29 July 1964
Supreme Court


Case number: Appeal (civil) 685 of 1963






DATE OF JUDGMENT: 29/07/1964


CITATION:  1965 AIR  568            1964 SCR  (8) 332  CITATOR INFO :  R          1966 SC  47  (7)  RF         1966 SC1514  (9)  F          1967 SC1061  (5,6)  D          1968 SC   9  (12)

ACT: Indian  Income-tax  Act  (XI of  1922),  s.  25(3)-Exemption applicable to what income.

HEADNOTE: The  respondent  was a firm dealing in  securities  and  was charged  to  income-tax  under the Income-tax  Act  (VII  of 1918).   It received certain sums of money as  interest  oil securities in the accounting years 1946 and 1947 (assessment years 194748 and 1948-49) respectively.  It discontinued its business  on  30th June 1947, and, for the  assessment  year 1948-49,  claimed exemption from taxation under s. 25(3)  of the Incometax Act (XI of 1922).  The income-tax officer  and the Appellate Assistant Commissioner, held that, the  income fell under the bead ’interest on securities" under s. 8  and not   under  the  head  "profits  and  gains  of   business, profession or vocation" under s. 10 and that therefore,  the respondent was not entitled to the exemption.  The Appellate Tribunal  reversed  that  order and the  High  Court  (by  a majority)   confirmed  the  order  of  the  Tribunal.    The Commissioner of Income-tax appealed to the Supreme Court. Held: The appeal should be dismissed. When  s.  25(3) of the Indian Income-tax Act  (XI  of  1922) enacts  that "where any business, profession or vocation  on which  tax was at any time charged, it is intended that  the tax  was at any time charged on the owner of  the  business. If  that condition be fulfilled in respect of the income  of the business under the Indian Income-tax Act (VII of  1918), the  owner  will  be  entitled to get  the  benefit  of  the exemption under the section if the business is discontinued. The section in terms refers to tax charged on any  business, that is, tax charged on any person In respect of all  income earned  by carrying on the business.  There is no reason  to restrict the condition of the applicability of the exemption only  to income on which tax was payable under s. 10 of  the Act   under  the  head  "Profits  and  gains  of   business,



profession or vocation". The   United   Commercial  Bank  Ltd.,   Calcutta   v.   The Commissioner of Income-tax, West Bengal, 19581 S.C.R. 79 and The  Commissioner  of  Income-tax,  Madras  v.  The  Express Newspapers  Limited, Madras, [1964] 8 S.C.R.  189,  referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 685 &  686 of 1963. 333 Appeal  from the judgment and order dated December  17,  18, 1958,  of the Bombay High Court in Income-tax Reference  No. 27/X of 1954. K.N.   Rajagopala  Sastri  and  R.  N.  Sachthey,  for   the appellant. N.A.  Palkhivala,  J.  B. Dadachanji, O.  C.  Mathur  and Ravinder Narain, for the respondent. July 29, 1964.  The Judgment of the Court was delivered by SHAH-- M/S.  Chugandas and Co a firm dealing in  securities- received  in  the year 1946 Rs. 4,13,992/-  as  interest  on securities  held by it.  In 1947 it received Rs.  1,01,229/- as interest from the same source.  On June 30, 1947 the firm discontinued  its business.  In proceedings  for  assessment for  1947-48 and 1948-49 the firm, relying upon s. 25(3)  of the  Indian  Income-tax Act, 1922,  claimed  exemption  from payment  of  tax on income earned in the  relevant  previous year,  on  the plea that the firm was carrying  on  business before the Indian Income-tax Act, 1922, was enacted, and  on that business, tax had been charged under the provisions  of the  Indian  Incometax  Act  7 of 1918  in  respect  of  the business done immediately before that Act was repealed.  The firm  also  applied to substitute the income earned  in  the year 1947 for the income of the previous year.  The  Income- tax  Officer  held that the interest earned by the  firm  on securities  being "liable to be assessed to tax" under s.  8 and not under s. 10 of the Income-tax Act, the firm was  not entitled to the benefit of the exemption claimed.  The order of  the  Income-tax Officer was confirmed in appeal  by  the Appellate Assistant Commissioner.  The Income-tax  Appellate Tribunal, however, reversed the order and held that the firm was  entitled to the benefit of the exemption in respect  of the  entire  income of the business  including  income  from securities   in   the  year  in  which  the   business   was discontinued. At  the instance of the Commissioner, the Tribunal  referred under s. 66(1) of the Act a question, which 334 when reframed by the High Court of Bombay read as follows:- "Whether the assessee is entitled to the benefit of s. 25(3) in respect of the interest on securities?" It  is  common  ground that the principal  business  of  the assessee was as a dealer in securities.  Securities held  by the  assessee were its stock-in-trade and interest on  those securities was received from time to time, and this interest had  for  computing  the taxable income  to  be  taken  into account under s. 8 of the Indian Income-tax Act, 1922. Section  25(3),  on  the true interpretation  of  which  the respective contentions of the assessee and the  Commissioner have to be adjudged, is in the following terms:               "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  to have  been  the  income,               profits  and gains of the said period.   Where               any such claim is made, an assessment shall be               made  on the basis of the income, profits  and               gains of the said period, and if an amount  of               tax  has already been paid in respect  of  the               income, profits and gains of the previous year               exceeding  the amount payable on the basis  of               such  assessment, a refund shall be  given  of               the difference." Exemption  from  liability  to pay tax  in  respect  of  the income, ,profits and gains under s. 25(3) may be claimed  by an 335 assessee if the business is one in respect of which tax  was charged  at any time under the Indian Income-tax  Act,  1918 and  the business is discontinued-there being? a  succession by  virtue  of which the provisions of sub-s. (4) of  s.  25 have  been  rendered  applicable.   Section  25(3)   however applies  even  if the person assessed under  the  Income-tax Act,  1918, was different from the person who claims  relief under that section provided the former was the  predecessor- in-interest of such person qua the business.  The reason for enacting s. 25(3) was that under the Indian Income-tax Act 7 of 1918, income-tax was levied by virtue of s. 14(2) of  Act 7 of 1918 on the income of the year of assessment.  Tax  was therefore levied in the financial year 1921-22 on the income of  that year.  By the Indian Income-tax Act 11 of 1922  the basis  of  taxation  was altered and by s. 3  of  that  Act, charge  for tax was imposed upon the income of the  previous year.  When Act 1 1 of 1922 was brought into force on  April 1,  1922, two assessments in respect of the same income  for the year 1921-22 had to be made.  The income for 1921-22 was accordingly charged to tax twice: it was charged under Act 7 of 1918 and it was also charge,’ to tax under s. 3 of Act  1 1  of 1922 read with the appropriate Finance Act,  resulting in double taxation in respect of the income for that year. But  with a view to make the number of assessments equal  to the number of years during which the business was carried on the  Legislature  enacted  the exemption  prescribed  by  s. 25(3).   This  benefit was however restricted  only  to  the income,  profits  and  gains  of  business,  profession   or vocation on which tax had been charged under the  provisions of  the Indian Income-tax Act, 1918.  By enacting  s.  25(3) the  Legislature intended to exempt the income, profits  and gains   resulting   from  the  activity   styled   business, profession  or vocation from tax when the business,  profes- sion  or  vocation  is discontinued if tax  was  charged  in respect thereof under the Act of 1918.  That much is  clear. But  that is not the whole problem.  What is to be  regarded --is  income, profits and gains of business,  profession  or vocation within the meaning of s. 25(3) for which  exemption may be obtained on discontinuance raises a problem on which 336 there was a difference of opinion in the High Court.  In the judgment  under appeal, Tendolkar, J., was of the view  that



by  this  expression  only  income,  profits  and  gains  of business chargeable to tax under the head "profits and gains of  business, profession or vocation" under s. 10 read  with s. 6(iv) stood exempt from liability under s. 25(3)_.  S. T. Desai, J., held that s. 25(3) exempted from liability to tax all  income, profits and gains earned by conducting a  busi- ness,  profession or vocation irrespective of  whether  they were chargeable to tax under the head "profits and gains  of business, profession or vocation", and with this view K.  T. Desai,  J.,  to  whom the case  was  referred  for  opinion. agreed. To appreciate the point in dispute, it is necessary to  bear in  mind  the scheme of the Act for  computing  the  taxable income.   Under the Act, income-tax is a single tax  on  the aggregate of income received from diverse heads mentioned in s.  6: s. 6 is not a charging section, and  income  computed under  each  distinct head is not separately  chargeable  to tax.  But income which is chargeable under a specific  head, cannot  be brought to tax under another head either in  lieu of  or in addition to that head.  As observed by this  Court in  The  United  Commercial  Bank  Ltd.,  Calcutta  v.   The Commissioner  of Income-tax, West Bengal(1) "the  scheme  of the  Indian Income-tax Act, 1922, is that the various  heads of income, profits and gains enumerated in s. 6 are mutually exclusive,  each  head  being specific to  cover  the  item) arising   from  a  particular  source   and,   consequently, "interest   on  securities"  which  is   specifically   made chargeable to tax under s. 8 as a distinct head, falls under that section and cannot be brought under s. 10, whether  the securities are held as trading assets or capital asset."  In The United Commercial Bank’s case(1) the Income Tax  Officer split  up the income of a Banking Company was in the  course of  assessment, into two heads"interest on  securities"  and "business income", and set off the business loss against the income  from securities in the year, of assessment, but  did not allow the business loss of a previous year to be set off under s. 24(2) against that (1)  [1959] S.C.R. 79. 337 income.   This  view  was  approved by  the  High  Court  of Calcutta.  The High Court held that the several heads  under s.  6 of the income-tax Act are mutually exclusive,  and  an item falling under an exclusive head cannot be charged under another head.  This view was affirmed by this Court, and  it was  held that "interest on securities"  being  specifically charged  under s. 8, which is a distinct head, it could  not be brought under s. 10, whether the securities were  trading assets or capital assets. It must therefore be held that even if an item of income  is earned in the course of carrying on a business, it will  not necessarily fall within the head "profits and gains of busi- ness"  within the meaning of s. 10 read with s.  6(iv).   If securities  constitute stock-in-trade of the business of  an assessee,  interest received from those securities will  for the purpose of determining the taxable income be shown under the  head "interest on securities" under s. 8 read  with  s. 6(ii)  of the Act.  Similarly dividends from shares will  be shown  under s. 12(1A) and not under s. 10.  If an  assessee carries on business of purchasing and selling buildings, the profits  and gains earned by transactions in buildings  will be shown under s. 10, but income received from the buildings so  long  as they are owned by the assessee  will  be  shown under  s.  9  read with s. 6 (iii).   Income  earned  by  an assessee  carrying on business will in each case  be  broken up,  and taxable income under the head profits and gains  of



business  will be that amount alone which is earned  in  the business, and does not all under any other specific head. Tendolkar  J.,  in  the judgment under  appeal  was  of  the opinion that income of the business to be computed under  s. 10  alone could be admitted to the exemption: the  ,majority of  the  Court held that all income earned  by  carrying  on business qualified for the exemption.  Now cl. (3) of s.  25 expressly provides that income of a business, profession  or vocation  which was charged at any time under Act 7 of  1918 to tax is, on discontinuance of that business. profession or vocation, exempt from liability to tax under Act 11 at  1922 for the period between the end of the previous year and  the date  of  such  discontinuance.  Tax is  charged  under  the Income-tax Acts on specific units, such 51 S.C.-22 338 as,  individuals, Hindu Undivided Families, Companies  Local Authorities,  Firms and Associations of persons or  partners of  firms  and  members of  associations  individually,  and business,  profession or vocation is not a unit  of  assess- ment.     When,  therefore,  s. 25(3) enacts  that  tax  was chargedat  any time on any business, it is intended  that the tax wasat  any  time  charged on the  owner  of  any business.If  that condition be fulfilled in respect  of  the income  of the business under the Act of 1918, the owner  or his successorin-interest qua the business, will be  entitled to  get  the  benefit  of the  exemption  under  it  if  the business,  is discontinued.  The section in terms refers  to tax charged on any business, i.e., tax charged on any person in  respect  of income earned by carrying on  the  business. Undoubtedly  it  is not all income earned by  a  person  who conducted any business, which is exempt under sub-s. (3)  of s.  25: non-business income will certainly not  qualify  for the  privilege.   But  there is no reason  to  restrict  the condition  of  the applicability of the  exemption  only  to income on which the tax was payable under the head  "profits and gains of business,profession orvocation".       The Legislature has made no such expressreservation,     and there is no warrant for reading intosub-s.  (3)  such  a restricted meaning.  Sub- section (3) it may be noticed does not  refer  to  chargeability  of  income  to  tax  under  a particular  head as a condition of obtaining the benefit  of the exemption. Diverse  other provisions of the Act lend strong support  to that  view.   Where the Legislature intended to refer  to  a specific head of taxation under s. 6 of the Act as a  condi- tion  for  imposing an obligation or claiming a  right,  the Legislature  has  in  terms referred to such  a  head.   For instance,  by s. 18(2) liability is imposed upon any  person responsible for paying any income chargeable under the  head "salaries" to deduct income-tax and super-tax on the  amount payable.   Similarly under s. 18(3) persons responsible  for paying  income-tax under the head "interest  on  securities" are  liable  to  deduct  income-tax  and  supertax  at   the prescribed rates on the amount of interest payable.  Section 24 enables set-off in respect of loss sustained under any of the heads mentioned in s. 6 against income, profits 339 and gains from any other head in that year.  These are  some of  the  provisions in which reference is made  to  specific heads  of  taxation.  But the exemption under  s.  25(3)  is general: it is not restricted to income chargeable under  s. 10  of  the Act.  Some indication is also furnished  by  the scheme  of sub-ss. (1) and (2) of s. 25.  Under  sub-s.  (1) the Income-tax Officer is given power to make what is called



an  "accelerated assessment" when a business, profession  or vocation  is  discontinued in any year.  The reason  of  the rule contained in s. 25(1) is to prevent loss of revenue  by the assessee discontinuing the business, profession or voca- tion and frittering away or secreting the assets and  income or disappearing from the scene of his activity.  But such an assessment would in the normal course have to be in  respect of  the  entire  income  of  that  business,  profession  or vocation.   If the contention of the Department that  income of  the business, profession or vocation for the purpose  of an accelerated assessment is to be limited only to income on which tax is payable under s. 10 be correct, the  assessment under  s. 25(1) would serve little useful  purpose,  because income received from securities, from dividends, from house- property  etc.  would  remain still  to  be  determined  and brought to tax after the end of the year and in the relevant year  of  assessment.  Again an assessee  discontinuing  his business, profession or vocation is entitled by s. 24 to set off  losses in one business against profits in another,  and this right may turn out to be illusory if in the  assessment of  the income of a business which is  discontinued,  profit and  gains  which  fall within s. 10  only  are  taken  into account.   The  Revenue authorities, it is true, may  get  a complete  picture  of  the  liability  of  the  assessee  to taxation only on final assessment.  This is not to say  that a  mere  possibility of two assessments is decisive  of  the intention of the Legislature, for if that be the test, every person who has income received from business, profession  or vocation and income from other source would still have to be subject, after an accelerated assessment under s. 25(1),  to a  final assess, ment in respect of the non-business  income to determine his overall liability.  But the possibility  of two assessments in respect of the same business for the same year,  one of which serves no useful purpose, must be  taken into account 340 in ascertaining the meaning to be attributed to the  expres- sion "income, profits and gains of business, profession or vocation"  which is discontinued.  The phraseology of s.  25 (2)  also  supports the view that the  income,  profits  and gains  of business are not restricted to profits  and  gains charge-able  under  s. 10.  For failure to  give  notice  of discontinuance  of  business,  penalty  for  an  amount  not exceeding the tax assessed in respect of any income, profits or gains of the business may be imposed.  There is no  local reason  for  restricting the penalty to the  amount  of  tax assessed on profits and gains determined for the purpose  of s. 10. It  has  also to be noticed that prior to the  insertion  of sub-s. (1A) of s. 12 by s. 9 of the Finance Act, 1955,  with affect  from  April  1,  1955,  income  from  dividends  was chargeable  not under s. 12 but under s. 10, if  the  shares from  which such income was received were the  stock-intrade of  the assessee.  The result of the insertion of s.  12(1A) is  that  in  respect  of a  business  in  shares  dividends received from the shares were till March 31, 1955,  regarded as profits and gains of business assessable to tax under  s. 10.   After  the  enactment  of the  Finance  Act  of  1955, dividends  became chargeable under s. 12(1A) under the  head "income derived from other sources".  Could it have been the intention  of  the  Legislature that dividend  income  of  a business in respect of which tax was charged under the  head "Income  from shares" under Act 7 of 1918 would  not,  after March 31, 1955, be entitled to the benefit of the  exemption under  s. 25(3) merely because the head under which  it  was



charged  prior  to the Finance Act of 1955 is now  the  head "other sources" ? Section  2(4)  of the Indian Income-tax  Act,  1922  defines "business" as including any trade, commerce, or  manufacture or any adventure or concern in the nature of trade, commerce or  manufacture.   Business is therefore an  activity  of  a commercial nature.  By s. 25(3) indisputably exemption  from payment of tax was intended to be given where there had been in respect of the same activity double taxation when Act  11 of 1922 was enacted.  If the right arises on  discontinuance of the activity styled business, 341 as s. 25(3) expressly provides, tax in connection with  that activity  would  prima facie be tax payable on  the  income, profits and gains derived from that business activity.   The heads described in s. 6 and further elaborated for the  pur- pose  of computation of income in ss. 7 to 10, and  12,  12A 12AA and 12B are intended merely to indicate the classes  of income:  the heads do not exhaustively delimit sources  from which income arises.  This is made clear in the judgment  of this  Court  in the United Commercial Bank  Ltd.’s  ,case(1) that business income is broken up under different heads only for the purpose of computation of the total income: by  that break-up  the income does not cease to be the income of  the business,  the  different  heads of income  being  only  the classification  prescribed by the Indian Income-tax Act  for computation of income.  It cannot be gainsaid that there was on the part of the Legislature a desire by enacting s. 25(3) to give relief to two classes of income subjected to  double taxation  for  the income of the year  1921-22.   That  this benefit was restricted to income paid by assessees who  paid tax  on  income  derived  from  business  and   professional earnings  under  the earlier Act and was  not  available  in respect  of  other income, will not, in our judgment,  be  a ground  for  giving a restricted meaning to  the  expression "income,  profits  and  gains  of  business,  profession  or vocation" occurring in sub-s. (3) of s. 25.  An intention to grant a partial exemption to income, profits and gains of  a business,   profession  or  vocation  may  not  be   lightly attributed to the Legislature. There  is no force in the contention raised by  counsel  for the  Commissioner  that  for the year  1921-22  interest  on securities  could not be charged to tax twice  over.   Under the Income-tax Act, 7 of 1918, by s. 14(2) tax was levied in respect of the year beginning from April 1, 1918 in  respect of each subsequent year, upon every assessee on his  taxable income in that year at the rate specified in Sch. 1. Section 5  of that Act classified the income chargeable  to  income- tax,  and  "Interest on securities" was charged under  s.  7 read with s. 5(ii).  In respect of interest on securities by s.  14(1)  the  aggregate amount of  the  assessee’s  income chargeable under each of the heads mentioned in ss. 6 to 11 (1)  [1958] S.C.R. 79 342 became taxable in the year in which it was received.  Act  7 of 1918 undoubtedly made a provision in s. 19 for adjustment of liability to tax when the actual income was  ascertained. Our  attention has not been invited to any provision in  the Income-tax  Act 7 of 1918 which excluded from  liability  to tax,  interest  on  securities for the year  in  which  that income had accrued.  By s. 3 of Act 1 1 of 1922 interest  on securities earned in the year 1921-22 became chargeable  and under s. 68 of that Act which was a provision transitory  as well  as repealing, machinery provided by the Inome-tax  Act of  1918  was  expressly  kept  alive  for  the  purpose  of



assessment and making adjustments under s. 19 of the Income- tax Act, 1918.  Interest on securities earned in 1921-22 was therefore chargeable to tax under Act 7 of 1918, and it  was also  chargeable  to  tax under Act 1 1  of  1922.   We  are therefore unable to agree with counsel for the  Commissioner that  interest  on securities not being  exposed  to  double taxation for the year 1921-22, benefit of s. 25(3)  was  not admissible to that class of income. Counsel  also contended, relying upon the judgment  of  this Court  in  Commissioner of Income-tax, Bihar and  Orissa  Y. Ramakrishna  Deo(1) that it is for the respondent  to  prove that the income sought to be taxed is exempt from  taxation, and  unless  he  discharges that burden, the  claim  of  the respondent  must fail.  Undoubtedly where a doubt arises  on the  facts placed before the taxing authority,  whether  the tax-payer  is  entitled to exemption from taxation  under  a certain  statutory  provision, the burden lies upon  him  to establish  that exemption.  But, here we are  concerned  not with any question of burden of proof, but with a question of interpretation  whether  the exemption which  is  admittedly given  by s. 25(3) operates in respect of the  entirety  _of the  business income for the year in question in the  course of which the business is discontinued or whether it  applies only to that class of income which is taxable under the head it  profits  and  gains  of business."  carried  on  by  the assessee in that year. Section  26 on which reliance was placed by counsel for  the Commissioner also may be noticed in this connection. (1)  [1959] Supp. 1 S.C.R. 176 343 That section provides for a scheme of assessment when  there is  change in the constitution of a firm or succession to  a business.   The  section applies not  to  discontinuance  of business, but to changes in the constitution of the assessee firm and to succession to business.  Under sub-s. (1) if  at the time of making an assessment it be found by the  Income- tax  Officer that a change has occurred in the  constitution of  a  firm or that a firm has been newly  constituted,  the firm as constituted at the time of making the assessment has to  be assessed.  But the income, profits and gains for  the previous  year  for the purpose of inclusion  in  the  total income  of  the  partners must be  apportioned  between  the partners who in such previous year were entitled to  receive the  same.   If the tax assessed upon a  partner  cannot  be recovered  from  him it may be recovered from  the  firm  as constituted  at  the time of making  the  assessment.   This provision  deals  with the machinery of assessment  and  not with   computation  of  income,  nor  with  exemption   from liability to tax.  Sub-section (2) of s. 26 deals with cases of  succession  to  any person  carrying  on  any  business, profession  or  vocation  by  another  person  carrying   on business,  profession  or  vocation in  such  capacity,  and provides  that  the  person succeeding is,  subject  to  the provisions of sub-s. (4) of s. 25, liable to be assessed  in respect of his actual share of the income, profits and gains of  the previous year.  But the proviso enacts that  if  the person  succeeded  in the business, profession  or  vocation cannot  be found, the assessment of the profits of the  year in which succession took place upto the date of  succession, and  for  the  previous year, shall be made  on  the  person succeeding in like manner and in the same amount as it would have  been made on the person succeeded or when the  tax  in respect  of  the assessment made for either  of  such  years assessed  on the person succeeded cannot be  recovered  from him, it shall be payable by and recoverable from the  person



succeeding.   This  clause  also  deals  with  liability  to assessment  and payment of tax and not with the  computation of income and whatever interpretation may be placed on s. 26 as  to the extent of liability incurred by a successor to  a business,  profession or vocation, it is not  indicative  of the  extent or of the field of the right to claim  exemption under 344 s.   25  (3).   Section  26 provides  for  apportionment  of liability  to tax in case of change in the  constitution  of firms  and  succession to persons carrying on  business:  it directs  apportionment  of tax liability in respect  of  the actual share of the successor and the person succeeded.  The fact  that  under sub-s. (2) of s. 26 liability  is  imposed upon  the successor to pay tax on behalf of his  predecessor or  to  be assessed in respect of the income of  the  person succeeded for the previous year, will not, in our  judgment, be  sufficient  to hold that the exemption  which  has  been granted in consequence of double taxation under the Acts  of 1918  and  1922 also must be restricted to income  which  is taxable under s. 10. We  may briefly refer to the decision of this Court  in  The Commissioner of Income-tax, Madras v. The Express Newspapers Limited,  Madras(1).   In  that case  Free  Press  Limited-a Private Company-transferred its business on August 31,  1946 to  the assessee the Express Newspapers Ltd. and  thereafter 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 taxable  under s. 10(2) (vii) and Rs. 3,94,576/- taxable  as capital  gains.   The  business profit was held  to  be  not taxable because it accrued in a winding up sale and not in a trading  venture.  Liability of the second amount to tax  as capital gains was not canvassed, but it was contended by the Express Newspapers Ltd. that as successor to the Free  Press Ltd.,  it was not liable to be assessed under s. 26(2).   In examining the scheme of s.   12B it was observed:-               "Under  that section the tax shall be  payable               by  the assessee under the head capital  gains               in  respect  of any profits or  gains  arising               from  the  sale of a  capital  asset  effected               during the prescribed period.  It says further               that such profits or gains shall be deemed  to               be  income of the previous year in  which  the               sale  etc.  took place.  This  deeming  clause               does  not lift the capital gains from the  6th               head in s. 6 and place it               (1)[1964] 8 S.C.R. 189               345               under  the  4th head.  It  only  introduces  a               limited  fiction, namely, that  capital  gains               accrued  will  be deemed to be income  of  the               previous year in which the sale was  affected.               The  fiction does not make them the profit  or               gains  of  the business.  It is  well  settled               that a legal fiction is limited to the purpose               for  which  it is created and  should  not  be               extended  beyond its legitimate  field.   Sub-               section (2A) and (2B) of s. 24 provide for the               setting off of the loss falling under the head               "capital  gains"  against  any  capital  gains               falling under the same head.  Such loss cannot               be set off against an income falling under any               different head.  These three sections indicate



             beyond  any doubt that the capital  gains  are               separately  computed  in accordance  with  the               said  provisions and they are not  treated  as               the  profits from the business.   The  profits               and  gains of business and capital  gains  are               two  distinct concepts in the  Incometax  Act:               the  former arises from the activity which  is               called business and the latter accrues because               capital  assets  are disposed of  at  a  value               higher  than what they cost to  the  assessee.               They  are placed under "different heads;  they               are  derived from different sources;  and  the               income  is computed under  different  methods.               The fact that the capital gains are  connected               with the capital assets of the business cannot               make  them the profit of the  business.   They               are  only deemed to be income of the  previous               year and not the profit or gains arising  from               the business during that year."                Dealing with s. 26(2) it was observed:-               the expression "profits" in the proviso  makes               it clear that the income, profits and gains in               sub-s. (2) of s. 26 only refer to the  profits               under the 4th head in s. 6. On the other hand,               if  the interpretation sought to be  put  upon               the expression "income" in sub-s. (2) of               346               s.    26 by the Revenue is accepted, then  the               absence  of that word in the proviso  destroys               the argument.  But the more reasonable view is               that both the sub-section and the proviso deal               only  with  the  profits under  the  4th  head               mentioned  in  s.  6  and,  so  construed,  it               excludes  capital  gains.  The  argument  that               sub-s.  (2)  of s. 26 read  with  the  proviso               thereto indicates that the total income of the               person succeeded is the criterion for separate               assessment under sub-s. (2) and for assessment               and  realisation under the proviso is  on  the               assumption  that  sub-s. (2) and  the  proviso               deal  with all the heads mentioned in s. 6  of               the  Act.  But if, as we have held, the  scope               of sub-s. (2) of s. 26 is only limited to  the               income from the business, the share under sub-               s.  (2)  and the  assessment  and  realisation               under  the  proviso  can only  relate  to  the               income  from  the business.  The  argument  is               really begging the question itself." It is obvious that the Court in that case held having regard to  the special nature of "capital gains" which are  not  in truth  income,  but  are deemed income for  the  purpose  of taxation and the phraseology used, that the liability of the successor under the proviso to s. 26 (2) is only in  respect of tax on income, profits and gains of the business strictly so-called,  to be computed under s. 10 read with s.  6  (iv) and not in respect of all receipts which may be regarded  as income  of  the business.  The schemes of s.  25(3)  and  s. 26(2) proviso are different.  The first grants an  exemption because  there  has  been  a double  levy  of  tax,  and  an intention  to  exempt  all  income,  profits  and  gains  of business from taxation may be attributed to the Legislature. Section  26(2) fastens liability of the predecessor,  if  he cannot  be  found, upon the successor and must  be  strictly construed.    The  Legislature  has  imposed  by  s.   26(2) liability  upon  the successor to be  assessed  for  profits



earned  in  a business carried on by  his  predecessor,  and unless there is a clear intention expressed                              347 in the statute to include in that expression what in reality is  not  income,  but is deemed  income,  the  liability  to assessment  would justifiably be limited to profits  of  the business which is computable under s. 10. The  appeals  therefore fail and are dismissed  with  costs. One hearing fee. Appeals dismisses.