Report No. 12

Notes on Clauses

Chapter I

Preliminary

Notes to clause 1

The word "Indian" has been omitted in consonance with the recommendation made by the Commission in respect of other Acts, and in conformity with recent legislative practice.

Notes to clause 2

The words "unless here is anything repugnant in the subject or context", appearing in existing section 2, have been retained, in view of the opening lines of section 3, General Clauses Act, though recent Central Acts use the formula "unless the context otherwise requires"

Agricultural income.-Till recently there was a conflict of judicial opinion regarding the interpretation of the word "agriculture". In the latest pronouncement of the Supreme Court1, all the decisions have been reviewed and the conflict in the judicial pronouncement resolved. Hence it is not necessary to explain what is meant by "agriculture".

1. C.I.T. v. Raja Benoy Kumar Saha Roy, (1957) 32 ITR 466. See also C.I.T. v. Jyoti Kana Chowdhurani, (1957) 32 ITR 705, and Kameshwar Sing v. C.I.T., (1957) 37 ITR 58.

Annual value.-Since existing section 9 has been broken up, in the draft, into various clauses, it appears useful to have this definition pointing to the relevant provision.

Appellate Assistant Commissioner.-No change has been made in the existing provision. Only, it has been placed before the definition of 'assessee'.

Approved superannuation fund etc.-Since these two expressions occur frequently in the Act, a reference has been made to them here.

Assessee.-The existing definition of 'assessee' has been replaced in the draft by a more comprehensive definition, so as to include all the possible categories of assessees, i.e, (i) (a) person who is himself liable to pay the tax on income belonging to him, (ii) a person liable to pay tax on income belonging to another person, and (iii) a person who is deemed under the sections of the Act to be an "assessee" or "assessee in default"

Wherever necessary, drafting changes have been made in the substantive provisions (particularly in the Chapter entitled "Liability in Special cases") to bring out the result that any person on whom a liability to pay tax etc. is imposed by the Act, becomes an assessee. It is hoped that the definition of 'assessee', as drafted, when read with substantive provisions, will cover all cases of vicarious liability falling under any of the following categories:-

(1) One person's income included in another's total income vide existing sections 4(2), 16(1)(c), 16(3), 44D, 44E and 44F, as well as section 42(2).

(2) One person liable to be assessed as representing another person under existing sections 40, 41, 42(1) and 44B(3).

(3) One person ceasing to exist, and thereupon another becoming liable, to be assessed for or to pay tax for which the former is liable-vide existing sections 24B, 25A, 26(2), Proviso and 44.

(4) One person liable to pay (without the formality of assessment) tax normally payable by another-vide existing sections 18(7) and 46A(2) and (3).

(5) Cases where procedure for recovery of tax may be applied against one person, (who is not himself the assessee) for tax recoverable from another-vide existing section 46(5A) 5th para and also draft Second Schedule, Rule 87.

(Existing section 8, 3rd Proviso and section 58U need not be specifically dealt with here).

Since the definition of "assessee" is made comprehensive, the words "or other person liable to pay such tax, penalty or interest" occurring in existing section 29 have been omitted in the draft1 This will remove the difficulty created by a decision of the Madras High Court2.

1. Vide draft clause 163.

2. E. Alfred v. Addl. I.T.O., (1956) 29 ITR 708. See also Abdul Kasim v. C.I.T., (1958) 33 ITR 466.

Assessment.-A definition of assessment, as including re-assessment, has been inserted on the lines of the Canadian Income-tax Act1.

1. See the (Canadian) Income-tax Act, 1948, section 139(1)(d).

Assessment year.-This is new. Though the Act uses the expression "assessment year" there is no definition of that expression anywhere in the Act. We have, therefore, included a definition which conforms to the existing practice. In the Income-tax Acts of other countries, e.g., Ceylon, there is a definition of 'assessment year'.

Average rate of Income-tax.-This is new. Instead of giving an elaborate formula to arrive at the average rate wherever it becomes necessary we thought it more convenient any conducive to clarity to add a definition. This is based in sub-section (5) of existing section 17.

Mention of earned income relief has not been made in the definition, in view of the fact that the provisions of the Act relating to earned income relief have now become obsolete. Since successive Finance Acts for the last two years have not provided for this relief, it would seem to be the confirmed policy of Government to abolish earned income relief.

Average rate of Super-tax.-This is also a new provision intended to arrive at the average rate of super-tax; (compare the definition of "average rate of income-tax" referred to above)

Business.-No change has been made in existing section 2(4).

Capital asset.-Item (iii) of the existing definition, which excludes "any land from which the income derived is agricultural income", has been redrafted and replaced by the words "any agricultural land in India" The general scheme of the constitutional provisions relating to taxation is to exclude agricultural land from taxation by the Union, and it would, therefore, be in conformity with that scheme to express this exclusion, not in terms of "agricultural income" but in terms of land Agricultural land which has been cultivated, say, for 5 years and then remained fallow for 2 or 3 years during which it is sold, would, under the existing definition, attract capital gains tax. This anomaly will now be removed by the proposed redraft.

Central Board of Revenue.-No change; it corresponds to existing section 2(4B).

Commissioner.-No change; it corresponds to existing section 2(5).

Company.-There is no substantial change in the draft, which follows the existing definition in section 2(5A).

Co-operative Society.-No change; it follows the existing definition in section 2(5B).

Director, Manager, Managing Agent.-We have included in the existing definition [section 2(8A)] the word "Director" also, and we have substituted for the "Indian Companies Act, 1913", the "Companies Act, 1956". To make the meaning clear, we have also introduced the words "in relation to a company".

Director of Inspection.-No change; it corresponds to existing section 2(6).

Dividend.-There is no change in the existing definition in section 2(6A), except that we have added another explanation to the effect that the accumulated profits "shall include all profits of the company upto the date of distribution or; payment referred to in this clause".

The reason for this alteration is this. In the case of Girdhar Das and Co Ltd v. C.I.T., (1957) 31 ITR 82, the Bombay High Court observed that in this section, "accumulated profits " have been used in contra-distinction to current profits. In our opinion, the intention of the legislature was to include the current profits also in the definition; and to make this clear we have made the proposed alteration.

Earned income.-We have adopted the existing definition [section 2(6AA) with the following changes. To make the meaning of clause (b) clear, we have split it up into two clauses and numbered them as (b) and (c). The existing clause (c) is renumbered as clause (d). We have added an explanation to overcome the difficulty introduced by the Madras High Court in Mori Muthu Nadar v. C.I.T., (1956) 30 ITR 670, For the corresponding provision in the U.K. Act, see section 525(1), last para, of the Income-tax Act, 1952.

Firm, partner and partnership.-No change; it follows the existing definition in section 2(6B).

Income.-We have included in the existing definition other provisions which treat income as deemed income for the purpose of the Act.

The Act uses at several places the lengthy expression "income, profits and gains". To simplify the matter and "to avoid repetition, we have included profits and gains" in the definition of income, and throughout the Act we have used, as far as possible, the word "income". Suggestions have been made that we should give in exhaustive definition of income. It is not possible to do so.

The provision within the brackets in existing sub-clause (iii) (relating to the meaning of "person having substantial interest in a company") has been transposed as an explanation.

Item (vii) of the existing definition of income relates to the profits and gains of insurance business carried on by a mutual insurance association or by a Co-operative Society. What is described as "profits and gains" in this item is, in fact, merely a surplus. The definition simply artificially extends the conception of income so as to cover such surplus. The existing words "computed in accordance with Rule 9 in the Schedule" indicate this clearly, when read with existing rule 2(b) of the Schedule. An attempt has been made to bring out this aspect still more clearly in the draft1.

1. For a general discussion of the position regarding mutual insurance associations, see the recent Privy Council case of English and Scottish Joint Co-operative Wholesale Society Ltd. v. Assam Agricultural Income-tax Commissioner, (1948) 2 AER 295. See also ITIC Report, 1918, para 126, p. 54, and compare section 121, Australian Income-tax etc. Act, 1936-1953.

Income-tax Officer.-No change, in the existing definition in section 2(7).

Indian Company.-We have revised the definition of 'Indian company', in the light of the Companies Act, 1956, and the abolition of the distinction between Part A and Part B States. The existing position relating to companies registered in the State of Jammu and Kashmir is retained.

Inspecting Assistant Commissioner.-No change; it follows existing section 2(6D), and has been placed after "Income-tax Officer".

Inspector of Income-tax.-No change; it follows existing section 2(6E), and has been placed after "Income-tax Officer".

Magistrate.-Under the existing definition, second-class Magistrates specially empowered by the Central Government are also authorised to try offences under Act, and in the State of Jammu and Kashmir the State Government may authorise a Magistrate of the second class to try offences under the Act. We are, however, not in favour of second-class Magistrates trying offences under the Act, and we have therefore, confined the power to first class Magistrates throughout India. Incidentally, this will lead to simplification of the definition and uniformity.

Non-resident.-The Act uses various phrases for person who is not a resident of India. For the sake of uniformity, the phrase "non-resident" has been used in the draft wherever practicable, and has been defined here.

Person.-The definition of "person" in existing section 2(9) has been amplified.

The existing definition includes (a) Hindu undivided family and (b) a local authority. The General Clauses Act,1 defines "person" as including a company or association or body of individuals whether incorporated or not. The charging section (section 3) of the Income-tax Act enumerates the units for taxation as "individual, Hindu undivided family, company, local authority, firm and other association of persons, or the partners of a firm or the members of the association individually". Section 4 of the Act refers to a "person".

1. Sections 3(42), General Clause Act.

It seems desirable to have a comprehensive definition of the word "person" in the Act so as to cover all entities mentioned in-

(i) the existing definition [section 2(9)],

(ii) the existing charging provisions [sections 3 and 4], and

(iii) the General Clauses Act.

The definition has therefore been amplified on the above lines1.

1. See also notes to clause 3.

Prescribed.-No change, vide existing section 2(10).

Previous year.-The expression is defined separately in clause 5.

Principal Officer.-No change, vide existing section 2(12)

Public servant.-No change, vide existing section 2(13)

Registered firm.-No change, vide existing section 2(14).

Regular assessment.-The expression is at present defined only casually in the Act in section 18A(5). Since the expression occurs in some sections, it is desirable to place its definition in this clause.

Resident.-The definition refers back to the proposed clause1 which reproduces section 4A with modifications.

1. Clause 6.

Tax.-The definition is new wherever both income-tax and super-tax are intended to be covered, the simple word "tax" would be sufficient. The substantive provisions in the draft, therefore, use the word "tax" wherever, convenient, and it has been defined here.

Total Income -No change; vide existing section 2(15), first para.

Total world income.-The existing definition in section 2(15) (second para) is reproduced with one change. The existing words "except income to which this Act does not apply" are not happy and have been replaced by more appropriate words which bring the wording in line with existing section 4(3).

Unregistered firm.-No change; vide existing section 2(16).

Taxable territories.-Existing section 2(14A), defining the expression "taxable territories", has been omitted in the draft, as the use of that expression is no longer necessary and can be conveniently replaced by the word "India".1

1. As assessments for the period prior to the Commencement of the new Act will continue to be governed by the existing Act, there will be no need to lay down separate periods for the various areas.