Shah, J. - (1.) 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the provisions of the Indian Income tax Act 7 of 1918 in respect of the business done immediately before that Act was repealed.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 to 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.
(2.) At the instance of the Commissioner, the Tribunal referred under Section 66(1) of the Act a question which 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 Section 8 of the Indian Income tax Act, 1922.
(3.) Section 25(3), on the true interpretation of which the respective contentions of the assesee and the Commissioner have to be adjusted,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 asscssee 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 no succession by virtue of which the provisions of sub-sec. (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 11 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 charged to tax under S. 3 of Act 11 of 1922 read with the appropriate Finance Act, resulting in double taxation in respect of the income for that year.;