IMPORTANT EVENTS 1939-45   1939     Appellate functions separated from Inspecting  functions. A new Cadre of officers known as Appellate Assistant Commissioners created.   Jurisdiction of Commissioners of Income-tax extended to certain classes of cases and a Central Charge Created at Bombay.   Board of Referees abolished vide Section 40 of Amendment Act 7 of 1939.   Excess profits tax introduced w.e.f. 1.9.39    1940   Directorate of Inspection (Income-tax) created.     1941 Income-tax Appellate Tribunal set up.   Central Charge created at Calcutta.   Special Investigation Branches set up.    1944 Advance payment of tax introduced.    Class I service for the I.T. Department constituted vide Finance Depts’ letter dated 29.9.1944

Revenue

• 1939-40 : Rs.19.82 crores

• 1944-45 : Rs.54.23 crores

THE TURBULENT YEARS Period 1939-1945

Impact of War on Trade & Revenue

Normally revenue department’s dictates for collection of revenue are decided by the economic necessities of the Government. Its priorities are dictated by the needs of the State and its financial preferences. Hence its growth and expansion depends upon the demands and prospects of revenues. A survey of the country’s economy used to be an essential feature of the annual Report published by the Department. Report for the Financial year 1940-41 described the situation province wise as under :

Madras : With the declaration of War against Germany early in September 1939, trade conditions took a turn distinctly favourable to revenue. The immediate effect of the declaration of War was an all-round increase in the prices of commodities, including good stuffs. The tendency to raise prices of commodities, was soon brought under control by the prompt action taken by the Government. The price of agricultural produce like paddy, grains and pulses advanced steadily yielding better profits, trade in rice being particularly favourable owing to the decline in the import of the rice from Burma and Indo-China. Groundnut and cotton were in good demand, dealers making fair profits ; but many engaged in export trade received severe setbacks owing to the loss of foreign markets. The tea Industry flourished on account of the large foreign demand, most of it required by the British Ministry of Good. The Nettukottai Chetty assessees of the province had a prosperous year due to the doubling of the price of rubber in the Federated Malay States and the increase of price of paddy in Burma, by about 50%. The adverse effect of the German market on the Indian Mica industry, was more than compensated by the increased demand for mica from America, Japan and other netural countries. (So far they were netural).

Bihar and Orissa : The mica business was very prosperous due chiefly to the War and there was considerable increase of revenue from this source. The coal market, was, however, dull. There were sporadic labour strikes and in some cases, there was suspension of work owing to fire and explosions in the mines. Sugar industry experienced a serious crisis, partly due to over productions and partly due to want of export facilities. Precious metals like gold and silver had a boom market. Next year, the trend further picked up but higher prices of petrol brought down the profits.

Bombay : The dominating factor affecting the trade conditions was of course, the war. Though declaration of the war was followed by a period of falling prices, this was, however, a temporary phenomenon and with the progress of the war, there came, an era of increased business activity and rising prices. The war, however, deprived India of practically, the whole of the European Market. The loss occasioned was later made good by large orders from the Empire countries, particularly for cotton manufacture in connection with war supplies.

Punjab : N.W.F.P. and Delhi Provinces : The restricted flow of foreign commodities naturally created a greater demand for indigenous products resulting in rise in their prices. Contractors as a class had a wonderful time. Punjab speculators who had sold cotton on forward contracts to Bombay dealers suffered losses owing to transport difficulties, though the losses were subsequently set off by the higher prices obtained for their stocks. Additional factories for the manufacture of surgical instruments and rubber goods were established to meet war needs.

United Provinces : The textile mills maintained a high level of activity. In calico printing, the merchants in Fyzabad made good profits but those in Farrukhabad had not been equally fortunate owing to export difficulties to the U.S.A. which is the main market for this product. Government control and purchase of cane at higher prices led to higher cost of production. There was a set-back in the export trade in Mirzapur carpets.

As the war progressed, these trends worsened. Because of the increasingly higher war demands, public shortages became more and more acute. Prices kept on soaring, Government spending put still greater strain on the exchequer. Besides increase in surcharge rates from time to time, other measures had to be taken. However, certain provisions had already been introduced in the Statute, as if by projection of the events to come, though in a different context. Whereas the implementation of the Ayers Committee report by the Amendment Act of 1939 was simply a continuing administrative process for developing a comprehensive statute on income-tax, two measures introduced subsequently can be specifically attributed to the outbreak of war.

Emergence of black money

 Hikes in rates of various takes in the category of Direct Taxes which were made because of needs of financing a war, and the consequent higher profits earned by the business sector, increased the temptation to evade taxes and started the rat race between black money and the measures to prevent and unearth the same. This continues to this date, there being hardly any basic change in methodlogy, on both sides.

While on the subject of tax evasion, the Annual Reports of the period registered a number of instances ; they were not different from what one comes across from year to year right till the present time. The tendency to evade tax by maintaining double sets of accounts, false purchase vouchers, suppressed sales, omission of sources of income such as branch business, house property, foreign income etc., maintenance of accounts in fictitious names, debit of bogus expenses in regard to interest and salaries etc. continues unabated.

Some of the instances strike a very familiar note. For example, one report mentions how a legal practitioner did not return the income from money lending carried on outside his province. A penalty of Rs.400/- was levied on him. In another instance, a cotton spinning and weaving mill owned by a private limited company tried to suppress its sales at its selling depot in another town, by several lakhs of rupees. It was found that considerable sums of money had been remitted from the Depot to the Head Office while there were no corresponding entries showing the despatch of goods from the Head Office to the Depot.

The Company had also suppressed profits from speculation. A similar case of evasion of tax detected & reported was that of a very wealthy merchant who tried to bride an officer of the Department with an offer of a lakh of rupees to ‘square his assessment’. A trap was laid and the wealthy merchant was caught red handed in the act of handing over to the said Officer a gold bar. The merchant and his associates were tried and convicted by the Chief Presidency Magistrate and on an appeal to the High Court, the sentences of all the accused were enhanced. Anyway, particularly because finances of the Central Government were under strain, there was a greater emphasis on detecting tax evasion and for that reason, statutory provisions were further strengthened. Administrative machinery was developed and geared to work in this direction with greater stress on coercive measures and intensive investigation.

The Ayers Committee had made the following observations in the context of assessees’ accounts, which were not audited. Generally the accounts, at that time, were in the following shape, as remarked by the said Committee :-
    "The accounts are however not balanced and in very many cases, have no summarised account corresponding to a profit & loss A/C which brings out the actual profit or loss for the year. An assessee cannot perform his statutory duty of making a correct return of his income, unless he summarises the various accounts in his books and extracts therefrom, the figures of profit. In practice, however, it is left to income tax officers, in many cases to extract the figures from the books and the assessee is even not asked for a statement showing how, from his books, he arrives at the figures of his return. This involves the tacit assumption that he does not take the steps necessary to enable him to make a correct return and the burden of ascertaining the profits is thrown upon the Income tax Officer who performs what is strictly the statutory duty of the assessee."

It was recommended by this Committee that with the form of Return, the assessee should send a statement showing how, from his books of accounts, he had arrived at the profit or loss shown in the Return.

Conclusion

It has been mentioned that at the out-break of the War, the department’s Receipt Budget was Rs.18/- crores. It was just trying to accustom itself to radical changes introduced by the amending Act of 1939. It was therefore unprepared for the sudden increase in the responsibilities which devolved on it, because of the demands of the World War. That it could not adjust itself to the impact even as late as 1942-43 when the effect of the war came to be seriously felt, following entry of Japan into the War, can only be attributed to the machinery, being too rigid to absorb the shock and on the incapacity of the administration, to appreciate the increase in its responsibilities and to do what every one else, saw, was inevitable.

 The Income-tax Act as it emerged in that year, had many new features especially distinction between a resident and a non-resident person. In conformity with these alterations in the basis of taxation, the form of return of income had necessarily to be changes. Yet, because the printing machinery failed, the forms or return of income were not available for issue by the ITOs till about the middle of Sept., 1939. The arrears of tax had been accumulating but real, heavy arrears started gathering from 1943 onwards.

Succeeding years, weighted by war conditions, gave no opportunity to the staff to catch up with the arrears so caused, while piled up in all branches of administration. The figures of arrears of assessment at the end of 1944-45 were 1,81,282/- as against 1,19,000/- at the end of 1943-44. The increase in arrears of assessment again, was due, in no small measure, to the failure as well as inability of the Department to recruit adequate staff even while imposing additional burden of work, to meet the demand of revenue, created by the war. It stands to the credit of the I.T. Staff of all ranks, observed Investigation Commission that, inspite of the strain thus placed upon it, it did its work valiantly during the crucial years of the war and collected, Govt. revenue, out of all proportion, to what they were called upon to collect before the war. All India Income-tax collections including super-tax during the above period rose as under :-

With these factors before them, the Government were forced to take cognisance of the problem of man-power. Towards the end of 1945, the then Director of Inspection Mr. K.R.K. Menon was deputed to take stock of man-power resources and to make projections of requirements of Officers and staff in each Commissioner’s Charge, the IAC’s Ranges and individual Income-tax Circles, detailing for each circle, the number and grade of ITOs and the Ministerial staff required. The reference by the Board was to make recommendations for complete re-organisation of the Department. Mr. Menon gave his report in September, 1945. His enquiry also brought out prominently that the Department was heavily under-staffed in all ranks, particularly in the rank of ITOs.

The period closed with the consciousness of the heaviness of the burden threatening to become heavier with each year that passes.