Income Tax India

1922	I.T.Act of 1922 passed.
1924	Central Board of Revenue Act passed and CBR created.
1925	Taxation Enquiry Committee Known as Todhunter Committee submits its report.
1930	A new authority-Board of Referees created under the Act itself.
1936	Income-tax Enquiry Committee (popularly known as Ayers Committee) submits its report.

The period of 1922-1939 was by far the most important period for the I.T. Department. It marked not only the laying down of an Act which till today has survived in its outlines, it marked as well the birth of the Income-tax Department in the sense that for the first time, a definite administrative structure was given to it and a proper nomenclature given to its officers. During this period, the Board of Revenue (Central Board of Revenue) came into existence and the I.T. Department was placed under its control and supervision.

During 1922-1939, three Committees whose deliberations and recommendations affected the legislative and administrative functioning of the Department were (i) All India Committee presided over by Mr. G.C. Sim (ii) Taxation Enquiry Committee 1924-25 known as Todhunter Committee and (iii) Income-tax Enquiry Committee known as Ayers Committee.

On 15^th of July, 1921, the All India Committee on Income-tax formed for recommending amendments to the Income-tax Act signed its Report. The Committee was presided over by Mr. G.C. Sim, C.I.E., I.C.S. It was attended by Collector of Income-tax, Karachi, Mr. C. Birch, Collector of Madras, Mr. A.R. Loftus Tottenham, Mr. H.B. Spry I.C.S., Mr. W.S. Watkins, I.T. Adviser to the Govt. Of India, Assistant to the Collector of Income-tax, Calcutta Mr. Kirkwood, the Income-tax Commissioner, Uttar Pradesh, Mr. Gaskell and eminent persons like Mr. Narayandas Girdhardas, Rai Bahadur Sir Ganga Ram, Dewan Tek Chand, Mr. Monmohandas Ramji, M.L.A. and Mr. F. Maccarthy, M.L.A. The Committee recommended large scale amendments to the Income-tax Act, as it stood then. It virtually laid down the lines on which, in coming years, the growth of Income-tax Department would take place. Towards administration, their observations were as follows :

"The non-official members of the Committee desire to record their opinion that a matter of greater importance than the amendment of the Act is an increase in the number and efficiency of the staff, which should consist of officers of the highest training and integrity. They would emphasis that the Income-tax Department should include experts of high standing, trained in accountancy whose remuneration should be such as to reflect the market value of their professional experience and attainments. Accountancy should be one of the foundations of training for the whole service. The scale of pay should be such as to attract the best material available and all posts in the department including the highest should be open to any officer of proved experience and capacity".

‘We agree to the proposal that the definition of Chief Revenue Authority should be amended so as to permit a person other than the Financial Commissioner of the Board of Revenue, being appointed as Head of the Income-tax Department in provinces, where these authorities exist. We also agree to the proposal of the Madras Committee that the designations of the Chief Revenue Authority, Collector and Commissioner should be abolished as they are likely to cause confusion and that the Income-tax authorities should be given a distinct nomenclature distinguishing between the assessor, the appellate authority and the Head of the Department. We also agree with the view of the Madras Committee that the Income-tax Commissioner should not be appointed as a matter of routine but should be an officer, experienced in Income-tax work in India who is himself prepared to keep the post for a sufficient time to preserve consistency and continuity’.

Towards the close of their report, they observed that in order to achieve uniformity in the interpretation of the Act and details regarding assessment, it was essential "That the Government of India should have atleast the nucleus of a department with functions similar to those of Board of Revenue, in England".

These observations became one of the guiding factors for the legislators who enacted the I.T. Act, 1922. For the first time, proper nomenclature was given to the officers of the Department and a hierarchy was fixed. Section 5 of this Act specified four categories of I.T. authorities.

Before 1922, there were not many whole time Income-tax Officers. Except for a few places, I.T. work was largely done by Land Revenue Officers as a subsidiary duty. The 1922 legislation had, for the first time, effectively centralised administration of the Department. A Board of Revenue was created. The Central Board of Revenue took its place in 1924 and in due course, a regular hierarchy of officers acting under the Control of the Board and the Provincial Commissioners was constituted. Powers and functions of the Commissioners were prescribed with reference to defined local areas. The I.T. Act which, till then, was administered through provincial machinery came under a separate administration. Even prior to 1922, in some provinces notably in Bombay City and in Calcutta, I.T. was administered through distinct departments under a Collector of I.T. but it functioned, however, as a branch of and under the control of the local revenue administration.

As the I.T. Administration grew out of the provincial revenue machinery, recruitment of officers became a very important task. The first recruitment under the 1922 Act was mainly from such revenue personnel as had been associated with the assessment / collection of I.T. in each province. Their pay and conditions of service were also initially on the pattern of local revenue administration in each province. Therefore, the scales of pay received by the I.T.Os in different provinces were not uniform. The system of recruitment also varied from province to province. In some provinces, the first batch of I.T.Os’ was drawn from the provincial Deputy Collectors. In places like Bombay where a nucleus of I.T. Staff existed, it was strengthened in various grades, such as Examiners, Inspectors, etc. By promoting revenue officials eligible for appointment to those grades on the strength of their experience and service. Except the I.T. Officers, the rest were non-gazetted officers who helped the I.T.O. either in examining accounts produced by the assessees or in making outside enquiries about the sources of income and amounts earned by taxpayers. In the mofussil areas, the scales of pay of the non-gazetted executive subordinates were similar to those of Provincial Tahsildars or Nambardars but in the cities of Bombay and Calcutta, pay of the post was higher. Direct recruitment in the two major provinces of Bombay and Bengal was first made to the grades of Examiners, Inspectors o Assistant Income tax Officers but not as I.T.Officers presumably because the assessment work in the two cities of Bombay and Calcutta being of a specially complicated nature, previous long experience was considered essential. The pay of these Examiners and Inspectors was fairly high being Rs. 225-500. The Commissioners were, therefore, able to get men with high Academic qualifications such as Bar-at-Law and Commerce Graduates of both Indian and British Universities to fill these posts in these provinces. In other provinces, particularly in U.P recruitment was made by the Commissioner of Income tax from among young men with high academic qualifications direct to the cadre of Income tax Officers and Assistant Income tax Officers. For this purpose, the Commissioner used to visit Universities & interview young men of calibre. In one such search for talent, the first officer of the I.T.Department who rose to be Chairman of the C.B.D.T., Shri Jamuna Prasad Singh, was interviewed and recruited. It is said that he had accompanied a friend who had been called for interview & he attracted the eye of the Commissioner who was looking for suitable persons to be recruited. The Commissioner was so impressed by his personality that he recruited him in preference to several others.

The difference in recruitment according to which persons with similar qualifications started in one province in non-gazetted grade while in another province, they directly entered the gazetted ranks, introduced obvious inequalities.

The Ayers Committee (1936) took note of it and recommended a uniform scale of pay and the introduction of three grades of I.T. Officers,(a) Assistant I.T.Officers, (b) I.T.Officers and (c) Senior I.T.Officers. The division of the I.T.Officer's grade into two would, according to the Committee, prevent an officer of mediocre ability from going almost automatically to the maximum of the undivided grade and would afford earlier opportunity for selecting the best men for promotion.

Although under the Act of 1922, the I.T. Department came under the direct control of Central Board of Revenue, from 1924, not only the recruitment of the I.T.Officers but also appointments of Assistant Commissioners continued to be made on provincial basis. These appointments were made by the Commissioners of Income-tax whose powers in respect of such recruitment were unrestricted except for the nominal approval of the local Government, which acted in the matter as an agent of the Central Government. Consequently, there was no interchange of officers from one province to another, whether, in the grade of Income-tax officers or as Assistant Commissioners.

Until 1939, Assistant Commissioners charges mostly corresponded to the Revenue Commissioners Divisions in the provinces. There were two scales of pay for Assistant Commissioners, Rs.1000-100-1500 except for Assistant Commissioners, Bombay and Calcutta where it was Rs. 1500-100-2000. In or about 1927, the number of Assistant Commissioners for the cities of Bombay and Calcutta was increased from 1 to 2 and the grade of Rs. 1500-100-2000 was abolished but the Assistant Commissioners in these cities were remunerated by a special pay of Rs. 250/-. Another officer of the I.T. department who drew almost this scale of pay was ITO Incharge of Non-Resident Refund Circle in Bombay. His pay scale also was Rs.1500-50-2000.

Prior to the year 1922, Commissioners were appointed by Governor General-in-Council. They were the provincial Heads of Income-tax Administration. Upto 1939, they were either recruited from I.C.S. or were General pool officers. Only sometimes, they were taken up from the cadre of Assistant Commissioners of Income-tax. A member of I.C.S. when appointed as Commissioner of Income-tax started on a pay of Rs.2250/- (whatever his own pay might have been in his service). His pay rose to Rs.2750/- by annual increments of Rs.100, but if posted to cities of Bombay and Calcutta, the Commissioner received a special pay of Rs. 250/-. Other Commissioners worked in the scale of Rs.2000-100-2500 with special pay of Rs.250/- at Bombay and Calcutta. In 1938, as per India Office list the following eight persons held posts of Commissioners of Income-tax :

In 1945, the number of Commissioners was raised to 13 for the whole of India by the division of the grade of Commissioners into Grade I & Grade II.

In order to understand how the assessment work was done, it is necessary to re-iterate what the machinery for assessing & collecting I.T. tax was, till 1922. Only in big cities like Calcutta, Bombay and Madras, there were a few whole-time Income-tax Officers. The Head of the Department corresponding to the present "Commissioner of Income-tax was sometimes known as Collector and sometimes as Commissioner of Income-tax. The work was done by Land Revenue Officers. There was no obligation on the assessees to furnish return of income nor consequently any penalty was levied for not doing so. Tax on salaries of public servants and interest on securities was deducted at source. Joint stock companies were compelled to send their returns of profit but the Act did not lay down any rule as to how the profits were to be calculated. These details were regulated by rules or executive orders. In respect of "other income", the Collector assessed summarily income below Rs.2,000/-. In other cases, the Collector communicated merely what he assessed as tax. No assessee could petition to Collector against the assessment ; assessees having to pay a tax of Rs.250/- or over and companies, had a right to apply to the Divisional Commissioner or the Board of Revenue in Madras for revision. The Collector had the power to compound the assessments of an assessee whether an individual or a company for a number of years. Upto 1916, the income was assessed in separate compartments. In 1916, the war had necessiated increased taxation. This called for a radical change in the whole system of assessment. It became necessary to abandon the system of assessing a person’s income in separate compartments. Higher rates of taxation required a degree of precision in arriving at tax, etc. It was, therefore, necessary to frame clear rules as to the calculation of tax and what expenses were to be deducted from profits and what not. The machinery of assessment also required tightening up. These difficulties were remedied partly by the 1918 Act. For the first time, it was provided that a notice could be issued and served on every person whom the Collector proposed to assess, requiring him to furnish a return of income. Non-furnishing of the return was made an offence punishable before a magistrate. Compounding of taxes for a series of years was given up. The assessee was assessed provisionally for the income of the previous year and the assessment was finally adjusted at the end of the year with reference to the income of the year : necessary refund or supplementary demands being made. Schedule to the Act fixed the rates varying from four pies in the rupees on the lower income ranges to twelve pies in the rupee in the higher income ranges. The chief Revenue Authority was vested with the discretion to refer doubtful questions of law to the High Court suo moto or at the instance of the assessee.

The 1921 Sim Committee made various recommendations towards streamlining assessment procedure which were by & large accepted. The following are a few of those

Sim Committee had thus rejected the suggestion that business loss should be carried forward for three years. This suggestion however became law, a few years later.

Two very important recommendations which were turned down by the Committee also need mention :

The majority of the Committee opposed the Bengal Committee’s proposal that provision should be made in the Act for making persons who are liable to income-tax liable to submit a return to the Collector of Income-tax whether called upon to do so or not. (Para 56).

We do not accept the recommendation of the Bombay Committee that accountants who claim to have examined accounts of a taxpayer should be called upon to take a declaration on oath that the accounts are correct for income-tax purposes and that a penalty should be imposed where certified accounts are found to be incorrect from this point of view. (Para 57).

The Income-tax Act, 1922 was framed against the above background. It laid down, in detail, the expenses which were allowable under each head of income. For the purpose of framing assessment, the I.T.O. could call for the books of accounts of previous three years. Losses under one head of income could be set off against profits under another head. This act fixed responsibility on a successor of a business as though he himself had carried on the business throughout the previous year. It also granted relief in respect of discontinued business. The 1922 Act provided that a copy of the assessment order and notice of demand be served on the assessee. A mistake in the assessment could be rectified and if the income was under assessed or escaped assessment, before the expiry of one year from the last date of the year, the assessment proceedings could be re-opened or taken up. Penalty could be levied for concealment of income and for non-payment of taxes. Prosecution proceedings before the Magistrate could be filed only in five circumstances. (a) Non-deduction of tax under the Act as provided by the Act or for non-payment of it, after deduction, (b) Failure to furnish a certificate of deduction from salaries and interest on securities, (c) For not furnishing the return of income called for, (d) For not producing accounts called for, (e) For refusing to grant inspection or allow copies to be taken of any register of members, debenture holders or mortgages of any company under section 52 of the Act. Besides the above, application before a Magistrate could be filed against a person for making a false statement.

The Commissioner was given power of suo moto revision of assessment both in favour of revenue and in favour of assessee. An important deviation from the previous procedure was that the 1922 Act established the change in the year of assessment. Henceforth the income of the previous year would be assessed, instead of adopting previous years’ income merely as a measure of the income of the year of assessment. Under Section 23 of the I.T. Act 1922, three types of assessment could be made :

Assessment of income earned outside India was a very sensitive subject. The 1922 Act made the foreign business income of a resident taxable on remittance basis. With effect from 1-4-33, the basis was widened to apply to income from all sources. In 1939, as a result of the recommendation of the Ayers Committee, the entire income of a resident whether accruing in (British) India or outside, became chargeable to tax. The remittance basis, thereafter, faded into the background except for its applicability to resident but not ordinarily-resident.

The 1922 Act, incorporated in its provisions, the levy of super tax which till then, was being assessed as a separate tax first by the Super Tax Act, 1917, and later by the Super Tax Act of 1920. Super-tax was defined to this end as an additional duty of Income-tax. The act of 1922 also made a departure by abandoning the system of specifying the rates which henceforth would be enunciated by the annual Finance Acts, a feature which survives to the present day.

The new Act laid down, thus, in fair details the procedure for computing income. The concept of depreciation of assets which existed earlier also, was made more sophisticated and provided in the Rules. The straightline method of allowing depreciation was replaced by written down value method of allowing it.

Till 1939, there was no authority whose sole function was to hear and decide appeals. The Inspecting Asstt. Commissioner used to hear the appeals against I.T.O’s orders. The assessee could go in appeal against Assistant Commissioner’s orders to the Commissioner. It was only after Ayers Committee’s recommendation, that appellate functions were separated from administrative functions and a new authority, namely Appellate Assistant Commissioner was created.

On reference to the High Court and the Privy Council, the observations/recommendations made by the 1921 Sim Committee and later by Todhunder Committee (1924-25) throw a lot of light on the Law and procedure as it existed during early twenties of this century.

"We are of the opinion that a reference to the High Court should be made only on a question of law and not on a question of fact. We agree to the proposal that this section should be amended so that the Chief Revenue Authority should no longer have power to withhold a reference to the High Court on the ground that an application is frivolous, or that reference is not necessary but should be required to state a case to the High Court on the application of assessee. Also in order to provide against frivolous and unnecessary applications, the section should contain a provision that every application should be accompanied by a fee of Rs.100/-. In order to safeguard the revenue, the section must provide that the fact that case has been stated to the High Court, shall not, in anyway, stop the collection of the income-tax due from the assessee. The assessee must pay the tax, but if owing to the judgment of the High Court, the amount of assessment is reduced, the amount over-paid shall be refunded with such interest, if any, as the High Court may allow. The Bengal representatives and Mr. Birch are of the opinion that there should not be an unrestricted right of appeal but that if the Chief Revenue Authority does not state a case on an application, it should be open to the petitioner to require him to reconsider his decision sitting with two non-official assessors, the opinion of the majority to prevail.

We unanimously agree to the proposal of the Madras Committee that the section should be further amended in order to make it clear that the application for reference need not be made before the final order is passed by the Chief Revenue Authority but should be made within one month after the passing of the order. In order to secure the revenue, such a reference should only be made after the assessment order has been passed.

We unanimously agree that no authority other than the Chief Revenue Authority should be required or allowed to state a case".

This matter was considered again by Taxation Enquiry Committee known as Todhunter Committee in its report (1924-25). This Committee observed as follows :-

"In the matter of points of law, difficulties have arisen from the fact that no appeal lies to the Privy Council against a decision u/s 66 of the I.T. Act because such a decision is merely advisory and not in the proper legal sense of the term a final judgement. As a result, differing judgements have been given by different High Courts on important questions and there is no means available, short of legislation, of securing a final settlement of the question in issue. The Committee would, therefore, suggest that whatever steps are necessary to secure an appeal to the Privy Council in such cases, should be taken without delay."

It may perhaps be appropriate to mention the two instances in connection with which such differences of opinion had arisen. The first was that the assessment of agency and branch profits which had been dealt with by the High Courts of Madras, Calcutta and Rangoon. The judgment of the first Court tended to restrict the powers of I.T.Officers U/s. 42. The tendency of the two latter, was more in favour of the point of view of the Department. The Committee recommended an amendment of the Section.

The second instance mentioned by the Committee was that of miscellaneous income of the holders of permanently settled land, such as the income from the mining royalty, fisheries, markets and fees o various kinds. This subject had been dealt with by the High Court of Madras, Calcutta and Patna, the point at issue being whether the taxing provisions of Income tax Act over-ride the provisions of Permanent Settlement Regulations. The decision of the above mentioned three High Courts on this point was different and the Committee had discussed in detail. The chief points of differences in the judgments of the three High Courts.

Sections 66 and 66A of the I.T. Act 1922 (as it stood amended upto April,1926) were a result of these recommendations, Section 66 gave the Commissioner right to appeal to the High Court and 66A right to appeal to the Privy Council.

The I.T. Amendment Act of 1930 (21 0f 1930) introduced a new authority known as the Board of Referees. A new section 33A was introduced which provided that the Commissioners, on receiving a petition against an order, could refer the case to the Board of Referees. This Board would consist of three to five persons of whom not less than one half were to be bon-officials having business experience and one was to be a judicial officer not below the rank of a subordinate judge or judge of a small causes court of at least ten years experience. The decision of the Board of Referees could not be appealed to any authority. Even the Commissioner could not review it. This provision did not last long. It was omitted by section 40 of Amendment Act 7 of 1939.

On 24.12.1936, an Income tax Enquiry Committee known as Ayers Committee submitted its report. ( The report was signed by Mr. C.W.Ayers, Mr. S.P.Chambers and Mr. J.B. Vacha). This Committee strongly recommended that Assistant Commissioners hearing appeals should be relieved of their administrative functions. They also advised the appointment of an independent Tribunal outside the department to hear the appeals. The Committee recommended that orders U/s. 23(4) viz. Ex-parte assessments should be made appealable. Like-wise. The Committee advised that orders U/s. 43 ( treating a person as an agent of a non-resident) be made appealable. The Committee further advised that there should be one Appellate Tribunal only for all India and that appropriate centres should be visited by Members of the Tribunal. The coming years saw the introduction of a new cadre of I.T. Authority "Appellate Assistant Commissioners". In 1941, Income tax Appellate Tribunal came into existence.

As stated above, the Assistant Commissioner of Income tax combined in his functions, both Appellate and administrative functions. He was expected to inspect the I.T.O’s work and guide him also. The quality of inspection reports came in for severe criticism from the Ayers Committee who found that one of the methods for improving the quality of performance by Assistant Commissioners in the area of inspection was to have full time Inspecting Officers with no appellate jurisdiction. These Inspecting Officers would be responsible to the Commissioner for seeing that the work in the Circles under their control was efficiently performed and it would be their duty, in addition to making thorough inspection of the Circles under their control, to give the I.T.Os advice and instruction. The I.T.O, the Committee suggested, should refer to the Inspecting Officer any major points of doubt or difficulty before he made the assessment in question. As a result of this recommendation, the cadre of Assistant Commissioner was divided in to two separate authorities, Inspecting Assistant Commissioners and Appellate Assistant Commissioners. Henceforth, greater emphasis was placed on Inspections & proper importance was attached to inspection reports.

All India I.T. Committee (Sim Committee) had recommended (para 62) that "all the rules under the Act should be made by the Govt. of India and that local governments should have no power to frame any rule." Towards this they observed, "We have further, throughout our report, recommended that numerous details regarding assessment and the interpretation of the provisions can be settled and made uniform by issue of the rules and instructions". This recommendation had heralded the creation of Board of Revenue, which in 1924, was replaced by Central Board of Revenue. In 1936, Ayers Committee reviewed the functioning of the Board and found that the powers given to it were not adequate to secure proper and uniform administration of the I.T. Act throughout British India. This Committee recommended that the Board be given more powers. They also recommended that in order that the Central authority be put into position to take a more active part in the organization and supervision of the department, a "Chief Commissioner of Income-tax" may be appointed to serve as a technical advisor to the Central Board of Revenue who would, subject to the general control of that Board, supervise and coordinate the administration of Income-tax throughout British India. To assist him, they suggested that one Assistant Commissioner and one I.T.O. be given. This Chief Commissioner, inter alia, would (a) consider copies of all inspection reports (b) watch the methods of recruitment (c) draw up comprehensive instructions on examination of accounts particularly regarding special types of cases such as Banks, Life Insurance Companies, etc, (d) give advice and instruction upon points of general importance (e) supervise application of certain Sections of the Act and the Rules made thereunder to secure consistent treatment in all areas (f) carry out continuous revision of I.T. Manual (g) make periodical review of registers and forms prescribed (h) obtain periodical reports on the assessment work and refund claims to ensure that Commissioners were taking proper steps to eliminate unreasonable delay. (i) take responsibility for systematic training and the departmental examination of Cadet Officers, to secure that before promotion, they have a thorough knowledge of Income-tax Law and adequate knowledge of General Principles of Accountancy (j) undertake periodical revision of statistical requirements with a view to making published returns as informative and intelligible as possible.

In addition, the Committee also said that arrangement for the appointment of full time legal adviser to the Central Board of Revenue might be considered. The above recommendation resulted in the creation of the first Directorate of the Income-tax Department, i.e. Directorate of Inspection (I.T.) in 1940

The Department was becoming increasingly conscious of the need for proper investigation of cases. In October, 1938, a Special Provincial Circle was formed in Bombay to examine important and difficult cases. It consisted of four I.T. Officers with a complement of ministerial staff working under the supervision of Mr. J.B. Bird, ICS. In Bengal, an Examiners pool was organised on 9^th August, 1938, with one chief examiner and 18 Examiners of accounts.

The amending Act of 1939 gave the Central Govt. powers to appoint not more than three Commissioners to discharge instant reference to serve the duties of a Commissioner in respect of certain classes of cases. Under this provision, the Bombay Circle was transformed into a commissionership and a number of important cases were assigned to it.

This was an era when new lines were being laid in all sectors of the working of the Department, The menace of ‘black money’ was still a few years away. By 1939, as per Central Board of Revenue (All India I.T. Report and Returns for 1938-39) the number of assessees had risen to 441774 of which 129575 were in Bombay alone. The revenue was Rs.20,00,91,597. In 1938-39, the demand raised by way of ‘Miscellaneous & penalties’ was reported at Rs. 6,02,092. In 1061 cases, penalty under Section 28 (concealment of income etc.) was levied and in 7964 cases, Penalty U/s 46(1) for non-payment of tax was levied. Prosecution proceedings were sanctioned in 13 cases. A bill based on the recommendation of Ayers Committee was introduced in April, 1939 & became law soon thereafter.

"India office lists" prepared of this period show that the Income-tax Department had not acquired the status, it did a few years later. Its personnel (Commissioners and Assistant Commissioners) appear in the Provincial lists in "Miscellaneous" section except for Bombay list where Income-tax Department makes a separate heading.