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December 3, 2020

Income shall be chargeable to tax under the head “Other sources” if it does not come under any other head of income – SC

by CA Shivam Jaiswal in Income Tax

Income shall be chargeable to tax under the head “Other sources” if it does not come under any other head of income – SC

As per the Section 14 of the Income Tax Act of 1961, there can be several modes of income for an individual. The income tax computation is an important part and has to be calculated according to the income of a person. For a hassle-free computation, the income has to be classified properly so that there is zero confusion regarding the same. The government has classified the sources of income under separate heads and then the income tax is computed accordingly. To make an income chargeable, it should be under one of the five income heads:

  • Income from Salary
  • Income from House Property
  • Income from Business or Profession
  • Income from Capital Gains
  • Income from Other Sources

Often confusion arises as to under which head would the income be taxable. Let us refer to the case of Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT (1966), where the main issue under consideration was whether Outstanding fee of professional work done by assessee, who kept his accounts on cash basis, after close of his profession was taxable either under head of professional income or under residuary head of income?

Facts of the Case:

  • The assessee was an advocate of a High Court and was practicing his profession.
  • Later, he ceased to carry on his profession as he was elevated as a Judge of the High Court (HC) at Bombay.
  • His method of accounting was cash and his accounting year was calendar year.
  • After he was appointed as a judge of the HC, he received certain moneys on account of the outstanding fees, though no profession was carried on by him.
  • The assessee included the aforesaid receipts as income from profession.
  • The ITO treated these receipts as fees for professional services rendered in earlier years and as part of total income of the assessee.
  • On a revision application under section 33A of 1922 Act the Commissioner held that it was chargeable under the residuary head and rejected the revision petition.
  • Aggrieved with the order of the Commissioner, assessee filed an appeal to the Supreme Court (SC) by special leave.

Issue before the SC

  • Whether an income from business or profession can be taxed under the head “Income from business or profession” after the assessee has ceased to carry on his business or profession?
  • If such income is not taxable under the head “Income from business or profession”, then can it be taxed under the residuary head “Income from other sources?

Observations of the SC on taxability under the Income Tax Heads

  • Taxability under the head “Profit and gains of business or profession” arise only in respect of profits and gains of any business or profession which was carried on by the assessee at any time during the previous year.
  • If no business was carried on by the assessee at any time during the previous year, then the charging provision did not get attracted and therefore, one did not enter such head of income.
  • Further, in order to compute an income, the Act bifurcated the incomes under Chapter IV of the Act ‘Computation of the Total Income’ in four specific heads viz. ‘Income from Salaries’, ‘Income from house properties’, ‘Profits and gains of business and profession’, “Capital gains’ and a residuary head i.e. ‘Income from other Sources’.
  • The scheme to arrive at the net income chargeable to tax under the various heads broadly differed from each other.
  • Thus, the computation mechanism under the head ‘Income from house property’ and ‘Profits and gains of business and profession’ differed.
  • The idea of having separate heads of income was to have separate computation mechanism for different types of income depending upon the nature of income. An income to be taxed has to be brought under any one of the heads of income.
  • All the heads of income were mutually exclusive and therefore, a particular item of income could be taxed only under one particular head of income.
  • If the same was not taxable under the said head of income then the same could not be charged to tax under the other head of income.

Conclusion by the SC w.r.t the present case

  • SC held that receipts in the present case were the outstanding dues of professional work done and therefore would fall under the head “Profits and gains of business, profession or vocation”.
  • Further, the Court held that the said receipts were not taxable under the said head as the said receipts were taxed on cash basis and in the year of receipt, no profession at all was carried on by the assessee.
  • SC also held that heads of income were mutually exclusive, and if the receipts could be brought under the fourth head, they could not be brought under the residuary head.
  • Section 12 dealt with income which was not included under any of the preceding heads.
  • If the income was so included, it fell outside section 12 of 1922 Act.
  • Whether an income was included under any of the preceding heads would depend on what kind of income it was.
  • It followed that if the income was profits and gains of profession it could not come under section 12 of 1922 Act.
  • Section 12 of 1922 Act did not state that an income which escapes taxation under a preceding head will be computed under it for chargeability to tax.
  • It only stated that an income shall be chargeable to tax under the head “Other sources” if it did not come under any other head of income mentioned in the Act.
  • Accordingly, SC held that the receipts were not chargeable to tax either under the head of professional income or under the residuary head.

However, Justice Bachawat had taken the dissenting view and held that the professional income of an assessee, whose accounts were kept on a cash basis, received by him during his lifetime after the discontinuance of the profession and after the close of the accounting year in which the profession was discontinued, is assessable to income-tax under section 12 of the Act.

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