What the courts have decided on section 176(4), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.
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Commissioner of Income-tax v. Justice R.M. Datta (Calcutta High Court, 4 July 1989) — section 176(4) deems the receipt to be income but creates no further fiction bringing it under 'Profits and gains of business, profession or vocation', so arrears received after the profession ceased escape the charge
High CourtHelps taxpayerValidity unconfirmed
I was an advocate on cash basis and stopped practising when I was appointed to the Bench. Fees for old work are still coming in. The Assessing Officer says section 176(4) makes them taxable. Is there an answer?
There is, and this is it. The Calcutta High Court held that section 176(4) creates only two fictions — that the sum received after discontinuance is deemed to be the income of the recipient, and that it is charged to tax in the year of receipt — and does not create a third fiction deeming the receipt to be income of a business or profession carried on by the assessee in that year. Because the receipt is the fruit of professional activity it falls under the head 'Profits and gains of business, profession or vocation' and cannot be taken to the residuary head; and because the assessee carried on no profession in any part of the relevant previous year, it cannot be computed under sections 28 to 43A. The question referred was answered in the affirmative and in favour of the assessee.
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V. Parthasarathy v. Addl. Commissioner of Income-tax (Andhra Pradesh High Court, 11 September 1975) — 'discontinuance' in section 176(4) covers temporary and involuntary cessation, so an advocate elevated to the Bench has discontinued his profession
High CourtHelps departmentValidity unconfirmed
I stopped practising only because I was appointed a judge, and I went back to the Bar when I retired. Surely that is a suspension and not a discontinuance, so section 176(4) cannot apply to fees I received while I was on the Bench?
That argument was run and rejected. The Andhra Pradesh High Court held that both 'discontinuance' and 'cessation' in section 176(4) take in temporary as well as permanent discontinuance, that the length of time for which the profession is stopped is not an element of the concept, and that the question whether the cessation was voluntary or involuntary has no bearing on the application of the sub-section. It also rejected the reading that the sub-section is confined to discontinuance by retirement or death, holding that the words 'on account of' govern cessation of the profession, retirement and death equally. The writ petition was dismissed.
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Statutory position — s.176: accelerated assessment on discontinuance, the fifteen-day notice in s.176(3), and the deeming of post-discontinuance receipts in s.176(3A) for a business and s.176(4) for a profession
CBDT Circulars & InstructionsCuts both ways
I shut my consultancy two years ago and money is still coming in for work I did before I closed. My accountant says section 176 taxes it. Which sub-section does that, what notice was I supposed to give when I closed, and how much time did I have?
Two different sub-sections do the deeming and it matters which one you are in. Section 176(3A) covers a discontinued BUSINESS: any sum received after the discontinuance is deemed to be the income of the recipient and charged to tax in the year of receipt, if it would have been included in the total income of the person who carried on the business had it been received before the discontinuance. Section 176(4) covers a discontinued PROFESSION, but only where the discontinuance was on account of the cessation of the profession by, or the retirement or death of, the person carrying it on, and it deems the sum received after discontinuance to be the income of the recipient charged to tax in the year of receipt on the same 'would have been included' condition. Separately, s.176(3) requires any person discontinuing any business or profession to give the Assessing Officer notice of the discontinuance within fifteen days of it.
Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.