COMMISSIONER OF INCOME TAX vs. JUSTICE ANIL R. DAVE

O/TAXAP/2/2006 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 2 of 2006 With TAX APPEAL NO. 3 of 2006

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE KS JHAVERI Sd/- and HONOURABLE MR.JUSTICE K.J.THAKER Sd/-

================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? No 2 To be referred to the Reporter or not ? No 3 Whether their Lordships wish to see the fair copy of the judgment ? No 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? No 5 Whether it is to be circulated to the civil judge ? No ================================================================ COMMISSIONER OF INCOME TAX....Appellant(s) Versus JUSTICE ANIL R. DAVE....Opponent(s) ================================================================ Appearance: MR SUDHIR M MEHTA, ADVOCATE for the Appellant(s) No. 1 MR SN DIVATIA, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER

Date : 08/12/2014 COMMON ORAL JUDGMENT Page 1 of 16

O/TAXAP/2/2006 JUDGMENT (PER : HONOURABLE MR.JUSTICE K.J.THAKER) 1. By way these Appeals, the Revenue is before this Court challenging the order of the Income Tax Appellate Tribunal, Ahmedabad Bench 'C' in :- Tax Appeal ITA No. Asstt. Year 2/2006 2317/Ahd./1999 1996-1997 3/2006 3429/Ahd/04 1998-1999 2. The brief facts as they cull out from the record is that the assessee was assessed to tax by the Appellant. The assessee was a Sitting Judge of the High Court of Gujarat. He was elevated to the Bench on 18.09.1995. Prior to this, he was practicing as an Advocate in the High Court of Gujarat. After being elevated to the post of Judge of High Court and for this reason he had discontinued his legal profession as an advocate. The assessee received certain outstanding dues from his past clients. Such amounts for the previous year relevant to A.Y. 1996-97 is Rs.4,52,277/- and for A.Y. 1998-99 is Rs.13,93,630/-. The assessee in his returns of income for both the years has claimed these amounts as non-taxable relying on the judgments in the case of CIT vs. Justice R.M. Dutta of Calcutta Page 2 of 16

O/TAXAP/2/2006 JUDGMENT High Court and Justice Kuldeep Singh vs. ITO, ITAT, Chandigarh Bench. In the assessment order, the assessing officer distinguished the above referred cases and placed reliance on the decision in the case of V. Pattabhiraman v. Addl. CIT (1976) (A.P.) in favour of the department. The Assessing Officer also referred to the intention of the legislature leading to introduction of section 176 in Income Tax Act, 1961 as an amendment to section 25 in I.T. Act, 1922. It was concluded that the amount received after discontinuation of legal profession is taxable under the head 'Income from business or professions'. These amounts were added to the total income in the respective years as per the provisions contained in Section 176(4) of the Income Tax Act, 1961. [B] In A.Y. 1996-97, in appeal filed by the assessee, CIT(A) deleted the addition made by the Assessing Officer. [C] Decision of the CIT(A) has been confirmed by the Appellate Tribunal. [D] That it is the case of the appellant that even otherwise the order dated Page 3 of 16

O/TAXAP/2/2006 JUDGMENT 24.05.2005 is bad in law. 3. The assessee claimed that the amounts were not amenable to tax based on the decisions in the cases of :- (i) Commissioner of Income-tax, Patiala v. Justice Kuldip Singh reported in [2009] 2 DTLONLINE137 (Punj. & Har.), (ii) Commissioner of Income-tax v. Justice R.M. Datta of the Calcutta High Court reported in 1989 Income Tax Reports 180, (iii) Commissioner of Income Tax vs. B.N. Sen in IT Ref. No.35 of 1981 (High Court of Calcutta), (iv) V. Parthasarathy v. Additional Commissioner of Income Tax in Writ Petition No.7247/1973 (High Court of Andhra Pradesh), (v) Commissioner of Income Tax vs. D.P. Sandu Bros. Chembur (P) Ltd. in Civil Appeal No.2335/2003 (Hon'ble Apex Court) and (vi) Commissioner of Income-tax, Bangalore v. K. Raheja Hotels & Estate (P.) Ltd. reported in [2014] 51 taxmann.com 212 (SC) The first two decisions were distinguished by the Assessing Officer and upheld the assessment in favour of the Department for the

concerned

assessment

years. Page 4 of 16

O/TAXAP/2/2006 JUDGMENT Provisions of Section 176(4) of the Income Tax Act were invoked and the amounts which were received after discontinuation of the legal profession was turned to be taxable under the Head 'Income from Business Occupation' and those amounts were added to the total income in the respective years with the aid of Section 176(4) of the Income Tax Act. However, both the authorities concerned upheld the said addition made by the Assessing Officer for the year 1998 – 1999. The Revenue being aggrieved came up with the following question of law :- “Whether the Appellate Tribunal is right in law and on facts in holding that professional fee received by the assessee after the alleviation to the post of Judge of the Hon'ble High Court is not taxable u/s. 4 read with section 176(4) of the I.T. Act?” 4. The

challenge

based

on interpretation of Section 176(4) of the Income Tax Act, which reads as under :- “Discontinued business. (4) Where any profession is discontinued in any year on account of cessation of the profession by, or the retirement Page 5 of 16

O/TAXAP/2/2006 JUDGMENT or death of, the person carrying on the profession, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the aforesaid person had it been

received

before

such discontinuance.” Section 4 of the Income Tax Act reads as under :- Charge of income-tax. “4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and [subject to the

provisions

(including provisions for the levy of additional income-tax) of, this Act] in respect of the total income of the previous year of every person : Provided that where by virtue of any provision of this Act income- tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.” 5. The Assessing Officer distinguished the judgment in the case of Justice Page 6 of 16

O/TAXAP/2/2006 JUDGMENT Kuldeep Singh V/s. ITO 46 ITD 251 (Chandighar). However, in Paragraph 4.2, he held as follows:- “Section 176(4)of the Income-tax Act, 1961-Discontinued business- Assessment years 1990-91 and 1991- 92- before his elevation as Supreme Court Judge on 14-12-1988, assessee was carrying on legal profession as an advocate-Whether arrears of professional receipts received

assessee

after discontinuation

legal profession could be brought to tax in his hands after he has discontinued his legal profession- Held, no Section 254 of the Income-tax Act, 1961-Appellate Tribunal – Powers of Assessment years 1990-91 and 1991-92 – whether a decision by a High Court, which may not be a jurisdictional High Court, which is only direct and extant decision, has to be given its due weight and respect - Held, yes Interpretation of statutes – Rule of beneficial construction.” 6. The CIT(A) for the year 1996-1997 while disagreeing with the Assessing Officer held that Section 176 of the Act which forms part of the Section 125 of the Page 7 of 16

O/TAXAP/2/2006 JUDGMENT existing Act the Commissioner of Appeal while disagreeing with the Assessing Officer in Paragraph 2 has given elaborate reasons and has followed the decision of the Calcutta High Court in the case of Justice R.M. Datta and that of Justice Kuldeep Singh v. ITO (Supra). Observations in Paragraphs 2 and 3 need to be reproduced and the same are as follows :- “2. I have considered the facts of the case and I am of the view that the above decisions of Calcutta High Court in the case of Justice R.M. Datta, cited supra, and ITAT decision in the case of Justice Kuldeep Singh vs. ITO (cited supra), are fully applicable to the facts of the appellant's case. This view is taken by me because the decision in the case of Justice R.M. Datta has been delivered by the Division Bench of Calcutta High Court whereas the decision of Andhra Pradesh High Court relied on by the Assessing Officer has been given by a Single Judge. The ITAT Chandigarh Bench had considered both the decisions of Calcutta High Court and Andhra Pradesh High Court as under :- There is no getting away from the fact that a decision by a High Court which may not be the jurisdictional High Court, which is only direct and existent decision, has to be Page 8 of 16

O/TAXAP/2/2006 JUDGMENT given its due weight and respect. The decision of Calcutta High Court in the case of Justice R.M. Dutta (supra) was a comprehensive decision which dealt with the issue in its entirety and in all its facts. It is a settled position of Law, as observed by the Supreme Court in the case of CIT vs. Elphinstone Spg. & Wvg. Mills Co. Ltd. (1960) 40 ITR 142 that if the works of a taxing statute fail, then so must be tax. The Calcutta High Court has simply shown in its judgment in the case of Justice R.M. Datta (Supra) that the words of section 176(4) do fail in as much as all the three fictions necessary for bringing such arrears of professional fees to tax are not there; section 176(4) gets only two cheers and is deficient in the third one. “There was merit in the submissions that if a taxing provision is ambiguous and is reasonable capable of more than one interpretation, that interpretation

which

is beneficial to the subject must be adopted. Even if it was

assumed

that

the interpretation suggested by the revenue was a reasonable interpretation, still the Page 9 of 16

O/TAXAP/2/2006 JUDGMENT matter had to be decided in favour of the assessee because if a provision of a statute can be reasonably interpreted in two ways, that interpretation

which

is favourable to the assessee has got to be accepted. The position of law is now well settled.

“Thus, the revenue authorities

were

not justified in bringing to tax the arrears of professional receipts in the hands of assessee

after

had discontinued

his

legal profession which he was elevated to the Supreme Court on 14-12-1988”. 3. In view of the decision of Calcutta High Court and ITAT decision referred to above the amount of Rs.4,52,277/- received by the appellant in asstt. Year 1996-97 was not taxable. The addition of the said amount is deleted.” 7. As far as ITA No.2317/Ahd/1999 for the Assessment Year : 1996-1997 is concerned, the Department challenged the order and the present respondent – Assessee was also compelled to prefer an Appeal against the orders of CIT(A) before the ITAT in ITA NO.3429/Ahd/2004. While dealing with both Page 10 of 16

O/TAXAP/2/2006 JUDGMENT the Appeals, the Tribunal held in Paragraph 3 as under :- “3. The assessee is an individual and derives income from salary and other sources. The assessee is a sitting Judge of Hon'ble Gujarat High Court. Prior to his elevation as Justice in Hon'ble Gujarat High Court, he was practicing as a senior advocate in Gujarat High Court. In the return of income, the assessee has written a note that he has discontinued the legal profession from 18-09-05 on being appointed judge of High Court. The relevant note is reproduced hereunder from the order of A.O. :- “Income as an Advocate being Rs.13,93,630/- during A.Y. 1998-99

i.e.

after discontinuation

legal profession from 18-09-05 on my appointment as Judge of High Court is not taxable in view of the judgment reported at page 86 of the year 1989 (CIT Vs. Lt. R.N. Datta and at page 251 of the year 1993 ITR in Justice Kuldip Singh Vs. ITO) and hence the said income is not included the statement of total income. The Assessing Officer added Rs.13,93,630/- for A.Y. 1998-99 and Rs.4,52,277/- for A.Y. 1996- 97. The assessee pointed out a Page 11 of 16

O/TAXAP/2/2006 JUDGMENT judgment of Hon'ble Calcutta High Court in the case of CIT Vs. Justice R.N. Dutta (180 ITR 86) in support of the note given alongwith the return of income. The A.O. was of the view that section 176 was introduced to bring under the purview of taxable income of such receipts. The A.O. noticed that on the issue the decision cited by the assessee, Calcutta High Court is not only the decision on the issue. The Hon'ble A.P. High Court had clearly decided on a parallel case wherein such receipts were clearly held to be taxable in the case of V. Parthasarathy Vs. Addl. CIT 103 ITR 508. The A.O. has also noted that there are contrary judicial pronouncement

a similar/identical case and thus in view of the Supreme Court's decision if there exists no contrary decision of any other High Court, the decision of any High

Court

territorial

or otherwise should be accepted, does not find favour in the case of the assessee. The A.O. has also gone through the decision of ITAT in the case of Justice Kuldip Singh Vs. ITO, decided by the ITAT, Chandigarh

Bench,

the

A.O. observed that when decision of various High Court are being relied upon in this matter with due respect to, the decision of Hon'ble ITAT, the same need not require consideration as the issue involved is the question of law Page 12 of 16

O/TAXAP/2/2006 JUDGMENT and interpretation of various provisions of Act. The A.O. was of the view that such income is chargeable to tax due to following reasons : i) The judgment of the Calcutta High Court is not the only judgment on this issue. Judgment of A.P. High Court is contrary to judgment of Calcutta High Court. ii) There is no binding judgment of Gujarat High Court on this issue. iii) The intention of the legislature was clearly to tax income

from

discontinued profession. iv) Section 176(4) provided for taxation of such income.” 8. While dealing with the factual scenario, more particularly, in Paragraphs 5 and 7, the Tribunal has held in favour of the assessee and inview of the judgment of the jurisdictional High Court held that if ITAT has held in favour of the assessee taken a view the Tribunal should not deviate for both the Assessment Years, i.e. Assessment Year 1998-1999 and the Assessment Year 1996-1997, the provisional receipts were held to be not within the purview of of tax as arrears of the provisional receipt came to be in the range of the assessee. Page 13 of 16

O/TAXAP/2/2006 JUDGMENT 9. Learned Advocate for the appellant has heavily relied on the facts and grounds urged in these appeals and interpretation of Section 176(4) is miscontrued by the Tribunal and has urged to allow the Appeals. 10. As against the above, learned Counsel for the respondent Mr. S.N. Divatia has once again placed reliance on the earlier decision relied by the ITAT and the recent decision of the Delhi High Court in the case of Commissioner of Income Tax Vs. Justice Rajiv Shakdher in ITA NO.173/2014, decided on 25.04.2014 and urged that even considering all the decisions and the decision of the Court in Justice R.M. Datta (supra's case), where it is held that the provisions pertaining to chargeing Section if they cannot apply, such a case was not intended to fall within the charging section. There is no scheme of computation for quantifying the amount which will not fall within the charging section. 11. Having heard the learned Advocates appearing for the parties and perusing the records of the case/s, we are unable to persuade ourselves to take a different Page 14 of 16

O/TAXAP/2/2006 JUDGMENT view than that which is taken by the Tribunal to hold that Section 176(4) of the Act does not contain any deeming provision which treats such receipts as as incomplete and which would fall within the head Provisions 'Gains of Business Profits or vocation and it cannot be taxed as income from other sources under Section 176 of the Act. 12. Having considered the decision on which the Tribunal has placed heavy reliance and the decision of the Delhi High Court, we do not think that any other view than that which is taken by the Tribunal can be taken in the facts and circumstances of this case. 13. The question posed before us is answered in favour of the assessee and we hold that the appellant Tribunal was right in law and on facts in holding that the provisional fee received by the assessee is taxed under Section 4 read with Section 176(4) of the Income Tax Act, 1961. 14. Hence, the question/s raised in these Appeals is answered in favour of the assessee and against the Department. Sd/- Page 15 of 16

O/TAXAP/2/2006 JUDGMENT (K.S. JHAVERI, J.) Sd/- (K.J. THAKER, J) CAROLINE Page 16 of 16