25(3) should apply to the whole business income taxed under the earlier Act, without being confined to a particular head.

The Court observed that the statute does not limit the exemption in sub‑section (3) of section 25 to income on which tax is payable under the head “profits and gains of business, profession or vocation”. The Legislature made no explicit reservation to that effect, and there is no justification for interpreting sub‑section (3) in a restricted manner. Moreover, sub‑section (3) does not condition the benefit of exemption on the chargeability of income under any particular head of taxation. The Court noted that several other provisions of the Act support a broader interpretation. For example, section 18(2) imposes liability on any person responsible for paying income that is chargeable under the head “salaries” to deduct income‑tax and super‑tax on the amount payable. In a similar fashion, section 18(3) makes persons responsible for paying income‑tax under the head “interest on securities” liable to deduct tax at the prescribed rates on the interest payable. Section 24 further permits set‑off of loss sustained under any of the heads listed in section 6 against income, profits or gains from any other head in the same year. These provisions explicitly refer to specific heads of taxation, whereas the exemption in section 25(3) is expressed in general terms and is not confined to income chargeable under section 10 of the Act.

The Court further explained that the design of sub‑sections (1) and (2) of section 25 supports a non‑restrictive reading. Sub‑section (1) authorises the Income‑Tax Officer to make an “accelerated assessment” when a business, profession or vocation is discontinued in any year. The purpose of this rule is to prevent revenue loss that could arise if a taxpayer were to discontinue the activity and hide or dispose of assets and income, or simply disappear from the market. In the ordinary course, such an accelerated assessment would have to cover the entire income of the discontinued undertaking. If the Department’s contention were accepted—that the income for the accelerated assessment should be limited only to income taxable under section 10—the assessment under section 25(1) would become ineffective, because income arising from securities, dividends, house‑property and similar sources would remain taxable only after the year ends and would be dealt with in a subsequent final assessment. Moreover, a taxpayer who ceases a business, profession or vocation is entitled under section 24 to set off losses from one business against profits from another; this right would be rendered illusory if the assessment of the discontinued business considered only the profits and gains chargeable under section 10. The Court therefore concluded that the legislative intent was to allow the exemption to apply to the whole income, profits and gains of the discontinued business, profession or vocation, without restricting it to the specific head of “profits and gains of business, profession or vocation”.

In this case, the Court observed that a complete understanding of an assessee’s tax liability could be obtained only after the final assessment is completed. The Court clarified that the mere possibility of two separate assessments does not determine the legislative intention. If that were the test, every person who earned income both from a business, profession or vocation and from other sources would have to undergo an accelerated assessment under section 25(1) and then a final assessment for the non‑business income in order to calculate his total liability. However, the Court emphasized that the prospect of two assessments concerning the same business for the same year, where one assessment would serve no useful purpose, must be considered when interpreting the expression “income, profits and gains of business, profession or vocation” that is discontinued. The wording of section 25(2) also supports the view that the income, profits and gains of a business are not limited to those chargeable under section 10. Accordingly, for failure to give notice of discontinuance of a business, a penalty may be imposed not exceeding the tax assessed on any income, profits or gains of that business. The Court found no justification for restricting the penalty solely to the amount of tax assessed on profits and gains determined for the purpose of section 10.

The Court further noted that before the insertion of sub‑section (1A) of section 12 by section 9 of the Finance Act, 1955, which took effect on 1 April 1955, dividend income was charged under section 10 when the shares producing the dividends were part of the assessee’s stock‑in‑trade. The insertion of section 12(1A) meant that, up to 31 March 1955, dividends received from shareholdings in a business were treated as profits and gains of business assessable under section 10. After the Finance Act of 1955, such dividends were re‑characterised under section 12(1A) as “income derived from other sources”. The Court questioned whether the Legislature intended that dividend income of a business, which had previously been taxed under the head “Income from shares” in the 1918 Act, should lose the exemption granted by section 25(3) after 31 March 1955 solely because the head under which it was taxed changed to “other sources”. Section 2(4) of the Indian Income‑Tax Act, 1922 defines “business” to include any trade, commerce, manufacture or any adventure or concern of a commercial nature. Consequently, the Court held that section 25(3) unquestionably intended to provide exemption from tax where the same commercial activity would otherwise be taxed twice under the 1918 Act, and that this purpose must guide the interpretation of the statutory provisions.

In this case the Court observed that the right to relief under section 25(3) arose when the activity described as a business was discontinued, for the provision expressly stated that tax attributable to that activity would, on its face, be payable on the income, profits and gains derived from it. The Court explained that the heads enumerated in section 6 and further detailed for the purpose of computing income in sections 7 to 10, and sections 12, 12A, 12AA and 12B, were intended only to indicate categories of income; they did not exhaustively define the sources from which income could arise. This principle was clarified by the Court’s earlier decision in United Commercial Bank Ltd. case (1), where it was held that business income is divided among different heads merely for the purpose of computing total income, and that such classification did not alter the character of the income, which remained business income irrespective of the head under which it was placed. The Court could not accept that the Legislature had intended a narrow interpretation of the expression “income, profits and gains of business, profession or vocation” in subsection (3) of section 25, merely because the benefit was limited to income earned by assessees who had paid tax on business and professional earnings under the earlier Act and not to other classes of income. The Court stressed that an intention to grant only a partial exemption to such income could not be lightly inferred. It further rejected the argument advanced by counsel for the Commissioner that interest on securities for the year 1921‑22 could not have been subject to double taxation. Under the Income‑tax Act 7 of 1918, section 14(2) imposed tax for each year beginning 1 April 1918 on every assessee’s taxable income at the rate specified in Schedule 1. Section 5 of that Act classified taxable income, and interest on securities was charged under section 7 read with section 5(ii). According to section 14(1), the aggregate amount of an assessee’s income chargeable under the heads listed in sections 6 to 11 became taxable in the year it was received. The Act of 1918 also contained section 19, which allowed adjustment of tax liability when the actual income was ascertained. No provision was found in that Act that excluded interest on securities from tax liability for the year in which the income accrued. Moreover, section 3 of Act 11 of 1922 continued to treat interest on securities as taxable, confirming that such income was indeed chargeable to tax under both statutes, and therefore could be subject to double taxation for the year 1921‑22.

In this case the Court observed that the interest earned on securities during the fiscal year 1921‑22 became liable to tax under the law then in force. Section 68 of the statute, which was described as a transitory and repealing provision, expressly preserved the assessment machinery that had been created by the Income‑Tax Act of 1918. The purpose of preserving that machinery was to enable the tax authority to continue making assessments and to carry out adjustments that were authorized by section 19 of the 1918 Act. Consequently, the interest that arose on securities in 1921‑22 attracted tax liability under the provisions of the 1918 Act, and at the same time it was also subject to tax under the Income‑Tax Act of 1922. Because the same income was liable to tax under both statutes, the Court could not accept the argument presented by the Commissioner’s counsel that the interest on securities was not exposed to double taxation for the year 1921‑22 and therefore the benefit provided by section 25(3) could not be applied to that class of income.

The Commissioner’s counsel further argued, relying on the judgment of this Court in the matter of Commissioner of Income‑Tax, Bihar and Orissa v. Y. Ramakrishna Deo, that the onus was on the respondent to prove that the income which the tax authority sought to levy was exempt from tax. The Court acknowledged that, where a doubt arises concerning the facts before the tax officer as to whether a taxpayer is entitled to exemption under a particular statutory provision, the burden of establishing that exemption does indeed rest on the taxpayer. However, the Court clarified that the present dispute was not about the burden of proof. Rather, the dispute centered on the proper interpretation of section 25(3). Specifically, the question was whether the exemption granted by section 25(3) applied to the entire amount of business income for the year in which the business had been discontinued, or whether the exemption was limited only to that portion of income that fell under the head “profits and gains of business” as defined in the statute. The Court therefore focused on the meaning and scope of the statutory language rather than on who must prove the exemption.

In addition, the Court noted that counsel for the Commissioner had relied upon section 26 of the Income‑Tax Act. The Court explained that section 26 deals with the procedure for assessment when there is a change in the constitution of a partnership firm or when a business is succeeded by another person. It does not address the situation of a business discontinuance. Under subsection (1) of section 26, if the Income‑Tax Officer, at the time of making an assessment, discovers that the partnership’s constitution has altered or that a new partnership has been formed, the firm as it exists at that moment must be assessed. Nevertheless, the income, profits and gains attributable to the preceding year must be apportioned among the partners who were entitled to receive those amounts in that earlier year. Where a tax assessed against a partner cannot be recovered from that partner, the liability may be recovered from the firm as it stands at the time of assessment. The Court emphasized that this provision concerns the mechanics of assessment and recovery, and does not govern the computation of income or the granting of exemptions from tax liability.

In this case, the Court explained that sub‑section (2) of section 26 addresses situations where a person succeeds another individual who is carrying on a business, profession or vocation. The provision states that the successor, subject to the provisions of sub‑section (4) of section 25, must be assessed for his actual share of the income, profits and gains of the previous year. The accompanying proviso adds that if the predecessor cannot be located, the assessment of the profits for the year in which the succession occurred, up to the date of succession, and for the previous year, shall be made on the successor in exactly the same manner and for the same amount as it would have been made on the predecessor. Moreover, if the tax assessed for either of those years on the predecessor cannot be collected from him, the liability for that tax shall become payable by and recoverable from the successor. The Court emphasized that this clause relates only to the liability to be assessed and to the payment of tax; it does not deal with the computation of income. Consequently, whatever interpretation may be given to section 26 regarding the extent of liability incurred by a successor to a business, profession or vocation, that interpretation does not determine the scope of the right to claim exemption under section 25(3). Section 26, therefore, provides for the apportionment of tax liability when there is a change in the constitution of a firm or a succession to a person carrying on a business. It directs that the tax liability be apportioned according to the actual share of both the successor and the predecessor. The Court held that the mere fact that sub‑section (2) imposes a liability on the successor to pay tax on behalf of the predecessor, or to be assessed for the predecessor’s income for the previous year, is not sufficient to conclude that the exemption granted to avoid double taxation under the Acts of 1918 and 1922 must be limited only to income that is taxable under section 10. The Court then briefly referred to the decision in The Commissioner of Income‑tax, Madras v. The Express Newspapers Limited. In that earlier case, Free Press Limited, a private company, transferred its business on 31 August 1946 to the assessee, The Express Newspapers Ltd., and subsequently resolved to wind up its business voluntarily. An amount of Rs 2,14,000 was assessed in the relevant year of assessment as business profit of the transferor company, invoking section 10(2)(vii), and Rs 3,94,576 was assessed as capital gains. The Court held that the business profit was not taxable because it arose from a winding‑up sale rather than from a trading venture. While the liability on the capital‑gains amount was not contested, The Express Newspapers Ltd. argued that, as the successor to Free Press Ltd., it should not be liable to be assessed under section 26(2).

The Court observed that Free Press Ltd. was not liable to be assessed under section 26(2). In examining the scheme of section 12B, the Court explained that the provision mandates that tax shall be payable by the assessee under the head “capital gains” for any profits or gains arising from the sale of a capital asset effected during the prescribed period. The provision further states that such profits or gains shall be deemed to be income of the previous year in which the sale took place. The Court clarified that this deeming clause does not remove capital gains from the sixth head in section 6 and place them under the fourth head; rather, it merely creates a limited fiction whereby capital gains accrued are deemed to be income of the previous year in which the sale was effected. The Court stressed that this legal fiction is confined to the purpose for which it was created and must not be extended beyond its legitimate scope. Sub‑section (2A) and sub‑section (2B) of section 24, the Court noted, provide for setting off a loss falling under the head “capital gains” against any capital gains falling under the same head, and such a loss cannot be set off against income falling under any different head. These three provisions, according to the Court, unequivocally indicate that capital gains are to be computed separately in accordance with the relevant provisions and are not to be treated as profits from the business. The Court distinguished between profits and gains of business and capital gains, describing the former as arising from business activity and the latter as arising when capital assets are disposed of for a value greater than their cost to the assessee. Consequently, the two are placed under different heads, derived from different sources, and computed by different methods. The Court further held that although capital gains may be connected with the capital assets of a business, this connection does not transform them into business profits; they are only deemed to be income of the previous year and not the profit or gains of the business for that year. Turning to section 26(2), the Court observed that the expression “profits” in the proviso makes clear that the “income, profits and gains” referred to in sub‑section (2) of section 26 pertain only to the profits under the fourth head in section 6. The Court added that if the Revenue’s interpretation of the word “income” in sub‑section (2) of section 26 were accepted, the omission of that word in the proviso would defeat the argument. However, the Court found the more reasonable view to be that both the sub‑section and the proviso deal solely with the profits under the fourth head mentioned in section 6, and, when read in that manner, they exclude capital gains. The Court rejected the argument that sub‑section (2) of section 26 read with its proviso indicates that total income should be treated otherwise.

In this case the Court observed that the criterion for a separate assessment of a successor was the income of the person who had been succeeded, as required by sub‑section (2), and that assessment and realisation under the proviso were based on the assumption that sub‑section (2) and the proviso applied to all the heads of income listed in section 6 of the Act. The Court then held that, as it had previously decided, the scope of sub‑section (2) of section 26 was confined solely to income derived from the business. Consequently, the share of income taken into account under sub‑section (2) and the assessment and realisation contemplated by the proviso could relate only to business income. The Court stated that the argument to the contrary was merely a question‑begging proposition. It was further noted that, having regard to the special character of “capital gains”, which are not true income but are deemed income for taxation purposes, the liability of the successor under the proviso to section 26(2) was limited to tax on income, profits and gains that are strictly part of the business, and these must be computed under section 10 read with section 6(iv). Such liability did not extend to every receipt that might be classified as business income. The Court distinguished the schemes of section 25(3) and the proviso to section 26(2), explaining that the former provided an exemption because of a double levy of tax, thereby reflecting the legislature’s intention to exempt all income, profits and gains of business from taxation. By contrast, section 26(2) attached the predecessor’s liability, where the predecessor could not be located, to the successor and was to be interpreted narrowly. The legislature, through section 26(2), imposed on the successor the obligation to be assessed only for profits earned in a business carried on by the predecessor. Unless the statute clearly expressed an intention to include items that are in reality not income but only deemed income, the assessment liability was rightfully limited to profits of the business that could be computed under section 10. For these reasons the appeals failed, the Court dismissed them with costs, and ordered the payment of one hearing fee. The appeals were therefore dismissed.