Chandra Prakash Bhatia
Joint Commissioner of Income Tax, Ahmedabad
chandra.p.bhatia@incometax.gov.in

Shri Chandra Prakash Bhatia, IRS, is an Officer of 2006 batch. He is presently posted as the Joint Commissioner (Judicial) at Ahmedabad. He has special interest in Legal research, Financial History and Taxation related issues of the Colonial period.

Chandra Prakash Bhatia, IRS, has collected historical facts and compiled a book titled ‘The First Budget of India and the Birth of Income Tax’ in 2015, published by Radiance, Kolkata. He has recently published a brief collection of citations of Income Tax judgments of Hon’ble Gujarat High Court in favour of Revenue delivered during past 25 years, titled as “The Tributum”

Executive Summary

The Royal proclamation on November 1, 1858 in grand Darbar held at Allahabad was a major event in modern Indian financial history. Lord Canning announced that the Queen had assumed the governance of India. This proclamation declared the future policy of the British Rule in India. This action also opened doors for the modern system of annual budgeting, revenue forecast and revenue accounting by the Union government as well as sharing it with the Provincial governments. Experience of the East India Company in governance made it clear that the government cannot depend upon the land revenue alone and other alternatives must be explored. At the same time modern banking, shipping and commercial agriculture also received public and private patronage. Introduction of railways and postage system gave a boost to the business. Many financial reforms like introduction of English system of judiciary and paper currency were introduced in India much ahead of the other Asian countries. The architect of such reforms was Right Hon’ble James Wilson, a financier, who was chosen due to his academic stature and apolitical approach to resolve the unprecedented crisis being faced by the new Indian Government, headed by Lord Canning. One of such measures was the introduction of the first direct self taxation in India, where the taxpayer had to assess his own income and to file his return of income and to pay the corresponding taxes on his own. It was by no means an easy task in a country where taxation was presumed undesirable and literacy was very low. However, such an experiment paved way for the diminishing the general resistance and for taking steps in the public welfare in future. We all must read his life story and the story of introduction of the Income tax in India of that time.

The Right Hon’ble James Wilson, the architect of modern system of budget and revenue accounting in India, was born on the 3rd June 1805 in a small border town of Scotland called Hawick. His father Mr. William was running a textile mill. He joined a hat factory, when he was 16 but continued his studies. This business proved successful and he soon set up his business in London along with his brother. He was an admirer of Adam Smith and believed in his theory of ‘laissez-faire’. He was married to Ms. Elizabeth Preston of New Castle-upon-Tyne.

He dreamt of setting up a news paper specializing in financial matters covering all aspects of trade and commerce, including business/financial statistics. ‘The Economist’ magazine was started by him on the 2nd Sep 1843. In early days of the magazine, he used to write many columns himself. Later-on, it was handled by Mr. Walter Bagehot, husband of his eldest daughter Eliza. It is not under family ownership at present. It’s columns are circulated in many news papers across the world

Mr. James Wilson had six daughters. A daughter, Sophie, was married to Mr. William Stirling Halsey, who later joined the Indian Civil Service. He also served as Private Secretary to Mr. Wilson. One of his daughters, Ms. Emile Isabel Wilson was later known as Mrs. Russell Barrington. Mr. Wilson had other daughters named Julia, Joe and Matilda1.

He was elected to British Parliament in 1847 from Westbury and was nominated for the post of Joint Secretary to the Board of Control for India, looking after Indian financial affairs from London. He could foresee the need for a new bank for International Business for the growing business needs. He set up the ‘Chartered Bank of India, Australia and China’ on the 9th October 1852. This bank had a branch in Calcutta as well. This venture grew up and later merged with ‘The Standard Bank of British South Africa’. Later-on it was named the Standard Chartered Bank, which has a global presence today.

In early 1859, Lord Stanley, the first secretary of State for India, recommended to appoint a financier from England to fill the vacancy caused by appointment of Sir Barnes Peacock, the Legal Member as the Chief Justice of the Supreme Court at Calcutta. Lord Palmerston, the British Prime Minister in 1859 had put a great faith in him and offered him the post of Finance Member to the Viceroy of India Council, akin to the post of Chancellor of Indian Exchequer. After the great mutiny, finances in India were in total chaos. The treasury was nearly empty and cost of governance was very high. It was perceived by some to be situation more dangerous than the mutiny itself.

Mr. Wilson took up the challenge and set sails for India the 20th October 1859 for India. He arrived on 28th November 1858. A letter dated 22nd November 1858 written by Lord Canning to him suggests that he may fix his residence in any of the government accommodations at the Park, Barrackpore, Calcutta2. However, the official papers disclose that at the time of his death, he was staying at 9, Middleton Street, Calcutta3 in the house of his physician, Dr. Macrae. This locality has been renumbered by KMC. At 9 & 9/1, a building has come up called the Middleton Mansion. Mr. James Wilson took over his seat as the Finance Member of the Governor General in Council on the 3rd December 1859. He introduced a Bill on the 18the February 1860 in the Indian Legislature, aimed at amending the tariff laws. Mr. James Wilson’s financial statements of 1860 marked the commencement of a new chapter in the financial history of the country. He introduced the system of budget, paper currency and was best known for introduction of Income Tax in India.

At the time of presenting his budget, Mr. Wilson delivered a forceful speech in the Indian Legislature4. He observed that the suppression of the mutiny had entailed a great expenditure and had resulted in large public debt. He surveyed the prevailing economic condition of India and outlined the steps he desired to take to put it in order. He proposed two new taxes- one was called the ‘License tax’ – to be imposed on trade and commerce and the other was imposition of ‘Income tax, which was to be imposed on people in general irrespective of their nature of work. In his opinion, the two supplemented each other and targeted different classes of people. Income tax was supposed to be levied upon annual income exceeding Rs. 200 annually. He defended such a low basic limit observing that it will ensure greater justice5. He called upon people to contribute for the cost of governance. The tax proposed was a progressive one, the rich supposed to pay more.

He also introduced better system of accounting for the tax collection. A separate account was to be kept for one percent duty. The tax so collected was to be utilized by the Provincial Govt. for construction of roads, canals and other public utilities. Proper documentation ensured that such statistics was to be utilized by successive governments for determining the proper course of actions and to study whether such steps were yielding results or not. Provincial governments were authorized to notify and exempt the properties utilized for religious and charitable purposes. He had to face opposition from many quarters, particularly from the European community. As traders, they were likely to be affected. So far they were enjoying special privileges. However, he termed his measures as just, equitable and based upon intelligent principles.

At that time several members of the Council expressed hope that imposition of Income tax will not be a permanent measure and it would be taken resort to only in emergency. They believed that it will be given up as soon as the situation improved.

The Income Tax Bill was passed on the 24th July 1860. It was known as Act XXXII of 1860. Mr. Wilson expressed his satisfaction that such a large Bill was passed without much change in its basic form. It received the assent of the Governor General in Council on the same day. It was to be imposed for five years.

The Bill was again partly amended due to some deficiencies pointed out. It came into force in the month of September 18606. This session was sponsored by Sir Bartle Frere, in the absence of Mr. James Wilson. It was numbered as the Act XXXIX of 1860. However, some taxes were already collected in some parts of the country, particularly in Oudh Province owing to the financial crunch faced by the Government. The government had to issue an order to legalize the collections already made.

The yield of tax was rather small in the very first year. Mr. Charles Canning was the Viceroy during that period. Other important works during this period was, setting up of a university each in Calcutta, Bombay and Madras, passing of the Indian Penal Code 1860, Indian Councils Act 1861 and Indian Police Act 1861, creation of Indian Police Service, reorganization of the Customs Department and setting up of Archeological Survey of India.

After its expiry in 1865, Income Tax was not renewed immediately. The period from 1860 to 1886 was a period of experiment in which 23 Acts were passed for charging the direct tax. The income-tax of 1860, by any standard, be it implementation, operation or collection, cannot be termed successful. The procedure experiment of levy and collection of tax was continued under different nomenclatures like. ‘License tax’ (introduced in 1867 and abandoned next year), ‘Certificate tax’ (introduced in 1868 and abandoned next year), ‘General Income Tax’ (introduced in 1869 and abolished in the year 1873) and a License tax on trades and professions (introduced in 1878). However, such sustained efforts by the Government softened the resistance of the public at large and sent a message that direct taxes could not be wished away. The Government machinery and the tax payers found a balance in consequential statute, known as the Income Tax 1886, which still exists despite several changes. Learning from the past mistakes, income from agriculture was exempt from Income Tax in India under this Act. From 1886 onwards, Income Tax has been an important part of the annual Budget presented before the Indian Parliament.

He died on 11th August 1860 at the young age of 55 years after suffering from dysentery. A Gazette notification shows that he was buried in Calcutta on the 12th August 1860. Flags were unfurled at half mast and guns were ordered to be fired for 15 minutes from the ramparts of Fort William at the time of his burial.

(Gazette- Courtesy- ‘The National Library’, Kolkata.)

Rt. Hon’ble James Wilson could not bear the hot and humid summer of Calcutta. Frequent travel and hard work took a heavy toll on his health. He died on the 3rd August 1860 and was buried in Calcutta. His tomb at Cemetery at Lower Circular Road, Kolkata has been discovered after much effort by the author of this article. It has been restored by the author with the permission of the Christian Burial Board. The photographs (after restoration) of his tomb and the epitaph inscribed on it are shown above.

The 24th day of July has been declared as the Income Tax day by the Government. We all are the proud inheritors of this legacy, now almost 160 years old.

Note:-

1. Life of Walter Bagehot- Mrs. Russell Barrington-1914

2. Life of Walter Bagehot- Mrs. Russell Barrington-1914

3. The Calcutta Gazette-1860

4. Proceedings of the Legislative Council of India-1860.

5. The History of Taxation in India- P Banerjea-1930

6. The speech of James Wilson along with the correspondence for preparation of the budget in 1860 has been published in a book titled ‘India’s First Budget and the Birth of Income Tax’ written by me and published by Radiance, Kolkata in 2015.

Source- CBDT Taxalogue Magazine Jul – Oct 19 | Volume 1 | Issue 1

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