Report No. 12
Notes to clause 171
Sub-clause (1).- This is new. The principle of the sub-clause however is not controversial and is therefore embodied in the draft on the lines of section 71(1) of the South African Income-tax Act.
Sub-clauses (2) and (3).- Existing section 42, second and third provisos, lay down a procedure whereunder the agent of a non-resident can approach the Income-tax Officer for the issue of a certificate stating the amount to be retained by the agent for discharging his estimated liability in respect of tax on the income of the non-resident. This provision can be usefully extended to all cases of representative assessment, and has therefore been embodied in the draft sub-clause under discussion.
Notes to clause 172
This is new and is based on section 72 of the South African Income-tax Act. In a sense, it is a corollary of the provision in the main clause1 relating to the liability of a representative assessee, to the effect that he is liable only to the extent of the estate and in a representative capacity only. If the representative assessee parts with the assets without making proper payment of tax, it is but fair that he should personally become liable.
1. Draft clause 170.
(The South African Act, of course, includes even a case where the representative assessee alienates, charges or disposes of the income in respect of which the tax is chargeable in South Africa the tax is payable on the income of the current year itself. Since, however, the scheme of the Indian Act is different, this part of the South Africa section has not been incorporated in the draft clause under discussion.)
Notes to clause 173
Sub-clause (1).-The definition of "agent", given in this sub-clause, is based in substance on existing section 43, main para, but assistance has been taken in drafting it from the language of the Ceylon Income-tax Ordinance1.
1. Section 35,. Ceylon Income-tax Ordinance.
Paragraph (d) embodies section 40(2) in a brief form. It seems unnecessary to treat the case of a trustee of a non-resident separately from the agent of a non-resident or to devote a separate section to it. In substance, the liability of the trustee (when the beneficiary is a non-resident) should be the same as that of the agent.
Existing section 43, main para, contains the words "upon whom the Income-tax Officer has caused notice of his intention to treat him as agent" to be served. Since a provision for giving opportunity to the agent is already contained in section 43, second proviso, [vide draft sub-clause (2)1, these words are unnecessary and have, therefore, been omitted in the draft.
The words"....shall....be deemed to be such agent" have been replaced in the draft by the words "agent....includes....".A definition in the form of enumeration having been adopted in the draft, the form had to be changed.
Existing section 43, Explanation, has been embodied in the Explanation to draft sub-clause, with the addition of the words "or relinquishment" on the lines of existing section 12B. The reference to the date 28th day of February, 1947, has been omitted as unnecessary, since the new Act will apply only prospectively, that is, for assessment years subsequent to the commencement of the new Act.
Section 43, 1st proviso, has been embodied in the proviso to the" draft sub-clause. An attempt has been made to make the language less involved, by opening the proviso with a reference to the "broker", instead of beginning with the word "transactions" as the existing proviso does.
Sub-clause (2).- Existing section 43, 2nd Proviso, has been embodied here, with the addition of the words "to be treated as such" at the end in order to make the provision more precise.
Notes to clause 174
The first proviso to section 41(1) has been split up into paragraphs, for the sake of clarity. The position in respect of income-tax has been stated separately from the position regarding super-tax, since the provision that the tax shall be levied at the maximum rate does not apply to super-tax, see existing section 58(1).
[The latter part of the Proviso, of course, must be taken as applying to super-tax also and this has been made clear in the draft, vide sub-clause (b).]
The latter part of the Proviso is, obviously, an exception to the earlier part of the Proviso, and not to the main para (part) of the sub-section. In other words, where the earlier part of the proviso does not apply, the latter part also does not apply. The draft makes this clear by treating the latter part as an item-item (i) in the draft-falling under the earlier part, i.e. under sub-clause (a) of the draft.
One important change has been made in the substance of the existing provision. Section 41(1), 1st Proviso, (dealing with the case where the income is not specifically receivable for one person or where the shares are unknown) provides that income-tax shall be chargeable-
(i) where the beneficiaries have no other personal income, and none of them is an artificial judicial person, then at the rate applicable to an association;
(ii) in other cases, at the maximum rate. This provision leads to an anomaly. Where a beneficiary has even 1 Rupee of other income, the income becomes chargeable at the maximum rate. Moreover, the provision is not simple in its working. The draft, therefore, proposes a provision where under the tax will always be at the rate applicable to an association, except in cases where the income is received by a beneficiary and the Income-tax Officer desires to charge income-tax at the rate individually applicable to him1.
1. The Subject has been discussed by the Taxation Enquiry Commission, which however, did not favour any change. See T.E.C. Report, 1953-54, Pt. II, Ch. VIII, paras. 9 to 11, p. 107.
Notes to clause 175
Existing section 41(1), 2nd proviso, has been embodied in this clause, which does not need, any comments.
Notes to clause 176
This is new and has been introduced on the lines of section 75 of the South African Income-tax Act, in order to make it clear that the fact that a person is holding certain property as a representative assessee (and not as the beneficial owner) does not affect the remedies available to the department against the property.
Notes to clause 177
Existing section 41(2) provides, in effect, that though a Court of Wards, Official trustee, trustee appointed under a deed etc. is assessable as representing the beneficiary, the direct assessment of the beneficiary is not barred. There is no reason why this principle should not be applied to all representative assessees, and the rule has, therefore, been embodied in this clause, which will be applicable to all cases of representative assessment.
Notes to clause 178
This is new and is intended to state the position regarding tax in respect of the estate of a deceased person in the hands of the executor. The clause, of course will be confined in its application to income derived after death. Income in respect of the period up to death will be governed by existing section 24B, which has already been incorporated in the draft clause in this Chapter relating to legal representatives.
The clause has been drafted on the lines of the relevant provision of the Ceylon Income-tax Ordinance.1
1. See section 11(10) and 11(11) of the Ceylon Income-tax Ordinance.
Notes to clause 179
This is consequential on the new clause introduced in the draft laying down the liability of the executor, and will authorise the executor to recover the tax from the persons to whom the estate is to be distributed.
Notes to clause 180
General
Existing section 26(2), which deals with the case of succession to business, profession or vocation, raises a number of difficulties, and the language of the section has not escaped criticism1. Some difficulty is created by the words "where a person carrying on a business....'....has been succeeded in such capacity". The exact significance of the words "in such capacity" is not clear. The observations of the Privy Council2 indicate that what is intended is, that the business etc. should continue to be carried on by the successor.
A person who becomes merely a successor (in the sense that he gets the legal ownership of the business etc. but does not actively continue the business etc.) would not be governed by this section, since in his case there would not be any income after the date of succession. The wording of the section, therefore requires some change to make this intention clear.
1. See observations of Madhavan Nair, J. in Jupuedi Kesava Rao v. C.I.T., (1935) 3 ITR 339 (343) (Mad).
2. Maharajadhiraj of Darbhanga v. C.I.T. Bihar and Orissa, (1934) 2 ITR 345 (347, 348)(PC): 61 IA 312 ILR 13 Pat 607.
For the sake of simplicity, section 26(2) has been split up in three sub-sections in the draft.
Sub-clause (1).- Apart from the changes explained above, the folloWing drafting changes have been made:-
(1) The existing words "person succeeded" and "person succeeding" cause a slight confusion, since it is not clear whether the predecessor is intended or the successor is intended, and some effort has to be made to remember the person intended to be covered. The expressions "predecessor" and "successor" have, therefore, been used in the draft in place of these words.
(2) In order to explain the effect of this section more clearly, clauses (a) and (b) have been added in the draft to provide that the income upto succession is assessable on the predecessor and the income after succession is assessable on the successor. Incidentally, the use of the words "income of the previous year up to succession" will also make it clear that the previous year talked of is the previous year in which the succession took place.
Sub-clause (2).- The words "year in which succession took place" have, in the draft, been prefaced by the word "previous". For the sake of clarity, the latter half of section 26(2), Proviso, has been dealt with in a separate sub-clause, see draft sub-clause (3).
Sub-clause (3).- In existing section 26(2), Proviso, latter half, which provides that the tax in respect of the "assessment assessed on the person succeeded", shall be payable by the successor, the wording does not sound well; the recurrence of "assessment" and "assess" can be avoided. The language has, therefore, been altered in order to make the intention clear, though this has resulted in a slight elaboration.
Sub-clause (4).- Existing section 25A, sub-section (2), deals in part with the case of succession, though that section mainly deals with the partition of a Hindu family. The portion dealing with succession has been incorporated in this sub-clause, for reasons already explained in the notes to the draft clause1 dealing with partition of Hindu families.
1. See notes to draft clause 181(4).
The words "where any person has succeeded to a business formerly carried on by a Hindu undivided family whose joint family property has been partitioned on or after the last date on which it carries on such business " in existing section 25A(2), do not give out the intended meaning easily. What is intended is, that there is first a succession to the business of a family, and simultaneously with the succession or subsequent thereto there is partition of the family property.
This has been stated in more direct language in the draft sub-clause under discussion. It has also been made clear that it is the income upto the date of succession which is to be assessed in the manner provided in the section relating to partition. Income subsequent to succession will be taken care of by existing section 26(2), and this has also been made clear by the words "but without prejudice to the provisions of this section" at the end of the draft sub-clause.
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