‘Fictio’ in old Roman Law was a term of pleading and signified a false averment on the part of the plaintiff which the defendant was not allowed to traverse e.g. an averment that the plaintiff was a Roman citizen, when he was a foreigner, if the object was to give jurisdiction over him [Maine’s Anc. Law Ch. II]. The term, meaning ‘fiction’, therefore, came to be used for those things that have no real essence in their own body but are so accepted in law for a special purpose. In the words of Viscount Dunedin in CfT v. Bombay Trust Corporation, AIR 1930 PC 54, “Where a person is deemed to be something, the only meaning possible is that whereas he is not in reality that something, the Act of Parliament requires him to be treated as if he were”.
2. Fictions in law are created for definite purposes to result in a situation which would not otherwise have resulted and to treat an imaginary state of affairs as real. It is introduced for necessity, generally to avoid inequity caused by mischief made possible under general provisions and concepts of law. In tax laws the object is mainly ‘to prevent mischief arising out of circumvention of normal legal provisions resulting in tax avoidance while remaining within the confines of the law, as also to remove unintended consequences. The introduction of legal fictions thus introduces equity in legislation which is expressed in the maxim, “In fictione legis acquitas exist it” i.e. the legal fiction is consistent with equity. Beyond the purpose for which they are created legal fictions must injure no one as expressed in the maxim ‘fictio legis neminem ladit’.
3. The English law has always abounded in fictions, so are taxation laws in India. The unrestricted operation of treating the imaginary as real has the potentiality of upsetting the whole scheme of legislation and the basic fundamentals of law causing injury to untargeted subjects and areas and thus violating equity. Courts have, therefore, in keeping with the maxim, been cautioning against extending them beyond their legitimate field. The Apex court has repeatedly observed that legal fictions are created only for a definite purpose. They are limited to the purposes for which they are created and should not be extended beyond their legitimate field. [CfT v. Elphinstone Spg. & Wvg. Mills Co. Ltd., 40 ITR 124].
4. In CfT v. Amarchand N. Shroff, 48 ITR 59, the court was to interpret the fiction contained in S. 24B(1) of 1922 Act making a legal representative an assessee in respect of the income which the deceased would have earned had he not died. Attempt was made to extend the fiction to post-death income as well. The court disapproved extending the fiction, the legitimates purpose of which was to tax income earned upto the year in which death took place. As a result, the 1961 Act made a specific provision in S. 168 to cover income upto the date of complete distribution of assets.
5. Commenting on Rule 8 of the Income-tax Rules which apportions the business income of the growers and manufacturers of tea, between agricultural and business income in the context of deduction u/s.80 HHC, the Calcutta High Court in Warren Tea Ltd v. UOf, 236 ITR 492 held that the applicability of the fiction is limited to computation of taxable income from business by apportioning the total business income computed after all deductions and, accordingly, held that since the stage of grant of deduction u/s.80HHC would be at the time before applying Rule 8 and not after apportionment is made, the Rule cannot be extended to computation of deduction u/s.80HHC. On that basis it struck down the CBDT Circular No. 600 dated May 23, 1991.
6. Fictions are suppositions and, unless it is clearly and expressly provided, it is not permissible to impose a supposition on a supposition of law. In Executors and Trustees of Sir Cawasji Jehangir v. CFT, 35 ITR 537, the Bombay High Court was to consider the scope of the jictio juris’ in S. 23A of the 1922 Act under which the undistributed income of the company, as computed in accordance with that provision, was deemed to have been distributed as dividend amongst the shareholders and included in their total income as such. The issue arose that if such income of the company constituted partly of capital gains, should the dividend which is deemed as distributed also be apportioned between capital gains and dividend in the hands of the shareholder. While accepting that full effect has to ‘fictio juris’ the court ruled out sub-joining or tacking a fiction upon fiction and observed that there is nothing even remotely suggesting the assessee to identify himself with the company or to assert an equivalence between his income and the income of the company. The argument, if accepted, would amount to imposing supposition upon the supposition of law.
7. Within its legitimate area of application, the fictione legis has to have its full effect. The question of chargeability of interest u/s.234B and u/s.234C came for consideration before the Gauhati High Court in Assam Bengal Carriers Ltd v. CIT, 239 ITR 862. Brushing aside all the arguments based on the impracticability of estimation of income before the book profit is arrived at, the Court directed full effect to be given to the fiction contained in the provision with its obvious fall out. Observing that, where fall out of the fiction leads to an obvious inference, there can be no half way house, the court held S. 234B & S. 234C applicable even in case where income is determined u/s.115JB. They quoted with approval the following observations of Lord Asquith in East End Dwellings Co. Ltd v. Finsbury Borough Council, (1951) 2 All ER 587 (HL) which was also relied upon by the Bombay High Court in the case of Executors and Trustees of Sir Cawasji Jehangir (supra).
“If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real, the conse-quences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it”.
The Supreme Court, however, in CIT v. Kwality Biscuits Ltd., 284 ITR 434 disapproved the judgment of the Gauhati High Court on a different ground of the impracticability of arriving at the total income before arriving at the ‘book profit’.
8. In a recent judgement delivered by the Special Bench of the Ahmedabad Tribunal in Assistant Commissioner of Income-tax v. Goldmine Shares and Finance P. Ldt 302 ITR (AT) 208, the Tribunal considered the fiction contained in S. 80IA(5) which bids one to treat the eligible business as the only source of income of an undertaking. Applying the observations of Lord Asquith (supra), the Tribunal took note of the consequences and incidents flowing from it and held that the profit from the eligible business for the purpose of deduction u/s.80IA has to be computed after deduction of the notional brought forward losses and depreciation of eligible business even though they have been allowed set off against other income in earlier years.
9. Fictions are generally by way of deeming provisions where imaginary or unreal state of affairs is deemed to exist in the presence of certain facts. Income-tax Act abounds in deemed provisions in which, all are not restricted to imaginary state only. Deemed provisions are sometimes used to give an artificial construction to a word or phrase that would otherwise not prevail. A clear example is to be found in the provisions of S. 2(22)(e) of the Act deeming advances to specified persons as dividend to shareholders. The Act defines ‘Income’ in an inclusive manner including receipts of the nature which would not otherwise be taken as such. They are also used to put beyond doubt a particular construction that might otherwise be capable of different interpretation. One may refer to the provisions of S. 9 which deems certain income as accruing or arising in India to keep them outside the pale of uncertainly. We have fiction in S. 45(3) and S. 45(4) to avoid unintended situation legalised by courts decisions and S. 115 JB to partly neutralise the impact of various tax incentives and thus introduce horizontal equity. All these provisions involve some digression from the normal provisions and the concepts in tax law. The peculiar sense in which the provision is employed has to be judged in the light of the scheme of the section and the context in which deeming is made.
10. Fictions in law, therefore, give completeness to the scheme of law and the intention of the legislature.
