Gujarat High Court
Commissioner Of Income-Tax, Gujarat-I vs D.N. Mehta on 18 February, 1981
JUDGMENT Divan, C.J.
1. In this case, at the instance of the revenue, the following questions have been referred to us for our opinion :
"(1) Whether, on the facts and in the circumstance of the case the Tribunal was correct in holding that the declaration made by the assessee under the provisions of section 17(1) of the Indian Income-tax Act, 1922, was not operative under the provisions of section 113(3) of the Income-tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the declaration made by the assessee on February 16,1953 as non-resident was not operative for the purpose of his assessment for the years 1964-65, when he was assessed in the status of 'resident but not ordinarily resident' ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not liable to be charged to income-tax on his total income at the rate applicable to his total word income ?"
The facts leading to this reference are as follows :
We are concerned with the assessment year 1964-65. On February 16, 1953, the assessee wrote to the ITO, Porbandar, that he was settled permanently in Uganda since 1950. Under s. 17(1) of the Indian I.T. Act, 1922, he being a non-resident, has exercised the option of being assessed in respect of his total income on the basis of total world income.
2. Up to the assessment year 1958-59, the assessee was assessed in the status of non-resident and tax was charged on his total income with reference it the rates applicable to his total world income in pursuance of this option. For 1959-60 the status of the assessee was accepted as "resident but not ordinarily resident" and the same status continued up to the assessment year 1964-65, which is the year under reference. According to the ITO, the option, once exercised by the assessee on February 16, 1953, under s. 17(1) of the Act of 1922, was still binding on the assessee for all in respect of his total income at the rate applicable to the total world income. For the years 1962-63 and 1963-64 the matter went up to the Income-tax Appellate Tribunal and the Tribunal held that the declaration made by the assessee on February 16, 1953, was not operative for the years 1962-63 and 1963-64. The Tribunal observed that for the years 1959-60, 1960-61 and 1961-62 the assessee was not resident but he was "not ordinarily resident" and the declaration made by the assessee in his capacity as non-resident was not operative when he was being assessed in the status of "resident but nor ordinarily resident". The Tribunal, therefore, held that the declaration made by the assessee was not in force for the years 1962-63 and 1963-64. Again with effect from April 1,1962, the I.T. Act, 1961, had come into force superseding the Indian I.T. Act of 1922. The Tribunal noted that the declaration made under s. 17(1) of the old Act could not be operative under the new Act as the corresponding provisions of s. 113(3) were not identical with the provisions of s. 17(1) of the old Act. In that view of the Tribunal on this ground the assessee's declaration did not survive. For the year 1964-65 the ITO held that the declaration was made under s. 113 of the I.T. Act, 1961, by virtue of the provisions of s. 292(2)(h) of the Act of 1961 and according to the ITO the assessee was bound by the said declaration. The AAC, relying upon the Tribunal's decision for the years 1962-63 and 1963-64, allowed the assessee's appeal for the year 1964-65 so far as this point was concerned. The revenue went in, appeal against the decision of the AAC and the Tribunal held that there was no reason to differ from the earlier decision of the Tribunal and relying on that earlier decision, the revenue's appeal was dismissed by the Tribunal. Thereafter, at the instance of the revenue, the three question hereinabove set out have been referred to us for our opinion.
3. In order to appreciate the controversy which has arisen in this case, it is necessary to refer to some of the provisions of the Indian I.T. Act, 1922 (hereinafter referred to as "the 1922 Act"), and the provisions of the I.T. Act (hereinafter referred to as "the 1961 Act").
4. In the 1922 Act, s. 4A dealt with "residence in taxable territories and there was. it may be noted, no definition of "non-resident" in the 1922 Act. Under s. 4A which was on the statute book from 1939 onwards any individual was resident in the taxable territories in any year if he was in the taxable territories in the year for a period amounting in all to one hundred and eighty-two days or more; or maintained or had maintained for him a dwelling place in the taxable territories for a period or periods amounting in all to one hundred and eighty-two days or more in that year, and was in the taxable territories for any time in that year; or having within the four years preceding that year been in the taxable territories for a period or for periods amounting in all to three hundred and sixty five days or more, was in the taxable territories for any time in that years otherwise than on an occasional or casual visit; or is in the taxable territories for any time in that years and the ITO is satisfied that such individual having arrived in the taxable territories during that years was likely to remain in the taxable territories for not less than three years from the date of his arrival. Section 4B of the 1922 Act defined a person "not ordinarily resident" and under s. 4B;
For the purposes of this Act -
(a) an individual is 'not ordinarily resident ' in the taxable territories in any years if he has not been resident in the taxable territories in nine out of the ten years preceding that year or if he has not during the seven years preceding that year been in the taxable territories for a period of, or for periods amounting in all to, more than two years;....." We are not concerned with the rest of the provisions of s. 4B. Under s. 17 of the 1922 Act provision was made for a determination of the tax payable in certain special cases. Under sub-section (1) :
"where a person is not resident in the taxable territories and is not a company, the tax, including super-tax, payable by him or on his behalf on his total income shall be an amount equal to -
(a) the income-tax which would be payable on his total income or the maximum rate. plus
(b) either the super-tax which would be payable on his total income at the rate of 19 per cent. or the super-tax which would be payable on his total income if it were the total income of a person resident in the taxable territories, whichever so greater;
Provided that any such person may, on the first occasion on which the day of March, 1951, and before the June 30, in that year, or where the first occasion on which he is so assessable falls during the year ending on the day of March 31, 1952, before such date as the Central Board of Revenue may, by notification in the Official Gazette, specify in this behalf, by notice in writing to the Income-tax Officer declare (such declaration including super-tax payable by him or on his behalf on his total income shall be determined with reference to his total world income, and thereupon such tax shall be an amount bearing to the total amount of tax including super-tax which would have been payable on his total world income had it been his total in come the same proportion as his total income bears to his total world income".
5. The second proviso to s. 17(1) provided for the extension of time for making the declaration if sufficient cause as set out therein was shown to the ITO. Sub-s. (1A) dealt with the question of salaries from government for rendering service in the taxable territories. Thus, under the first proviso to s. 17(1), if an option was exercised by the assessee concerned, then instead of paying income-tax on his total income, that is, on his total income in India at the maximum rate plus super-tax either at nineteen percent. or super-tax which would be payable on his total income if it were the total income of a person resident in the taxable territories, whichever was greater, the option enabled such a person who was non-resident in India to have his tax payable on his income in India determined with reference to his total would income and thereupon the rate which was applicable would be the rate applicable to his total world income. As a result of the exercise of the option, person with smaller incomes were enabled to get the benefit of paying tax at the lesser rate, that is at a rate lesser than the maximum rate, and they has also the benefit in respect of payment of super-tax. But it must be borne in mind that it was only an option under s. 17(1) that was exercisable by a person who was not resident in India. Under the Act of 1922 there were only two categories, namely, a person resident in India as defined in s. 4A, or a person not ordinarily resident in India as defined in s. 4B, but there was no definition of "non-resident" or a Person "not resident in India".
6. Section 17(1) of the 1922 Act, came up for interpretation before Division Bench of this High Court in Girdharlal Ghelabhai v. CIT (1964) 53 ITR 23. There the Division Bench held that s. 17(1) applies only where a person is not resident in the taxable territories in respect of all sources of income; it has no application in case where a person is "resident" in the taxable territories in respect some source or sources of income and is "not resident" in the taxable territories in respect of others. Thus, according to this interpretation placed on s. 17(1) by the Gujarat High Court, the processions of s. 17(1) applied only to a person who was wholly non-resident in respect of some source or sources of income and was non-resident in respect of some others sources of income.
When the Act of 1961, came to be enacted, the major change that was made was in the definition section. Under s. 2(30) of the Act of 1961, the word "non-resident :" was defined as follows :
"'Non-resident' means a person who is not a 'resident' and for the purposes of sections 92, 93, 113 and 168, includes a person who is not ordinarily resident within the meaning of sub-section (6) of section 6."
7. It may be pointed out that with effect from April 1, 1965, s. 113 itself was deleted from the Act of 1961, and consequently reference to s. 113 was deleted from s. 2(30) with effect from April 1, 1965. Section 6 deals with "residents" in India. Sub-s (1) of s. 6 defines "resident in India" and the provisions of sub-s. (1) of s. 6 are more or less similar to the provisions of s. 4A of the 1922 Act, that behalf. Under sub-s (4) of s. 6 :
"Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India."
Sub-s. (5) is material for the purposes of this judgment. It provides :
"If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income."
8. By virtue of this deeming fiction if a person has other sources of income outside India and some sources of income in India, he would be deemed to be resident in India for the relevant precious year. Sub-s. (6) defined a person who is said to be "not ordinarily resident" in India in any precious year and so far as clause (a) of sub-s. (6) is concerned, it is on the same lines as the provisions of s. 4B of the 1922 Act. But by virtue of s. 2(30) of the 1961 Act, for assessment years 1962-63, 1963-64 and 1964-65 for the purpose of s. 113 the word "non-resident' would include also all person who were not ordinarily resident in India. It may be borne in mind that so far as the facts of the present case are converted, from assessment year 1959-60 onwards, the assessee was being assessed in the status of "resident but not ordinarily resident" and so far as assessment year 1959-60 onwards, the present assessee was being assessed in the status of "resident but not ordinarily resident" and so far as assessment years 1962-63, 1963-64 and 1964-65 are concerned, by virtue of the definition section 2(30), for the purpose of s. 113 he would be considered to be a "non-resident" because for the purpose of s. 113 the word "non-resident" would include a person who is "not ordinarily resident" within the meaning of s. 6(6) so far as these three years are concerned. We are not concerned in the present case with s. 92, 93 or s. 168 of the Act, and the only question is with reference to s. 113 as it was on the statute book for assessment years 1962-63, 1963-64 and 1964-65.
9. Before proceeding further with the other previsions of the Act, it may be pointed out that when the Bill, which ultimately became an Act in the form of the 1961 Act, was introduced in Parliament, originally the clause, which ultimately was enacted as s. 2(30), merely defined a "non-resident" two mean a person who is not a resident, but in accordance with the recommendations of the Select Committee, which were accepted by Parliament when the Bill was enacted into law, a reference to the inclusive definition was add, and the section as finally enacted included the reference to the inclusive definition of "non-resident" to mean a person who was "not ordinarily resident" within the meaning of s. 6(6). Ultimately, the whole of the provisions of s. 113 were deleted by the Finance Act of 1965. At the time when the Finance Bull of 1965, which ultimately became the Finance Act of 1965, was presented to parliament, the memorandum explaining the provisions in the Finance Bill stated, as regards the proposal to delete s. 113 of the 1961 Act, from the statute book, as follows (see[1965] 55 ITR (St.) 136) :
"Non-residents to be charged to tax in accordance with the rate Schedule applicable to resident assessees, without tax relief for personal allowances or exemption in respect of small incomes."
And the explanation states :
"At present, non-company non-resident assesses are charged to tax on the income arising. or received in the first instance, in India at the maximum rate of income-tax and surcharge thereon plus super-tax at 19 per cent. viz., 48.37 per cent. If their income attracts super-tax (in accordance with the rate Schedule of super-tax applicable to resident assessees) at a rate higher than 19 per cent. Super-tax is charged at the higher rage. However, if a non-resident exercises the option to be assessed on his income in India at the average rate of tax applicable to his total world income, tax is charged on him on that basis. The option once exercised, is final and applicable to all subsequent assessments also.
Assessees who are resident but 'not ordinarily resident' in India are also charged to tax on the same basis.
It is proposed to levy tax in the case of such assessees from the assessment year 1965-66 onwards on their income assessable in India at the graduated rates in the rate Schedule for income-tax Non-resident assessees will, however, not be eligible for tax relief on account of person allowance, nor will they be entitled to the exemption in respect so small incomes (viz.) total income not exceeding Rs. 6,000 in the case of Hindu undivided families satisfying certain conditions, and Rs. 3,000 in any other case)."
10. It may be pointed out that though s. 113 as it was introduced in the I.T. Act, 1961, corresponded to s. 17 in the sense that it provided for tax in the case of non-residents, in several; respect it differed from the scheme of the 1922 Act. So far as s. 113 was concerned, it provided, m in sub-s (1) on the same lines as s. 17(1) of the 1922 Act. However, when it came to giving the benefit of the option, some difference was made so far as the provision of sub-s. (4) of s. 113 were concerned as compared to the similar provisions under s. 17(1) Under s. 17(1) first provision, once the option was exercised by the assessee, tax was to be determined with reference to his total world income and then such tax was to be an amount bearing to his tax, including super-tax, which would have been payable on his total world income has it been his total income, the same proportion as his total income bears to his total world income, that is, the average rate was to be calculated with reference to the total world income, and, at that rate the total income in India was to be taxed. However, under sub-s. (4) of s. 113 a change was introduced and the change was that on the option being exercised, either the tax payable on his total income as if it were the total income of a resident or an amount bearing to the total amount of tax which would have been payable on his total world income has it been his total income the same proportion as his total income bears to the total world income, whichever is greater. This concept of "whichever is greater" even in the case of persons exercising the option was not to be found under the scheme of s. 17(1) and, therefore, in some cases, the possibility of an advantage being gained because of loss outside India in the case of an assessee in a particular previous year being available to him for the purpose of calculating the average rate of tax payable on his total income in India, was taken up by the provision of sub-s. (4) of s. 113.
11. Having examined the schemes of the two sections and noted the difference between the scheme of the 1961 Act and the scheme of the 1922 Act, we will now proceed to deal specifically with the application of these principles to the facts of the present case. The option was exercised by the assessee before us in 1953 with reference to the provision of the 1922 Act and he did so in his status of non-resident, that is, to use the language of s. 17 of the 1922 Act, a person "non resident in India". It has been held by the Supreme Court in K. L. Varadarajan v. CIT (1975) 98 ITR 182, that the words" all assessments thereafter" in the second proviso to s. 17(1) of the Indian I.T. Act, 1922, signify not only assessments for the subsequent years but would also cover assessments or reassessment for earlier years in case the assessments or reassessment are being made subsequent to the filing of the declaration by the assessee. The entire scheme of s. 17(1) clearly shows that the word "assessment" in that section has been used in a comprehensive sense so as to include reassessment under s. 34. This judgment was cited by Mr. Raval, appearing for the revenue, for the purpose of pointing out that the option once exercised under s. 17(1) was final and all subsequent assessments, the is, assessments made subsequently in point of time after the exercise, irrespective of whether as a result of that option the assessee stands to gain or lose so far as the particular assessment year is concerned. So far as the option exercised under s. 17 of the 1922 Act is concerned, there is a provision made in the repealing section, namely, s. 297. Under s.297, sub-s. (1), the Indian I.T. Act of 1922 was repealed and there was a saving clause, namely, sub-s (2) and that saving clause provided (under clause (h) :
"Notwithstanding the repeal of the Indian Income-tax Act, 1922......
(h) any election or declaration made or potion exercised by an assessee under any provision of the repealed Act and in force immediately before the commencement of this Act shall be deemed to have been an election or declaration made or option exercised under the corresponding provision of this Act."
Mr. Raval for the revenue has emphasized that the words in section 297(2)(h) are "corresponding to" and not "identical with". The Supreme Court has pointed out in T. S. Balaram v. Volkart Brother (1971) 82 ITR 50 at page 53 :
"Section 113 of the Income-tax Act, 1961, corresponded to section 17(1) of the Indian Income-tax Act, 1922, but that section has now been omitted with effect from April 1, 1965, as a result of the Finance Act, 1965."
12. There are some major difficulties in the way of the revenue so far as the application of the option of 1953 to the assessment year 1964-65 is concerned : (1) The option which was exercised by the present assessee, though he is the same individual, was in his capacity as a person not resident in India or, as he put it in his letter, as a non-resident. At the time when he exercised the option, he was non-resident but subsequently he was a "resident but not ordinarily resident" in India. The status of a person "not ordinarily resident" and the option which was exercised by him was in a status different from the status with which we are concerned in the present case. In the present case, at the material time, he was a person "not ordinarily resident" in India and it was only by virtue of the inclusive definition in s. 2(30) that for the purpose of s. 113 he was to be treated as "non-resident". (2) Apart from the question of status, m the whole scheme with reference to the assessment of the total income in India of a non-resident is different as between the 1922 Act and the 1961 Act. Under the 1922 Act, as explained by the Gujarat High Court decision in Girdharlal Ghelabhai's case (1964) 53 ITR 23, the provisions of s. 17(1) were to be applicable only if the person was a wholly non-resident person. Under the scheme of the 1961 Act, a person who is "not ordinarily resident" would also be governed by the provisions relating to a non-resident and thus the whole scheme being different the option which was exercised under one set of circumstances cannot be made to apply to a different set of circumstances altogether. It may also be pointed out that for the assessment years which immediately preceded the years under reference (1964-65), that is for assessment years 1962-63 and 1963-64, the assessee was treated as "not ordinarily resident" and the option exercised by him in 1973 was not made applicable to the two assessment years. That decision has become final for those two years so far as the present assessee is concerned. The contention which is urged on behalf of the assessee ifs that because there was no reference for those two assessment years. That decision has become final for those two years so far as the present assessee is concerned. The contention which is urged on behalf of the assessee is that because there was no reference for those two years the provisions of s. 297(2)(h) would not apply to the present year under reference. It was also contended that even for the assessment year 1961-62, the assessee was assessed as a person "not ordinarily resident."
13. In our opinion, the first two difficulties in the way of the revenue are impossible to overcome. Under the income-tax law, every person is assessed in view of his status, namely, the same individual may be assessed as an individual for his personal income; he may be assessed in his capacity as the karta of an HUF, and he may be assessed in a representative capacity if he happens to be the trustee of a trust, either public or private, but so far as the assessments are concerned, he is a different assesses with respect to each of the statuses in which he is being assessed. Therefore, if a person is assessed in the status of a person "not ordinarily resident", he is not definitely to be assessed in the status of "non-resident". The option which the assessee in the case before us exercised in 1953 was with reference to his status as a "non-resident" person and that option cannot be made applicable to him when he is being assessed in his capacity as a person "not ordinarily resident". It is only by virtue of the inclusive definition in s. 2(30) that for the purposes of s. 113, a person "not ordinarily resident" is to be treated as a "non-resident, but when it comes to s. 297(2)(h) of the I.T. Act, 1961, and the questions is whether the option exercised by him in 1953 under the 1922 Acts will be applicable to him in respect of the assessment under s. 113, the answer must be that he is not a "non-resident" so far as the option of 1953 is concerned. Departing from the definition of the 1922 Act, he is now to be treated as a "non-resident" by virtue of the inclusive definition in s. 2(30) but for the purpose of the option, it cannot be said that he is the same assessee because the category of the assessee is different.
14. Moreover, when the option was exercised by the assessee in 1953, he did so with reference to the definition of "non-resident" or, to use the language of the 1922 Act, a person "not-resident" in India", with reference to the provisions of the 1922 Act. When the Act changes the definition subsequently, as it has done by providing the inclusive definition in s. 2(30) of the 1961 Act, and the whole concept of "non-resident" is totally changed, since there is no clear-cut provision in the 1961 Act for the applicability of the option exercised under a different set of circumstances to the option to be exercised in the present set of circumstances, the option exercised in 1953 cannot be made applicable under the new definition in the 1961 Act. Section 297(2)(h), which is merely a saving clause, cannot be availed of to fill in a lacuna of the option exercised under the 1922 Acts not being mentioned in the main provisions of s. 113(3). If the Legislature has wanted that the option exercised under s. 17(1), proviso, under the 1922 Act should still continue in spite of the changed definition in the 1961 Act in s. 2(30), it should have been specifically stated so in s. 113(3), but the legislature has clearly not stated so. Under these circumstances, this option exorcised in 1953 cannot be made applicable to the new set of circumstances which arose under the 1961 Act.
15. The contention of Mr. Patel that inasmuch as for the assessment years 1959-60, 1960-61, and 1961-62, the assessee was "resident but not ordinarily resident" and was not" non-resident" and hence the declaration made has come to an end, cannot be sustained. It is true that under s. 297(2)(h) of the 1961 Act, two condition are required before an option exercised under the 1922 Act can be made applicable to a corresponding provision of the 1961 Act, and one of the requirements is that the option must have been in force immediately before the commencement of the 1961 Act. Merely because the option exercised by the assessee in 1953 could not be made applicable to the facts as they existed in 1959-60, 1960-61 and 1961-62, it cannot be said that the option was not in force. It was in force but it was in a state of suspended animation. As has been pointed out earlier, once the option is exercised under s. 17(1), proviso, of the 1922 Act, it was to become final and it was to apply to all subsequent assessments. That finality was not to be touched and that continuance of the option was not to be touched merely by reason of the circumstances that for some of the subsequent assessments, the assesses was not a "non-resident" but was "resident but not ordinarily resident."
16. Therefore, we base our conclusion on the above-mentioned two grounds, namely, firstly, the category of the assessee was different, and secondly by virtue of the change of definition in s. 2(30) in the 1961 Act, that being an inclusive definition the entire concept of the exemption under there option has changed and, therefore, the option of 1953 would no longer apply in the case of the present assessee because he was in the year under reference a person "resident but not ordinarily resident."
17. Under these circumstances, the final conclusion reached by the Tribunal was, in our option, correct.
The questions referred to us are, therefore, answered as follows :
Question No. (1)-In the affirmative, that is, in favour of the assessee and against the revenue.
Question No. (2)-In the affirmative, that is, in favour of the assessee and against the revenue.
Question No. (3)-In the affirmative, that is, in favour of the assessee and against the revenue.
18. The Commissioner will pay the costs of this reference to the assessee.