Income Tax in India has its origins to the first Act of 1860. In their paper titled Income concentration in British India, 1885-1946, Facundo Alvaredo, Augustin Bergeron and Guilhem Cassan write that the Indian Income Tax Act of 1860 was enforced to meet the losses sustained by the government of account of the military mutiny of 1857. Interestingly, this first Act of 1860 had a life; the law was applicable only till 1863. After its expiry, the government introduced a License Tax.
Subsequently, after failing to realise revenue and suffering losses, the British Government introduced the Indian Income Tax Act, 1869. Yet again, the 1869 Act had a limited life and expired in 1873. After five years, in 1878, the government introduced several license taxes to raise money for famine insurance in Bengal, North-Western Provinces and Oudh, Punjab, Central Provinces, Bombay and Madras.
The government’s license taxes did not yield much revenue even in the second phase of such taxes. In 1886, faced with growing financial difficulties, the government again introduced the Indian Income Tax Act, 1886. Under this new tax law, income was divided into four schedules:
(i) Salaries, pensions or gratuities
(ii) Net profits of companies
(iii) Interests on the securities of the Government of India
(iv) Other sources of income
The schedule “Other sources of income” included incomes earned from HUF, income from learned professions, manufacturing, construction, income from commerce and trade and income from property or other taxable estates.
Amongst the exempted category of incomes were, foreign consuls and consular employees, officers whose salary was less than Rs.500, inhabitants of specific territories like hill tribes regions, railway, shipping and indigo companies.
Agriculture, properties devoted to charitable and religious purposes, savings up to one sixth of total income, capital gains and casual profits were the source of income which did not form part of taxable income.
In this article, I discuss in brief one of the earliest reported tax judgments of the High Court of Bombay of the year 1896 which decides an issue under Section 21 of the Indian Income Tax Act, 1886. The earliest income tax acts also had the concept of non-resident and representative assessee or agent as was then called. The relevant case is H. Plunkett, I. T. Collector v. Narayan Parashram Tullu1, where the issue was:
“Whether in an assessment of a non-resident assessee company, could the non-resident company be assessed in the name of its manager in India and could such manager be called upon to make payment of tax?”
Section 21 of the Act of 1886 provided that a person not resident in British India, but being in receipts through an agent, of income chargeable under the Act, shall be chargeable in the name of the agent just as he would be chargeable if he were resident in British India.
One Chatre Circus Company based in the then princely State of Gwalior, was assessed to tax. Interestingly, Gwalior was an independent princely State with significant autonomy. The Income Tax Act of 1886 though not directly applicable to the princely state, yet there were certain treaty obligations with the British Government which the princely state was obligated to comply with.) Coming back to the facts, the respondent filed an appeal against the assessment, which was rejected. The appellant, who was the Income Tax Collector of Poona (as it was then known as), subsequently called upon the respondent to pay the tax as manager of the Company by the tax collector.
Since the tax remained unpaid, the tax collector issued a warrant for recovery of tax. In execution of the warrant, the manager’s private property in the form of six currency notes of Rs.10 each were attached. The manager filed a suit for recovery of his personal property, which he contended was wrongfully attached. The District Court agreed with him and decreed the suit in his favour. The Income Tax Collector filed an appeal before the High Court of Bombay, which held that the recovery from the manager was in terms of the provisions of Section 21. The manager was liable to discharge the liability on account of the non-resident company in his capacity as its agent. The Income Tax Collector had rightly attached the manager’s personal property to recover the unpaid demand.
Under the present Income Tax Act, 1961, agent or representative assessee is covered under Chapter XV from sections 160 to 167 of the Act. Over time, the law on taxation of non-residents and their assessment to tax and recovery thereof, as also the concept of representative assessee has undergone significant changes. An agent or a representative assessee is not viewed only with respect to a non-resident. Section 160 defines a “representative assessee” whereas section 163 defines an “agent”.
What is significant, however, is that the concept of taxation, in its originating days in India had almost similar basis, which matured, improved and also expanded with changing times.
Taxation remains one of the very critical and essential foundation of any country’s growth. Tax professionals, therefore, form part of one of the main and enabling group that helps in nation building.
[1] [1896] 1 ITC 1 (Bombay) [23-07-1896], Parsons and Ranaded, JJ, decided on July 23, 1896
